Thursday, November 20, 2008

The Big Three Need a Business Plan

The big three auto companies are using and have been using a failed business plan. In many ways it is similar to the government’s plan for programs. These auto makers agreed to provide both retirement and health insurance to retirees. This is not a bad thing, but they way they implemented this agreed upon benefit was just terrible. The big three grew each year from WWII to about the 70’s. They were awash in money and were growing. In order to maintain the appearance of great profits they decided to pay for retirees benefits out of current operating cash flow. This worked well when few of the promised workers had retired. However, when ever more workers retired the cost began escalating exponentially.

The oil embargo along with foreign car makers gobbling up the car market, the big three saw their growth slowed and ultimately reduced. Making better cars increased the useful life of a car contributing to flat sales. All the time more and more workers were retiring.

Instead of setting aside a small portion of the profits decades ago and accruing the cost for these benefits in the year they were earned, the big three used cash flow accounting. Now they have no way to make a car at a low enough cost to pay both the worker and retiree’s benefits.

It would be a huge mistake to bailout the big three. Until the big three come back with a workable business plan, not one penny should be LOANED, not given to them. This may seem cruel, but the fact remains that there have been numerous business that have failed with workers losing much and they never received a bit of help. In fact it is not the purpose of taxpayer to assume every risk.

Many say the big three if allowed to fail will be devastating. I will say that there will be pain, but not devastating. The number of cars being built or the demand for cars will be no less than before. The demand for cars will fuel the remaining auto makers, suppliers of parts and dealers to produce and sell more. This will require more workers. These displaced workers from the big three will simply have to find other companies to work for, the same thing millions of us have had to do.


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