The global financial crisis is suffocating the Detroit automakers, but the problems at General Motors (GM), Ford (F), and Chrysler have been festering for years—even when the mighty "Big Three" were earning billions. Aging factories, inflexible unions, arrogant executives and shoddy quality have all damaged Detroit. Now, with panicky consumers fleeing showrooms, catastrophe looms: Without a dubious federal bailout, all three automakers face the prospect of bankruptcy.
There will be plenty of business-school case studies analyzing all the automakers' wrong turns. But, as they say in the industry, it all comes down to product. So here are ten cars that help explain the demise of Detroit:
Ford Pinto. This ill-fated subcompact came to epitomize the arrogance of Big Auto. Ford hurried the Pinto to market in the early 1970s to battle cheap imports like the Volkswagen Beetle that were selling for less than $2,000. Initial sales were strong, but quality problems emerged. Then came the infamous safety problems with exploding fuel tanks, which Ford refused to acknowledge. Message: The customer comes last.
Jack Nerad of Kelley Blue Book said:
The problems for the domestics really started in the '70s when they were offering cars like the Pinto up against higher-tech, better-built Toyota Corollas and Honda Civics.
Chevrolet Cavalier. GM sold millions of Cavaliers in the 1980s—and decided the thrifty car was so successful the company didn't need to update it for more than a decade. To milk the model, GM even added some lipstick and high heels and tried to peddle the upgrade as the Cadillac Cimarron—a legendary flop. Honda (HMC) and Toyota (TM), meanwhile, were updating their competing models every four or five years, and grabbing market share with each quality improvement. A new Cavalier came out in the mid 1990s—then languished for another decade, while GM put most of its money into big trucks and SUVs. GM has since improved its small cars. "But they have to be miles better than the imports for Americans to forget how bad their small cars used to be," says Jamie Page Deaton of U.S. News's Rankings and Reviews car-ranking site. Even if they are better, many Americans wonder why they should give Detroit a second—or third—chance.
Chevrolet Astro. While Chrysler, Toyota, and Honda were refining their minivans in the 1990s and coming up with innovations like hideaway seats and electric sliding doors, GM was offering an old, truck-based van gussied up with carpeting and cupholders. "It showed GM's repeated failure to market competitive products based on styling and packaging," says Tom Libby of J. D. Power & Associates. The Astro drove like a bread truck, and consumers noticed. It also earned the worst safety ratings in its class. Before long, GM was effectively out of the minivan segment. No biggie—those were just mainstream American families the automaker decided to ignore.
Ford Taurus. Try to explain this logic: After its 1986 debut, the Taurus became a perennial bestseller. So for the next 20 years, Ford let quality decline and neglected the family sedan, while pouring love and money into trucks and SUVs. By early this decade, the Taurus had become a dowdy, rental-lot staple. So Ford simply retired the Taurus in 2006 and replaced it with the 500 sedan—which went on to set records as one of the most short-lived models ever. A year later, Ford revived the Taurus name and applied it to a bastardized 500. But by then, the damage was done.
Ford Explorer. This breakout vehicle helped launch SUVs and drove record profits at Ford in the 1990s, as Americans flocked to big utilities that could take them off-road if they ever got adventurous. It also blinded Ford to the future. "Executives could not see beyond the green piling up at their feet," says David Magee, author of How Toyota Became No. 1. "The Explorer helped create an addiction that lasted 15 years." GM and Chrysler followed right behind, with SUVs like the Chevy Trailblazer and the Dodge Durango—lockstep moves that reveal how the Detroit automakers focused on each other rather than the broader marketplace.
Jaguar X-Type. Ford bought the British luxury brand Jaguar in 1990, when all three Detroit automakers were seeking ways to expand their global reach. Eventually, Ford decided to build an entry-level Jaguar starting at around $30,000 for people looking to move up from, say, a Mercury Marquis. The down-market move "represented everything that Jaguar is not," says Libby of J. D. Power. The X-Type was built on an ordinary sedan platform from elsewhere in Ford's lineup, and the front-wheel-drive system underwhelmed enthusiasts used to rear-drive European makes. Jag purists were horrified, and aspiring luxury buyers shunned the X-Type in favor of BMWs, Lexuses, and Acuras. After fumbling the luxury brand for nearly two decades, Ford sold Jaguar to an Indian conglomerate in 2008.
Hummer H2. It sure seemed cool back in 2003, when gas was less than $2 per gallon. And it sure seems gaudy now. This supersized SUV clearly had a heyday, but it also helped paint parent company GM as an enviro-hostile corporation that sold only gas guzzlers. Sales collapsed as gas prices rose toward $4 a gallon in mid-2008, and GM has been trying to sell the division for six months—with no takers, so far. "GM wanted to make Hummer a signature company brand," says Magee. "Instead, it showed the company was out of touch with the needs of the 21st century."
Toyota Prius. While GM was spending $1 billion to build up the Hummer franchise, Toyota was spending $1 billion to develop a high-mileage hybrid—even though gas prices were still low. After the Prius debuted in the United States in 2000, GM execs seized yet another opportunity to display their intimate knowledge of American consumers, arguing that hybrids didn't make economic sense and that only environmentalists would buy them. Today, Toyota can barely keep up with demand for the Prius, and it has plans to start building them in the United States. GM, meanwhile, is scrambling to rush hybrids and other high-mileage cars into dealerships—far too late.
Chrysler Sebring. Did Chrysler engineers set out to build the world's most boring car? Of course not. Yet Chrysler still produces this blandmobile to keep assembly lines running and maintain a presence, however weak, in the sedan market. In the new Darwinian auto industry, this model seems destined for extinction, since the only way to sell marginal cars is with steep discounts, which money-losing automakers can no longer afford. In fact, if Chrysler ends up being carved into pieces and sold to competitors, as many analysts expect, most of its passenger-car lineup could get the axe, since there's little to distinguish it. Besides—what's a sebring, anyway?
Jeep Compass. Quick, what's the difference between the Jeep Compass, the Jeep Liberty, and the Jeep Patriot? The bosses at Chrysler, which owns Jeep, could explain, but the real answer is that Chrysler has oversaturated its strongest brand lineup in a desperate attempt to boost sales. "The Compass is not needed," says James Bell of Intellichoice.com. "Just the Liberty, please." The Compass has the same mechanical underpinnings as the Dodge Caliber, which helps illustrate one of Detroit's favorite tricks: Create multiple versions of every product under a bunch of different brand names, hoping that if buyers shun one, they'll take a more favorable view of another. Message to Detroit: Consumers aren't that stupid. Give them a bit more credit, and you might have a future.
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This article has 46 comments:
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Magnum
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8 Comments
Nov 16 06:17 AM(Let me say at the outset I am truly sorry for those who have lost their jobs or are facing the possibility of a job loss, whether at GM or any other firm. I have been there, as have most people at one time or another.)
I wrote in 2004 that GM was essentially bankrupt. They owed more in pension obligations than it seemed likely they would be able to pay, without major restructuring of the union contracts. I was not alone in such an assessment, although there were not many of us. Now that assessment is common wisdom.
Bloomberg today cites sources that claim a collapse of GM would cost taxpayers $200 billion if the company were forced to liquidate. The projections also called for the loss of "millions" of auto-related jobs. GM, Ford, and Chrysler employ 240,000. They provide healthcare to 2 million, pension benefits to 775,000. Another 5 million jobs are directly related to the three auto companies. GM has 6,000 dealerships which employ 344,000 people. According to a recent study by the Center for Automotive Research (CAR), if the domestic automakers cut output and employment by 50 percent, nearly 2.5 million jobs would be lost and governments would lose $108 billion in revenue over three years. (Edd Snyder at Roadtrip blog)
How did we get to a place where the market cap of GM is a mere $1.8 billion and its stock price has dropped from $87 in early 1999 to $3.10 today? (See chart below.) Where Rod Lache of Deutsche Bank has a "price target" of zero for GM? "Even if GM succeeds in averting a bankruptcy, we believe that the company's future path is likely to be bankruptcy-like," Lache wrote.
The litany of reasons is long. At the top of the list are union contracts which mandate high costs and pension plans which cannot be met. Then there is the problem of many years of poorly designed cars, although they are now getting their act together. We can also discuss poor management and bloated costs, like paying multiple thousands of workers who are not actually working. GM is structured for the 50% market share they used to command, whereas now they only have 20%.
Wilbur Ross, a well-known multi-billionaire investor, was on CNBC saying that allowing GM to go bankrupt would throw the country into what sounded like a depression. Of course, he does have an auto parts company which supplies GM; so he, as my Dad would say, does have a dog in that hunt.
Ross said that we as a nation are to blame for GM's problems (I am not making this up) because we do not have a national industrial policy. The US allowed other automotive companies to build plants in states that had lower labor costs, and that is the reason GM is uncompetitive. GM pays an average of $33 an hour, and those selfish other companies pay a mere $19 plus a host of benefits.
Ross evidently believes that because some states have lower taxes and right to work laws, that it is the responsibility of the taxpayer to give GM a certain type of immortality rather than suggest GM deal with its problems directly. I assume that Ross also sides with the French when they suggest that Ireland should raise taxes so they will not have to compete with Ireland for business. Such thinking is nonsense and is also unconstitutional.
Let's all acknowledge that having GM go bankrupt would not be a good thing. But it is not the end of the US automotive industry, nor even of GM. Let's think about what a GM bankruptcy might look like. In a bankruptcy, the debt holders line up to come up with a restructuring plan so that they can maximize the return of their loans or obligations. The shareholders get wiped out, but with GM down over 95%, that has largely been accomplished. That process has happened with airlines, steel companies, and tens of thousand of other companies. It is called creative destruction.
First, let's understand that the real owners of GM are the pension plans, as I wrote in 2004. They are the entities with the largest obligations and the most to lose. They are the biggest stakeholders in a successful GM. Giving them the responsibility for making a new, leaner, meaner GM with realistic union contracts would be rational; otherwise they would lose most of what they have.
Factories need to be closed. Auto sales are down to 11 million cars a year, the lowest since 1982, which was the last major recession. Automotive companies sold cars at such low prices in the last few years that sales went to 16 million a year. But the cars that have been sold will last for a long time. Few people are going to buy a new car when the old one is working fine, especially in a recession and a Muddle Through economy. Further, does GM really need eight automotive lines, some of which have been losing money for years?
A restructured GM with realistic costs could be quite competitive. They have some great cars. I drive one. It is four years old and so good I am likely to drive it for at least another four.
At some point after the restructuring, the pension plans could float the stock on the market and get some real value. If actual pensions need to be adjusted, then so be it. While that is sad for the GM pensioners, is it any sadder than for Delta or United Airlines or steel company pensioners who saw their benefits go down? For the vast majority of Americans, no one guarantees their full retirement. Why should auto trade unions be any different?
Taxpayers in one form or another are going to have to pay something. Unemployment costs, increased contributions to the Pension Benefit Guarantee Corporation, job training, relocation, and other costs will be borne. So, it is in our interest to get involved so as to minimize our costs, as well as help preserve as many jobs as possible.
Sadly, I think it is likely that a Democratic majority next year will quickly pass a bailout that will not solve any of the longer-term problems. Obama evidently wants to appoint an "automotive czar;" and the name being floated is the very liberal Michigan former Representative David Bonior, whose anti-trade and pro-union positions are well known. This is appointing the fox to guard the hen house. It is not a recipe for the restructuring that is needed.
The bailout for GM is a bailout for the trade unions and management (who not coincidentally both made large contributions to the Democratic Party and candidates). US consumers are simply going to buy fewer cars in the future. That is a fact. Spending $50 billion does not address that reality. That $50 billion can be better spent by helping workers who lose their jobs. Without serious reforms a bailout will simply postpone the problem, and there will be a need for more money in a few years. And do we think that the management which got GM into the current mess is the group to bring them out?
And as to the argument that "We bailed out Wall Street, so why not GM?" it doesn't hold water. What we did and are doing is to try and keep the financial system functioning, so we don't see the world economy simply shut down. But don't tell the 125,000 people who have lost jobs on Wall Street that it was a bailout. That number is likely to go to 200,000. No one thinks that a restructured GM would see anywhere close to half that number of job losses.
Do we protect Circuit City? Sun just announced plans to lay off 6,000 workers. Where is their bailout? Citibank announced 10,000 further job cuts today. This is a recession. And sadly that means a lot of jobs are going to be lost. GM workers should have no more right to their jobs than a Sun or Citibank or Circuit City worker.
Now, would I be opposed to a bridge loan to help in the transition? No, because a viable Detroit is good for the country and will cost the taxpayer less in the long run than if we have to pick up their pension benefits. But any money must come with realistic reforms that put in charge new management and a realistic cost structure so GM can compete.
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WPSPIKER
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6 Comments
Nov 16 09:05 AM-
Pat Shuff
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11 Comments
Nov 16 09:08 AMOn December 1st, 2006 Wilbur L. Ross announced a definitive agreement for IAC North America to acquire Lear Corporations North American Interior Systems Division.
The operations being acquired by IAC NA include 26 facilities located in the United States, Canada and Mexico with revenues of approximately $2.6 billion. The facilities supply cockpits, door panels, flooring and acoustics, instrument panels, interior trim and overhead systems to various original equipment manufacturers.
On April 2nd 2007, the completion of the North America transaction has been announced.
In April 2007 Wilbur L. Ross announced that IAC North America has signed a definitive agreement with Collins & Aikman (“C&A”) to acquire C&A’s Carpet & Acoustics Division (“Soft Trim”). The Soft Trim operations include 16 facilities located in the US, Canada and Mexico. The facilities supply a broad range of automotive interior carpet and acoustic products including molded flooring systems, accessory mats, dash insulators, package trays and trunk liners. On October 12th 2007, IAC announced that it has completed the acquisition of the Soft Trim Division from Collins & Aikman.
Additionally, IAC concluded its acquisition of a C&A manufacturing facility in Saltillo, Mexico on October 1, 2007. The Saltillo facility manufactures injection molded components, including instrument panels, doors, fascias and interior trim.
Furthermore IAC announced on November 7, 2007 the completion of the acquisition of Collins and Aikman’s (C&A) manufacturing facility in Hermosillo, Mexico. The facility primarily
manufactures and assembles instrument panels and door panels for Ford Motor Company.
South America
Our owners have acquired a majority interest (56%) in Plascar Participacoes Industriais S.A. which is listed on the Sao Paolo stock exchange. Plascar is a leading interior and exterior supplier producing parts for all major OEM’s like VW, GM/Opel and Mercedes Heavy Trucks. The turnover is approx. $ 360 Mio.
We are delighted to have Plascar as an IAC Group member on board to cover the South American Automotive Market with 4 plants in Brazil and 4 plants in Argentina.
www.iacgroup.eu/10.0.h...
~~~~~~~~~~~~~~~~~~~~~~...
How does this oligarch find time to run his auto parts empire while running from one NY financial news network to the next for major facetime pumping of the carmaker bailout. More importantly, what are these news networks running. Is Ross a golfing foursome with Imelt, Murdoch, Bloomberg. And what skin in the game have his partners got that is routinely a failure to mention.
When pajamas are outlawed only pajama people will have pajamas. It just isn't fair, an unlevel playing field,
competing with those paid by the word as in the former Eastern Bloc.
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Roy M.
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355 Comments
Nov 16 11:01 AMNo need to talk too much.
American made cars SUCK.
The last 2 GM cars bought were a total failure.
No good products, don't stay in the business. Period.
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Paul Killinger
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1025 Comments
Nov 16 11:08 AM"No more givebacks. We've done our part."
Why, of course. What else would anyone expect?
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Skepto
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3 Comments
Nov 16 12:09 PMIf America feels she must waste her dwindling national wealth on end-of-life intensive care for this moribund patient, god help us all.
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jrs87sch
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35 Comments
My Website
Nov 16 04:10 PMLet them die. Don't get me wrong, I love my Chevrolet Tahoe, but I despise the idiots that gained from poorly running the company.
It's too bad that the culmination of a few executives and labor unions are going to take a chunk out of our GDP if these companies fail, but capitalism is about rewarding those who run businesses well.
We have to let businesses, big or small, fail in order to let our economy go on.
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Ax
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25 Comments
Nov 16 04:41 PMWhile the rest of the world was thinking about the consumer (how much would a car buyer save on gas), GM thought about how much money it can extort from the consumer (who wanted to drive a panzertank on a road). The theory at GM was: why should we make a fuel efficient car (that needs some f...ing engineering, cost restructuring, price competitiveness), when we can just built a monster truck and put a price of... 200.000 $ on it?
And so they did it. Well, now that f...king engineering must be done by the government, with a bail out. GM, Ford, Chrysler. I would personally bail out Ford, because this car company at least tried to compete in world markets, while GM... did absolutely nothing.
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Ax
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25 Comments
Nov 16 04:49 PM-
Reinko
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346 Comments
Nov 16 05:23 PMFrom the mid nineties the big three are complaining about the foreingers and they did nothing, just absolutely nothing to adept.
In this world the USA has plenty of so called 'economists' that always explain that the US economy is 'very adaptive'.
After my humble opinion the US economy is not very adaptive and we are only looking at some fatbag obese people doing their dairly routine; that is all we can say about the US industrial complex. (Although when it comes to weaponry stuff they still are rather good, but who wants to buy those weapons if you get a free 'maintainance team' with it?)
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mike mohr
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13 Comments
Nov 16 06:00 PM-
inthemoney
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70 Comments
Nov 16 06:10 PMIn the rest of the country one has to get good college education and at least 5 years of experience to make this kind of money. No wonder they are bankrupt.
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Jackson Cash
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293 Comments
Nov 16 06:16 PMSpeaking from personal experience, American auto's have been a shame. After owning a Ford F250, and Taurus, I will never buy another Ford again.
Credit, price, etc, mean absolutely nothing to the consumer that values quality -- Detroit was utterly doomed when they couldn't offer anything above a 36k mile warranty.
They won't recover.
NO BAILOUT FOR THE RICH AUTOMAKERS AND THEIR FAT CAT UNIONS THAT MADE HORSE-$HIT DECISIONS AND WORSE CARS/TRUCKS!
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Jerbear
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20 Comments
Nov 16 06:53 PMGM, Ford, Chrylser, Toyota, Honda and Nissan all have their own way of doing business and their own personalities.
GM and Chrysler are the worst of the bunch. They are bloating bureaucratic monsters that manage by intimidation. They intimidate their employees and suppliers to control and motivate. The unions control the plants which are over paid and over staffed.
No one is allowed to make a decision and they constantly move people around so that no one is accountable or can complete anything they start. Common Sense has left the building a long time ago.
Ford is better but not by much.
It would not be good for the USA to loose a company as large as GM. Management screwed it up long ago and it is beyond repair. Putting money into them would be a very bad investment.
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usanowGMelect
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12 Comments
Nov 16 07:57 PMBy voting to close GM, you vote against your investment in your own community and to allow foriegn interests to entrench deeper in your back yards. I agree that GM needs to redo their business plan because there are lots of mixed signals and this is why congress is taking their time to sort all this out. But to destroy any community in this country as a lesson to unions and poor management would be like cutting off your nose to spite your face. I don't look at this so much a bailout, but as a loan to help out a nieghbor who's fallen to an unfreindly economy. Hell, we're pumping 10 billion into Iraq every month. Just helping a nieghbor out right? Let's help our own with 2 just months of Iraq compensation.
But demand a business plan, that emphasizes that our communities come before retention bonuses, golden parachutes, foriegn investment and global aspirations. Demand union accountability - stem absenteeism, tighten work restrictions, better review family medical leave abuse, throw out appointed position slackers and eliminate job entitlement attitudes.
In turn we should expect work coming back to our communities, which should energize our economy, which hopefully will return the big three to profitability, and in a year or two create a robust return for the taxpayer.
If we don't start to come together soon, we will surely fall apart.
We just have to put politics aside and demand accountability. Please
save the U.S.A.. Don't ask for it, Don't argue about it. Demand it!
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DavidR
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10 Comments
Nov 16 08:00 PM-
Miamicanes
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1 Comment
Nov 16 08:01 PMWorst-case, Toyota buys GM at a pittance for the brand name, shuts down most of its non-Saturn US manufacturing facilities, and shifts the rest to its existing "Toyota" plants... someday, expanding production with new plants in business-friendly states. Chevy, Cadillac, and Saturn live on as brand names for US-inspired Toyota designs. Scion quietly assumes a new identity as "Chevrolet". Cadillac becomes their brand for "luxury/sport trucks", limousines, and maybe a sedan or two positioned at the upwardly mobile African-American market (among whom "Cadillac" has ALWAYS been a strong brand name). Saturn assumes a niche somewhere between "Toyota" and "Lexus", leaning heavily towards minivan-like SUVs and targeting the "suburban family" market. Pontiac? Tough call... it overlaps with "Chevrolet" so much, it's hard to say what really makes a "Chevy" a "Chevy" and distinct from a "Pontiac". My guess is they'll let the "Pontiac" name limp along for a few years as their "Muscle Car" brand (especially if gas stays cheap for a few years), then quietly give it the axe the next time prices soar. "Hummer?" Yeah... they'll keep it alive... but only the most expensive model, and take it back to its roots as the "Maybach" of high-end SUVs.
Insofar as Chrysler goes, I can see Ford tiptoeing around trying to buy the rights to their intellectual property, getting caught with their hands in the cookie jar by Washington, and bullied into buying the whole company as a condition of bailout funding. Jeep would be spun off, and probably get bought by Mazda or Mitsubishi. Ford will conveniently package "Jeep, Inc." in a way that allows it to unload most of Chrysler's American manufacturing facilities and thwart the Democrats in Washington, and its new buyer will liquidate most of them within a matter of months.
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dixie
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49 Comments
Nov 16 08:56 PMThe Asian transplants don't give back. They take American dollars and send them to their overseas owners.
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Andy Cole
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26 Comments
My Website
Nov 16 09:22 PM-
ptr44
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40 Comments
Nov 16 10:27 PM-
Jackson Cash
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293 Comments
Nov 16 10:37 PMHow the heck can one try and make the case that donating money to communities whilst the top ranks make decisions that have zero to do with community development??
Communities based on unions ripped themselves apart and bad management and poor products earn zero sympathy from me.
Simply because "people" are attached to this problem doesn't mean we socialize it.
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Former autoworker
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1 Comment
Nov 17 12:04 AMThe auto industry is an example of America gone bad. Let'em go chapter 11 and allow market economics heal the wounds. The smart survivors of this mess might start a company that can compete with Toyota, or build solar panels. Pouring tax dollars into these failing businesses will only take down what's left of America. Instead spend the money to send the motivated survivors to school so they can compete with the Chinese or Indian's who can do math and speak multiple languages.
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4HOFTA
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5 Comments
Nov 17 12:52 AMSo, how many BIllions does the taxpayer have to float the Big three before we see a new car?
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bcncv
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28 Comments
Nov 17 01:02 AMProblem #2: Letting one of the big three shut down would be an economic nightmare for this country and they can't be allowed to fail.
Problem #3: Both of the above are right.
So what do we do?
My proposal:
-Let GM declare chapter 11. It will be messy, but it has to be done. Private investors will have to put up the restructuring loan. If they can't do this, then part of the bailout can guarantee (but not act as) some of these loans. They can restructure their debt, pension obligations, and entire business model. If it works right, we might actually get an American car company that we can be proud of.
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User 263844
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12 Comments
Nov 17 01:24 AMIt would also cause the coming depression to be much deeper.
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hernje
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20 Comments
Nov 17 08:48 AMOn Nov 16 06:16 PM wyosteven wrote:
> Good. Let Detroit rot.
>
> Speaking from personal experience, American auto's have been a shame.
> After owning a Ford F250, and Taurus, I will never buy another Ford
> again.
>
> Credit, price, etc, mean absolutely nothing to the consumer that
> values quality -- Detroit was utterly doomed when they couldn't offer
> anything above a 36k mile warranty.
>
> They won't recover.
>
> NO BAILOUT FOR THE RICH AUTOMAKERS AND THEIR FAT CAT UNIONS THAT
> MADE HORSE-$HIT DECISIONS AND WORSE CARS/TRUCKS!