Bankrupt

I’ve expressed my strong opposition to auto industry and other bailouts in other posts. Part of me dared to hope that the worst of these was over. But with the announcement of this morning’s “rescue package” for the Big Three, I simply must add a few more thoughts.

First off, among the more disingenuous rationalizations for the auto industry bailout is the notion that consumers will not purchase a vehicle from a bankrupt company.

[Bush] said that bankruptcy was not a workable alternative. “Chapter 11 is unlikely to work for the American automakers at this time,” Mr. Bush said, noting that consumers would be unlikely to purchase cars from a bankrupt manufacturer.

I contend that when Chapter 11 is explained properly to consumers, they will be willing to purchase from a company which is reorganizing itself under its provisions. Perhaps two brief anecdotes from my own experience will illustrate this:

1) United Airlines filed for Chapter 11 bankruptcy protection in December of 2001, and didn’t emerge until February of 2006. Over the course of that period, I logged many thousands of miles (and spent thousands of dollars) on United Airlines…and many other passengers logged and spent much more. While it is true that a plane ticket costs significantly less than a car, for a business traveler the stakes can be very high: if an airline is liquidated on the eve of a critical trip, it may be impossible to arrange alternative transportation at the last minute. An entire, long-planned and potentially profitable trip can thus be wiped out. And for business or leisure travelers, if an airline liquidates in the middle of a trip, the traveler will be stuck at the destination (or perhaps even in a connecting city) without a ticket home. These facts were on my mind every time I bought a ticket on UAL, but I had confidence that the airline was simply reorganizing itself so it could emerge on its feet again.

2) Even if an automotive company liquidates, a vast network of aftermarket repair shops and parts suppliers will remain to service the company’s vehicles. I have an extreme example of this in my own experience: For the last eight years, I have been the happy owner of a vehicle make which has not even been imported into the USA since 1983, and which has not had a single dealership in this country for 25 years. And despite the puzzled looks from auto parts store employees when you ask for parts for a “Fiat,” once they start looking they can nearly always find what you need (or special order it). And if you want to bypass the local shops, there are online retailers who stock literally every single part of the car from bumper to bumper. When asked, nearly any foreign car repair shop will work on a Fiat. When I blew half of the motor a few years ago, it didn’t take long to locate a new short block — and arrange for a shop in Urbana (IL) to put the whole thing together. She’s run like a dream ever since.

Of course, my 1975 Fiat was many years out of warranty when I acquired it in 2000. For someone contemplating a new car purchase, warranty issues would loom larger; if I bought a new Chevy truck tomorrow, and GM liquidated next month, what would happen if my transmission failed before the warranty expired? This could be among the first issues addressed under a well-structured bankruptcy, with funds set aside and an independent entity established to cover such claims.

While there are many reasons Fiat withdrew from the US market, government regulations had a lot to do with it. Put simply, it got too difficult (and expensive) for Fiat to keep up with increasingly strict American safety, fuel economy, and environmental regulations. Anyone who has visited Italy knows how incredibly “basic” even modern Fiats are. Mine is laughably unsafe: no shoulder belts, no airbags, no roll bar, no crumple zones. The only safety features it has are lap belts (but only in the front — the back seat has no belts at all) and padded sun visors. But you know what? I don’t care. I love the car, and drive it every chance I get, anyhow. (Mrs Yeoman Farmer, by contrast, does care…and will not allow any of the children to ride with me.) And 20 MPG is plenty good gas mileage for my purposes.

Which raises an important question: Are the American automakers in trouble now for some of the same reasons Fiat was in 1983? Has the cost of compliance with federal regulations driven the price of the product beyond what consumers are willing to pay? While I can understand the need for some emissions mandates, crash safety requirements are a separate issue. Why not lift the mandates, and let the manufacturers differentiate themselves based on safety features? Let Volvo capture a larger market share of those who value crash safety most highly, and are willing to pay extra for it. While there are probably very few Americans crazy (or daring) enough to buy a car with as little crash safety as my 1975 Fiat Spyder has, I bet there are many who would be interested in a lower-cost “basic” vehicle that has less crash safety than currently mandated. As I understand it, the Big Three have no trouble selling such vehicles in overseas markets. Why not give Americans a chance to vote with their wallets and buy “Fiat-like” automobiles themselves?

I’d argue that the most effective auto industry bailout would consist of suspending all safety and fuel economy regulations for the next two years, and letting the auto companies build the vehicles that American consumers can afford and want to purchase.

But hey. Nobody in Washington listens to me. That’s why I think we’re far more likely to see something resembling this in 2012 than anything resembling a Fiat.

Now I’m going to go listen to Red Barchetta and dream about the day when we have Michigan roads clear enough to take my Spyder out on again.

One thought on “Bankrupt

  1. The regulation bit is a red herring. Toyota and Nissan make a profit on cars manufactured and sold in the U.S. They don’t have to service the pension and retiree obligations that GM does. It is all about the warranties. That and the fact that the GM business model (too many models, too many dealers, obligations to retirees) is no longer sustainable.

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