Posted 2/19/2009

DON'T BAIL OUT GENERAL MOTORS
(THE COMPANY HAS ALREADY DIED)

Bailing out General Motors would be like building Cadillacs and running them off a cliff.

Like Ford and Chrysler, GM has long been classified as "capital destructive" by serious economists. That means a government bailout would be throwing good money after bad.

GM will promise anything to Congress for a handout – except giving up big salaries, big bonuses, big benefits, and the corporate jet.

The United Auto Workers Union is just as stubborn about giving up their outlandish work rules, retirement benefits, and health care perks.

But the worst part of all is that General Motors has lost its reputation.

Because so many GM lemons have been designed and produced since World War II, the company has lost its quality image, its design image and most important, its status image.

The company no longer commands the kind of imagery necessary to compete with Toyota and Honda.

The huge image gap between GM and Honda means that Honda vehicles command prices thousands of dollars higher than comparable GM models. The GM image gap plays out the same way when it comes to Toyota.

Thus, GM can no longer build profitable cars that the public will buy.

And the more Congress demands that GM build small cars, the bigger the losses will become. This applies equally to Ford and Chrysler.

Let's compare the retail price gap in small cars:

The Honda Civic is the king of the small car market. GM's Chevrolet Cobalt must cost $3,638 less than the Honda Civic in order to stay in business. The Ford Focus has had reams of good publicity, but it still must cost $3,673 less than the mighty Honda Civic, according to the highly respected Power Information Network.

At the same time, GM is hit with healthcare and retirement benefits add nearly $2,000 to the cost of each car it produces. Honda's costs are minimal by comparison. Thus GM is confronting a $5,000 price/image gap when it goes up against Honda in small cars.

Even if GM designs a highly desirable small car in the future, it will lose money on it. If the company tries to make the car profitable, the price will be too high to sell. If it sells the car for considerably less than Honda's make, GM will lose fistfuls of money.

Thus GM is in a Catch-22 situation.

The severity of the GM price/image problem surfaced in 1983 when the company went into a joint venture with Toyota at GM's Fremont, California plant. A GM/Toyota joint workforce produced a new small car using a drive train from Toyota and a body from GM. When the car rolled off the assembly line, half were badged as Toyota Corollas and the other half were badged Chevrolet Novas.

Other than the badges, the cars were identical in all respects – design, quality, cost, etc.

But the consumer did not perceive the vehicles as the same car.

The Chevrolet Nova was forced to sell at a price that was $1,200 less at retail than the Toyota Corolla.

Even worse, buyers reported far more defects in the Chevrolet Nova version.

Thus the price/image deficiency of GM has been worsening consistently in the last quarter century.

And a problem that long in the making is not likely to be solved in a year or two, or five.

Thus, Congress should not force President Obama into a bailout of General Motors.

It would be building a bridge to nowhere.

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