I want to preface this note simply by saying that I am a car guy. I really like cars and read numerous car magazines. That said, neither me nor any of my family members work in the auto industry. With that said, let’s dig into the post:
I work a for a small high tech company and we live and die by our products. We compete with larger companies in virtually every deal and need to prove the value of our solution or we lose. If we cannot maintain our competitive edge then our competitors will win the deals and my company will eventually go under. This is the "survival of the fittest" mentality of business today. A company must innovate and provide compelling products versus their competitors or they will die. That is, companies that have great ideas flourish while those that cannot innovate will fail. This is not a bad thing, but keeps our economy strong by pruning out companies that cannot compete effectively.
It is in the context of the above paragraph that I view the auto industry. This is an industry that in its hayday was the leader in automotive design and manufacturing. They used the most advanced technologies and developed compelling and differentiated products.
Here we are many years later and the situation has changed. The US automakers have not shown innovation or an ability to identify and create products that consumers want. At the same time, their bloated cost structures meant that they were unable to maintain profitability without turning to high margin and horrible mileage trucks and SUVs.
In contrast, the Japanese automakers were much more focused on developing the cars that consumers wanted in a more cost effective and reliable manner. The result is that they were able to outperform the US automakers. Just look at the Camry and Accord, what US car can really compete effectively with these perennial best sellers? These two cars have been dominant for 10 years. Where have the US automakers been? The short answer is that they have struggled to create a credible competitor. So they have cars that no one wants and cost structures that are uncompetitive.
With all of the above being said, the obvious "survival of the fittest" answer is to let the market run its course. The result would be likely be bankruptcy of one or more automakers and possible mergers. Is this a bad thing? Perhaps, but it also might give the automakers the wake up call they need. They must start producing cars that consumers want. It also might allow them to bring their cost structures in line with the global competitors. The resulting companies that emerge may look very different from those today, but I am not sure if that is a bad thing because today’s automakers have a rather dismal track record.
The bureaucrats in Washington are talking about giving government subsidized loans to the automakers. Why? The automakers are struggling because of their own doing; how would loans help? Wouldn’t they just prolong the agony?
All of the politicians express concerns about the loss of the auto manufacturers. As mentioned above, letting them fail will not make them all disappear, but will make them reorganize which they will need to do eventually anyway.
I want to end this post with a quote from Albert Einstein that I think summarizes this situation and the proposed loan guarantee:
Insanity: doing the same thing over and over and expecting different results
Come on guys, let business run its course. We may be in for short term pain, but long-term it will be better for the businesses and the economy as a whole – anything else is insanity.