Tuesday, November 18, 2008

GM Bailout - Go or no go?

This really makes for an interesting case study. The largest US automaker GM has only enough money to last until Dec 2008. Banks don't want to lend money and the commercial paper market has dried up making it impossible for GM to raise money from the market.

Here are some of the facts:

1. GM employs 266,000 people. Together with its subcontractors employ close to 500,000.
2. For each car GM sells it loses about US$600 (vs Toyota which makes $700).
3. Because of unions, the hourly pay for GM workers is US$78 per hour. The US autoworker is paid in 2 days the monthly salary of a Thai worker on the Toyota assembly line in Thailand.
4. If GM goes bust, the estimated cost to govt in terms of lost taxes, unemployment benefit payouts etc is $200B. GM needs a bailout of $20B to remain a going concern.

The best thing to do according to George Bush is let it go bust - GM is has an uncompetitive business and it should be allowed to fail. Rescuing GM using tax payer's money will be a moral hazard - other uncompetitive businesses will want govt bailouts. It is not fair for the govt to use tax payers money to help some people (like overpaid autoworkers) and not others. The Democrats argue that it does not make sense to let GM fail because it will cost the economy 500,000 jobs and tax payers more money. Many analysts suggest the best and most practical way forward is to bailout GM and squeeze its unions and management for pay cuts and concessions...force a restructuring of the company to make it competitive again. Letting it go bust is just too horrendous to consider for the US economy which ia already falling off the cliff. However, if GM remains uncompetitive, it will need more infusions in the future. IMHO, whether to bailout a business depends on whether it will eventually become competitive. A positive example is Chrysler's bailout of US$1B in 1979. Under the leadership of Lee Iacocca the company turned itself around and repaid the govt ahead of schedule. For a negative example we don't have too look too far. Chartered Semiconductor received billions through Temasek but can't get to the level of competitiveness of its Taiwanese rivals and after years of red ink and cash infusions, Temasek is looking for someone to buy this company....and the losses to Singapore taxpayers all part and parcel of Temasek's investment process which ordinary Singaporeans are told not to be too concerned about.


Anonymous said...

Its case studies like this that creates a love and hate relationship between me and Economics. Thanks Lucky for highlighting this case.

We hope to achieve a win-win situation. But sometimes,it is impossible in the short-term. In the long term we might achieved win-win BUT might not be able to enjoy the fruits of our labour or the things that sacrificed because we are six feet under.

If we start using the argument of greater good than we can easily fall into the trap of authoritarianism like William Pitt the Younger, the youngest British PM, reminded the the British people ages ago.

"Necessity is the argument of tyrants, the creed of slaves."

-NS is a must.
-1st April 2008, the first $40,000 must be locked up in CPF.
-CPF Life is a must.
-In 1 year, you can only use a maximum of $3,500 in your Medisave even though if your operation cost $5000 and your Medisave has $10,000.

Who says Economics is boring??


Economist with a Heart :)

AlphavilleSG said...

In some ways, Bush is the cause of GM's failure, they were given the wrong incentives.

To weight the problem, consider the statement by Toyota, which had announced that annual profit is dropping by 74%, this is a company that advertise its way of management, to sell cars.

So if the best of breed is fraying on the edges, what is the market like for the laggards? Overcapacity will eventually cause plants to shut.

If it's union makes airplanes with a few years of backlog, then we are talking, this is a company that sells unattractive cars.

And to add to the point of being competitive, comparative advantage says that the US is good at making cars (just not as good as the Japanese), nevertheless every car marker around the world has a factory in town. So the fact remains, GM is a badly run company.

Here's my bet, it will go chapter 11, the fall-out is overblown, some deals will be cut between Ford and Chrysler, bail-out funds made available to them instead. Some jobs will be saved. God bless American once again, happy days.

Onlooker said...

GM hmmm......
Is a symbol of American industrial rise.If the bailout(hopefully with condition attached mainly sack the useless CEO because he/she is suppose to make the business competitive) is managed properly by Obama's team,it's possible that it will revived and come back stronger.
Chartered Semiconductor is gone case liao.
Know why? QC,QC,QC.
It's better to let the scholars (elites or not) face the real world and compete with people whom they look down on(it's true) ,then to keep them in a sheltered environment and breed a misconception of the real world.
Our Scholars both import and local are becoming Jing di zhi wa or frog in a well.
Studying in Ivy leagues school and other prestigious school is only preparing for them to contribute to society by means of striving and hard work.
And usually they wind up going for cushy jobs under uni dropouts like Bill gates or (in our case) GLC doing very little and minute things.
The next route is the ministerial route where they hope to become the next minister where they get a million dollar paycheck regardless if they have "REALLY" contributed to society plus bragging right and then some.

Undertaker said...

US$78/hr. for assembly-line worker!
Let it die!

Daniel Ling said...

I thought CPF Lock up is 20k?

Anyway i wonder whether SG will take tat as a example to say cannot maintain min wages.Which i think currently does not exist right.USD 78 is so bloodly high...

yamizi said...

An autoworker's daily pay is higher than me! Mine is around the same figure but in SGD.


Anonymous said...

Hmm a Law assistant in SG makes $624 a day (assuming 8 hrs) ... SGD$18720 per month basic (assuming 30 days).

Maybe I should have studied law :-S


Anonymous said...

Mr Tan,

Really thank u for giving a lecture. You make a very complicated so simple and clear.

As for ur Semi... Sigh.....

Your grateful reader

DanielXX said...

Fuck man, restructure those union workers' salaries and GM will be the most profitable company again! Surely those farkers who earn US$80/hr or S$20,000 PER MONTH (can you believe it???) can compromise so that they keep their jobs and their company? Otherwise just let the whole US die lah. And they keep on chanting "USA!USA!" at those sports events for what? When it comes to money, no patriots, all sons of bitches.

Jason said...

Today GM suffers a loss of about $2,000 per vehicle sold. On the other hand Toyota whose employees are not part of the UAW earns a profit of about $1,200 per vehicle sold.

No Bailout until the UAW sees the light.


Anonymous said...

As the hourly rate of US$78 seemed really high, went to counter-check other sources.
The base rate plus the cost of benefits, including pension and future retiree health care costs, adds up to about US$78. The base rate itself is about US$28, which, in my view is still very high.

Anonymous said...

$78 per hour is the rough ball park figure, it is the cost to the company, just like CPF, whether it is the employer contributions or employee contributions, who pays you?

I saw the fucker CEO photo, that guy really look like a scumbag in movies.

Jason said...

The UAW needs a little tough love. It derailed the Cerberus deal at Delphi. Today GM suffers a loss of about $2,000 per vehicle sold. On the other hand Toyota whose employees are not part of the UAW earns a profit of about $1,200 per vehicle sold. If GM was able to operate with labor prices near Toyota’s it would have pocketed an additional $29,715,200,000.


Onlooker said...

Just to put thing in perspective.
Fact check
To see through propaganda one must consider all the facts that were laid in front of them and sift for the answer or derive it from the facts that are collected.
IE do not jump to conclusion(Though I guilty of jumping to conclusion sometimes ;p )

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