Finance On Wheels

Too Big to Fail

“Too big to fail” and is a concept where a particular company or industry is so large has such a big footprint on a country or area that a failure is perceived to have such devastating consequences on the economy of a country that it must be avoided at all costs. In the circumstance, a government provides a “safety net”, injecting cash and resources into the area, often taking a “stake” in the failing entity. I can remember this being applied to the auto industry in the UK (British Leyland), to the airline industry in France (Air France) and Belgium (SAS) and many others. Although the results of such intervention have been a mixed bag of success and failure, such results do not seem to play any part in many of the decisions to support potential ailing recipients.

How we got here

Before we examine the consequences of applying “too big to fail”, let’s first take a look at how we came to be in this position in the first place. Companies are in business to make money providing goods and services to those who want them and a cost they can afford to pay. In the process the company buys supplied from other companies, employs people to do the work of making a product that is needed and wanted from those supplies and sells the resultant product to customers eager to purchase the product. The difference between the amount the product costs to make and the amount paid for it by the customer is the profit. In most healthy companies, a good proportion of these profits after taxation is re-invested into the business to ensure that it is in a position to do business in the future. This is what being is business is.

Unfortunately, many businesses make the fatal mistake of thinking that they know better than the customer what product they actually want to buy, and then spend an inordinate amount “persuading” people to buy it and in awarding executives “bonuses”. Enter modern advertising and lobbying, and easily available credit to pay for it on both sides. Once we are on the road of ‘have it now, pay for it later’, the entire thing runs away with itself. Couple this with the fact that large industries abhor change, and rather then forging ahead with innovation, get very protective. Many actually do not actually realize what line of business they are truly in. For example, an auto company is really in the transport business, but only actually covers a very restricted part of that product area. One question, does the Ford Motor Company make trains, ships and airplanes? You see what I mean. Once you restrict yourself, you shut off a vast potential area of business opportunities. Much of the clamour for diversity in auto makes

The decline of the US motor industry

Whilst modern automobiles and trucks easily run for 10 years and do between 200k and 250k miles, we are all encouraged to change our vehicles every 2-3 years, all because we can, or could. Once the credit crunch arrived, it was easy to fall back to the great reliability built into modern vehicles. Over the last few months, everyone who needed to change their vehicles did, many downsizing due to the high gas prices. And guess what; most purchased smaller, more reliable foreign cars, not the vehicles offered by the US motor behemoths in Detroit. This was further complicated for the US motor industry in that it has become more of a lender than a car maker. Once demand dries up and there are more and more payment defaults, the entire thing comes off he rails, fuelled by the fact that the entire industry has borrowed deeply in recent years just to keep it afloat.

The real future of auto making is in smaller, much more efficient vehicles with lots of automation to make driving safer and more environmentally friendly. This contrasts markedly with the current slow progress in this direction for the US auto industry. It moves slowly, very slowly. The choices are clear. Support it with public money using the TBTF approach and keep it alive and in its death throws for several more years. This has been tried before in the UK and elsewhere. It did not work. The entire industry failed and disappeared. The alternative is to let the industry take it on the chin now; suffer possible huge lay-offs and upsets so it can restructure itself for the future. Change is inevitable, so let’s just get it over with quickly.

Author:

Malcolm
tentwentyseventy.typepad.com

Posted in Finance On Wheels |