It was a wrong decision of the government to bail out General Motors

The financial crises struck in September 2008, after the world famous investment bank, Lehman Brothers filed for bankruptcy. The crises were originally caused because of the pile up of defaults in Subprime loan market in The United States. This shock has had a huge impact on major firms, banks, and households all over the world and General Motors was not an exception.

General Motors filed for bankruptcy protection on 1^st of June 2009, with the amount of debt approximately 17 trillion dollars, which is the largest amount of debt ever recorded. There are various possible reasons for its bankruptcy. General Motors has been struggling with years of losses and market share declines in sales even before the Lehman shock struck. It has been hit so much harder than most of its competitors during the sales slump. General Motors’ U.S. sales through April were down 45% compared to the previous year, while the sales decline all over the industry was only 37%. The stock price of General Motors has been dropping considerably since October of 2007. (Figure 1) In addition to the decline in market share, stock prices and sales, it has been struggling with the requests by UAW for an extraordinary amount of retirement allowances. Their lack of ability to compete in the new international automobile industry was another major factor. With these backgrounds, General Motors had started to own a large amount of securities in order to compensate for its deficits, however, this has worsened the effects by the current crises.

General Motors has applied the Federal Bankruptcy Court of Civil Rehabilitation Law. Also, with the Troubled Asset Relief Program (TARP), which is a program of the United States government to purchase assets and equity from financial institutions in order to strengthen its financial sector, GM has started to receive governmental funding. The government has started with injecting the fund of $20 billion and then injected another $30 billion on top of it. The government now owns about 60% of the new GM stock and therefore, GM has practically became what is commonly called “Government Motors”.

However, this governmental bailout is a controversial issue. There are groups of people who are supportive with their bailout plans. On the other hand, there are groups of people who are strongly against the plan. According to the random official telephone survey in the United States, 70% of the call receivers were against the bailout plan and 26% were for the plan. The controversy is still on the go, and therefore this topic is very interesting to pursue researches on. This research aims to find out whether it was the right governmental policy to bailout General Motors or not.

The supporters of the General Motors’ bailout plan have two main reasons for their claims. One is based on their assumption that the American market will recover in the near future and therefore General Motor will recover as well. They claim that if this assumption is correct, it is worth injecting governmental fund to rescue this largest automobile company of the United States from going bankrupt. Another reason is because they believe that General Motors is such a large company with too large a number of employees and even more workers in retail parts makers, therefore it is “Too Big To Fail”. There will be an enormous number of people being laid off and the increase in the number of unemployed will probably be greater compared to the number of workers who would be effected when another company goes bankrupt. The supporters fear that when this happens, it will have great impacts on its workers’ families and even on the American consumption level. This will eventually lead to a vicious circle; loss of works, decrease in the consumption level, less demand for products, decrease in sales, and more people being laid off again. However, there remains a question if the American market will really recover to its former standard before the crises, just as they assume. Another question is, even if this turns out to be true, there is no evidence to back up the ability of General Motors, as a company, to compete not only in the American automobile market but also in the international automobile industry. Moreover, supporters claim that there are too much negative impacts on people and the economy itself by letting General Motors go bankrupt. However, they have not stated what exactly is the problem with not bailing out General motors and leaving it to file for bankruptcy. There are lots of other companies with bad management policies, just like General Motors is, that are simply left to file for bankruptcy. They have not stated the clear difference between General Motors and groups of other companies in the United States. It sounds rather odd and unfair to treat such a private company as if it were a public company, which has to be bailed out for the sake of stable American economy. These are the main objections that the groups of people against the bailout plan have risen up with. When arguing the right or wrong of this governmental act, these claims should be taken into consideration and should also be carefully analyzed. This thesis aims to figure out whether it was the decent governmental policy to bail out General Motors and if not, considers what alternative policies should be brought up to improve the current situation.

The followings are the three main opposing opinions against the governmental fund injection to General Motors. First, there is no appropriate evidence as to tell whether the American Market will recover in the near future for sure or not. Even if it did, there is a big question mark as to whether the demand for automobiles would recover to its former standard. On the other hand, even if supposing that the automobile industry will recover, it is still not for sure if General Motors, as an auto mobile company, will be able to compete in both domestic and international market. Second, as is stated in the previous paragraph, the supporters of this bail out plan claim that the company is “Too Big To Fail”. However, opposing groups of people claim that bailing out a private company means a violation of the principal theory of economics under capitalism. A theory saying that competition in an industry should be carried out under the policy of small government, therefore when a firm files for bankruptcy because of its own mistakes in the management system and defaults that are produced, a new more competitive firm with future would enter the market and replace its role in the society. The higher the efficiency of the resource distribution in a country is, the better it is for the economy of the country. In the latter paragraphs, the problems that would have been triggered if the government did not bail out General Motors will be discussed. Third, there has been a long history of General Motors and it has experienced similar situations to the current situation. The company has gone through tough situations not too different from the current one, and it is clear that every recovery plan that it had come up with had not been successful enough to make itself last longer in a sound and stable situation. In addition to these, there are a large number of people who are doubtful about the management system of General Motors. They claim that all of its former mistakes and current problems have been caused due to their fundamental lack in the ability to manage the company efficiently.

It maybe claimed that this Job Bank system is the key to the reason of GM’s failure, and therefore if this system could be abolished and replaced by a new efficient system, then the current condition of GM will recover. However, precisely, the current system cannot be abolished easily. First of all, in America, it is a common notion of the employees to think that they are working for themselves and their family, not for the company. It is often regarded as the opposite notion to Japanese employees who believe that they are working for both their own good and for the company. It is due to the traditional labor system and cannot be changed easily. Thus, American employees in general think of their career in a particular company in a very short term. Now, the rights of employees in the American automobile industry are being assured very well due to the power of UAW, in forms such as the Job Bank System. Therefore, the union members are obviously against changing the present system even though the company is close to going bankrupt. For those employees, it does not matter is the company files for bankruptcy or not, since it is already assured by the agreement that they receive certain amount of money anyways. This has indeed lead to the laziness of the employees. Even if the company does abolish such system, the workers have the right to strike, and the productivity will decline anyways. Another reason why such traditional system cannot be abolished is due to the unfairness caused by doing so. Once the system is abolished, employees will not be able to receive revenue from the next year on. For example, if the job bank system stopped in 2010, workers who retired in 2009 will receive full pension and medical insurance, but workers who retired in 2010 receive neither full pension nor medical insurance. Because of these problems, the current system of General Motors may not be able to be replaced in the near future.

Second, their lack of ability to compete in the international market is due to its poor lineups of products. First of all, the main stream of the GM products has been large-sized cars, such as Cadillac, Chevrolet, and Hammer. In the 1950’s and the 1960’s, the automobile industry grew up to become the symbol of capitalism of The United States. It had been the dreams of the customers to own such large-sized luxury cars. Thus, the automaker companies including GM had achieved to meet their demands and succeeded in making a large amount of profit. With its clever marketing strategy and tactics, GM had attracted the consumers very well. GM had even succeeded in taking the consumers into purchasing luxury brand cars with the large amount of its payment paid by the car loans and the credits that GM had offered. GM had thrown off Ford, which had been rejecting to apply the credit and other types of financial services that GM offered. In addition to its clever financial services, GM had constructed many production plants in various countries, and also succeeded in making variety of car brands. In this course of the events, GM had the largest share among all the companies in the American automobile market, and eventually became the best company in the world. “What is good for GM was good for the country”. It is a famous line by the chairman Charles Wilson of GM, representing the power and self- confidence that GM had in its golden period of time.

However, the glory did not continue for so long. In the 1970’s, GM had faced the crisis, precisely known as the oil shocks of 1973 and 1978. The style of products that GM had been producing ever since it had been established was low-mileage. They were even called “Gasoline Insectivore”. Once the oil shock struck, consumers shifted their needs from low-mileage cars to high mileage cars that consumed less amount of gasoline. Therefore, Japanese automobiles sold well because of its efficiency and the Japanese auto companies eventually came into power. Because of this, trade friction has occurred and the American automaker companies including GM turned their heat to Japanese companies not export products to the United States order to keep their social status stable. They blamed automakers of foreign countries for their decrease in sales and had not considered improving their own management system, marketing strategies or producing new types of products. By this course of the events, GM failed to catch up with the needs of the consumers who wanted to buy a high-mileage car. In addition, GM had opposed legislation in a way such as the Muskie act.

Over the past couple of years, more and more people, especially in developed countries are becoming environmentally conscious. Thus the eco-car market is gaining more and more attention all around the world. It is now essential for automobile company in any country to produce high quality and attractive eco friendly cars. However, because of the reasons stated in the previous paragraph, GM is so much behind in the field of eco-car production compared to Japanese automobile companies. Japanese Automaker companies such as Honda, Toyota have been advanced in this field since they have started their researches and developments of various kinds of eco-car, by the time Japanese version of the Muskie act was legislated. They have already pretty much succeeded in designing and producing eco- cars and now, they are at the stage where they aim to cut its production costs. It is still new in memory that Toyota decided to cut the price of “Prius” in rivalry with Honda’s “Insight”. Compared to those advanced Japanese automobiles, eco-cars that GM has produced are way too behind in quality and thus, GM cannot compete in the international eco-car market.

Moreover, GM’s lineups of products are not as attractive as other companies’ lineups. In another word, the design of cars is too old fashioned.　The image of GM automobiles as being symbol of wealth and glory has disappeared already among the consumers, but GM still takes its pride in their old styled products. What consumers want now are the types of cars that are fuel efficient, eco friendly and those with excellent cost performances. When GM has finally noticed that their designs are way too behind the times, they had hired a designer of Chrysler’s design section before, but the result was the same.

The second question is if there will be a serious problem with leaving General Motors filed for bankruptcy. The right or wrong as to whether it is right to use tax to bailout such a private company should also be considered. There are two reasons why General Motors had to file for bankruptcy. One is that General Motors was not able to meet the customer’s constant change in demands. Another reason is the fundamental problem with the structure of the automobile industry of the United States. These reasons could also be applied to Ford Motors and Chrysler that are the other two members of the Detroit three automakers and they have filed for bankruptcy before General Motors did. They have all been through serious dangers of going bankrupt.

In the 1950’s and the 1960’s, it had been the dreams of the American people to own luxury brand cars, in another word, products of “The Big Three”. Cars were considered symbols of their social status and it had been the typical way to show their power. General Motors has indeed succeeded in producing such products to perfectly meet the needs of American consumers. However, in the 1970’s, the fuel price rose dramatically due to the occurrence of the oil shock and customer’s tastes for automobiles have started to change. The automobiles that consumed a lot of fuels have become out of time. Consumer’s demands have shifted to the new type of cars, commonly known as “ high-mileage cars”, while General Motors had not noticed the changes in the society and therefore had not changed its marketing strategy. The sales of General Motor’s low-mileage cars had dropped, and of course it has given a tremendous damage on its business.

In spite of all the lessons that General Motors should have learned from its own experiences, it had been continuously producing cars with high profit margin. The low –mileage cars, such as SUV and Pick-Up Track were popular in the 1980’s and 1990’s when the fuel price was low. General Motors has indeed succeeded in making high profits by producing these products in those old days. As is stated in the previous texts, GM has managed to recover from a serious recover from the tough situation for a certain period of time. However, after all, its marketing strategy, mainly producing large-sized car did not satisfy the consumer’s needs and kept GM from recovering perfectly.

There is also a problem in the structure of the car industry its self. That is, the labor cost is extraordinary high. American companies tend to think the labor cost to be the same variable cost as the material cost. Therefore, when business worsens, the workers are easily laid off. However, GM accepts recommendation of Drucker, the business administration person, and comes to take the labor policy that treats the workers as man. GM pays some part of the medical expense not only of the workers and the retirees but also of their family. In addition, GM pays pension to the retirees. These welfare systems are pretty much enough. As the result of such a high quality welfare, the wage of the American automakers turned out to be extremely high. Some investigation suggests that the wage per an hour including costs of medical insurance, pension, and benefit package, etc is $73.20. That of Toyota is $48, that of other industries is $47.57, that of the workers of the manufacturing is $31.59, and the average of all the industries is just $28.48. How high the wage of the American automaker companies is. This problem of the system that the cost to make products is very high inevitably leads to the high price. Therefore, the American automakers cannot beat the Japanese ones and the European ones because of low price competitiveness.

As the two reasons indicate, GM has not changed its style and not made effort to improve its system. That is, GM did to go bankrupt and went bankrupt. The more competitive a company is, the more sharing in the market it gains. And companies with low price competitiveness cannot help withdrawing from the market. This is the very capitalism. GM was on the verge of the bankruptcy according to the principle of capitalism.

Then, is it right to use tax to bailout such a company? We would try to say “No”. Under the condition of the perfect competition of capitalism, companies with low competitiveness which cannot manage its self well withdraw from the market and companies which seem to grow up in the future gain access to the market. This is preferable situation for capitalistic market and capitalistic country.

Some people say that if GM goes bankrupt there are a lot of the unemployed. The number of the people who work in the GM headquarter amounts to 266 thousand. It is quite easy to think how the effect of GM bankruptcy is enormous when you think not only of the GM headquarter but also of the subsidiaries, for example parts supply companies. Such people agree with GM bailout for that reason. Indeed it is right that a lot of workers lose their jobs if GM go bankrupt, it is not right, however, to use tax to bailout GM.

From now on, we suggest some plans which could solve the unemployed problem. First of all, tax is the means for redistribution of the resource. This is taught in the some classes of the economics, and many people who are interested in the economics know that. According to this idea, GM bailout is not completely mistake because the government redistributes resource to GM in order not to generate the unemployed, while bailout is not suitable for the principle of capitalism. Here, how about reallocation of the unemployed generated by GM bankruptcy? This is one idea to solve the unemployed problem, and this is according to capitalism. However, the plan of reallocation of the unemployed and using tax to achieve it is not efficient redistribution of the resource but just redistribution. It is preferable for redistribution　 of the resource to be done as efficient as possible. Standing this point of view, there are other plans.

One is investing tax in the kinds of the industries including automobile industry for research and development spending in order to make companies more competitive. This way is measure taken before a company goes bankrupt, rather than measure taken after a company goes bankrupt such as bailout plan. This plan is pretty much constructive and positive than bailout plan.

Other plan is construction of the safety net for the unemployed. It is said that there are horizontal equity and the vertical equity when it comes to the efficient redistribution of the resource. While reallocation of the unemployed is reasonable for the vertical equity, construction of the safety net is reasonable for the horizontal equity. Of course, the vertical equity is important, but in this case which it is possible for everyone to lose his/her job the horizontal equity is critical. If the safety net which helped people who lost their jobs found new jobs and paid them some money for the cost of living by when they found new jobs has been well constructed before it became recent situation, the unemployed would find new jobs easily and the effect of that would not so enormous. In addition, such a plan of construction of the safety net would gain the citizen’s agreement because all the American people are applied to the safety net. Therefore, there would be no discussion about it is right to use tax in such a way like GM bailout. The government should manage public fund to improve the public welfare. It is not preferable to manage public fund to save or survive specific people.

It is also reasonable to invest in the industries that will develop in the future instead of GM bailout. For example, even though a lot of workers lose their jobs because of GM bankruptcy, such industries are able to absorb them. Thus, the unemployed problem is not critical. And though it is said many times, this is the way of capitalism. The more competitive the companies are, the more efficient the market is, and this situation is also profitable for the country.

As stated above, some alternative plans are able to thought, and such plans are not desk plans but executables that are based on the principle of capitalism and the idea of efficient redistribution of the resource.

Considering from General Motor’s way of management, we think bail out plan of GM was not right. There are examples of GM’s failure of management in the past. There are three evidences.

First, in 1973, the oil shock happened, and the price of oil suddenly went high. Rise of oil price meant sale of automobile went drop, so American automobile industry (especially GM) should take action such as management reforms, for example changing the model of automobile or getting price down of automobile. But American automobile industry (especially GM) tackled this problem by American political power. In detail, American government limited car exports of Japan. In 1985(what is called Plaza accord), the government did foreign exchange intervention and the current account deficit of America went recover and it ended the black in 1991. But in 2009, GM could not solve the problem by helping the government power. These facts have really important meanings, That is to say GM should reform the management in 1970s or 1980s but due to interruption of American government, the problem of GM was long-postponed. GM tended to hide the problem and refuse the advice or recommendation. In the GM Company, the worker thinks that GM is the best company in the world in the field of auto mobile company so it’s nonsense to accept criticism and advice. We think such a way of management caused the bankruptcy of GM. GM seems to solve the problem temporally but could not solve basically. And GM should change the way of management such as corresponded to changes of time. GM should accept advice and proposal.

Second, we think the GM’s system of employment is failure. The company member consists of like family. For example, from grandfather to grandchild worked in the same company like telephone company AT&T. So family worked in the same company means ray off is difficult. And also All-American Automobile Labor Union has much authority; GM had to take responsibility of health cost insurance of retired person. What is called legacy cost. Concretely, retired person can get 1500 dollars which amount five times of Japanese. And the worker’s hourly wage is 70 or 80 dollars compared the Japanese hourly wage is 30 or 40 dollars. So the cost of production got high. We think this way of management has much useless cost. Even if government bail out GM, these traditional tendencies would not fade away so we think before bail out GM, these traditions should eliminate.

Third, neglecting of development a new type of car such as compact and hybrid car is failure management. GM should make the transition from big sized car to compact and hybrid car. But in 1990s, the oil price was sustainable so GM concentrated on production on big sized car which can get large margin. GM’s management is going their way and they could not keep away with the time.