Once again this week we were subjected to the CEO’s of the big three automakers appearing before congress requesting money to rescue their failing operations. They all claim that they will be out of money and in default by the end of the year. There is no doubt that if one or all three of the automakers fail, it will have a major affect on the economy. The question we need to ask ourselves is if it is wise for the government to simply give money to the automakers in order to rescue them without addressing the reasons for the shortage of cash being experienced by the companies.
In last weeks posting we explained management of cash flow. The fact that the automakers find themselves going into default leads us to believe they have insufficient operating cash flow to sustain their operations at the present level. To fix this problem the automakers need to discover why they lack sufficient operating cash flow.
Prior to the introduction of foreign competition, the U.S. automakers held a majority of the U.S. auto market. It was during this period that the automakers decided they wanted to share their prosperity with their hard working employees. They did this by entering into labor contracts that provided lucrative fringe benefits. Included in these fringe benefits were healthcare benefits that employees continued to receive even after retirement. As the workforce of the automakers matured, a point was reached where they were paying more to provide benefits to employees who no longer produced for the company than they did for those who were productive employees. In other words operating cash flow is being used to provide benefits for employees who no longer produce operating cash flow, or income, for the company.
In addition, the companies provided a job bank where employees continued to receive pay even after being laid-off. The reasoning here is that these employees would still be paid while they either looked for another automaker job or went back to school to train for a different career. However, many employees abused this benefit and continued to receive pay for many years past their being laid-off. In a sense, the automakers would downsize and lay people off but the automakers received no financial benefit from the layoffs since they still had to pay the laid-off employees thus depleting more of the company’s operating cash flow.
To make matters worse, increased pressure from environmentalists on the government led to increased regulations on the companies. Among these regulations were fuel economy standards implemented to reduce carbon emissions and the use of fossil fuels. These regulations control how automobiles are built. Each time these regulations change, automakers need to retool their assembly lines and redesign their cars and trucks to adhere to the new regulations. These changes can cost the automakers millions of dollars, depleting more of their valuable operating cash flow.
To fix these cash flow problems, automakers will first require concessions by the company’s employees. No one likes to give up benefits from their employer but employees of the automakers must look at the long-term picture. Making concessions at this time helps insure the company continues to operate in the future. Without these concessions, the company may go into default and eventually have to liquidate in order to pay their obligations. If this occurs, all the benefits will cease to exist and thousands will become unemployed. Wouldn’t it make more sense to make some concessions now in order to insure continuance of benefits that remain and employment for those still working for the companies?
Second, instead of the government giving the automakers more of the taxpayers’ money, wouldn’t it make sense for the government to ease some of the costly regulations on the industry? This would make it possible for the automakers to build cars the way they want to which is to build cars people want, and can afford to buy. Perhaps it would be wiser for the government to give the automakers tax breaks, instead of cash, so they can reduce the price of their cars and become more competitive in the marketplace.
A loan to automakers does nothing to increase the company’s operating cash flow. It just increases the company’s cash flow through financing. Before throwing money at the problem, we need to take time to discover the reason for the problem. Otherwise, we will only be prolonging the inevitable default and possible liquidation of these once successful companies.
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