Catch 22: Too Big To Fail, Too Big To Succeed

Hat in hand the U.S. Auto Industry lined up for their slice of government aid and it appears as of this posting that they will get the money they are asking for. These titans spent years hiding behind the “free market” shibboleth when convenient (the market wants gas guzzling SUV’s) and when punished by that same market we hear that they are victims of factors outside their control and that they are “too big to fail.” It has become a hackneyed expression precisely because it summarizes the situation so well; this is the privatization of profit and the socialization of loss.

The very concept of “Too Big To Fail” points to a deeper truth: the U.S.’s auto industry does not operate within the “free market” at all. Far from it. As their moniker suggests, the “Big Three” are an oligopoly with a long record of eschewing innovation (electric cars, hybrids etc.), killing off alternatives like mass transit and bullying public policy (lobbying against CAFÉ standards, environmental and tax policies [Hummer owners get a $34K tax credit!], the threat of relocating factories etc.) all in an effort to conform the not so “free market” to its lumbering non-strategies of pursuing short-term profit.

Now that their short-term thinking has met with long-term reality we are faced with bailing them out. Fair enough. There are millions of jobs connected to the automobile industry. But do we now trust these same institutions to deliver and execute the plan for a sustainable U.S. transportation industry?

If these are the flaws of the industry, consider their current leadership; The CEOs of these failing behemoths flew in on corporate jets, asked for $25 billion dollars, brought literally not one shred of documentation on what they intended to do differently and couldn’t explain how they arrived at the 25 billion dollar figure in the first place. When asked if they would accept a $1 dollar per year salary (Iacoca style) in exchange responses from GM and Ford ranged from non-committal to sarcastic (“I don’t have a position on that today” – Rick Wagoner of GM, “I think I am OK where I am today.” Ford’s Alan Mulally who earns $22m per year).

Oligopolies like The Big Three thrive on standardization, scale and market manipulation – not innovation. It is precisely their structure, size and leadership DNA that I believe precludes them from any chance of successful innovation. So there is the Catch 22. They may be too big to fail – but they are too big, bloated and corrupt to succeed. If we are the taxpayers funding the bailout, what are the alternatives?

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  • Tim, you’ve summarized many of my exact sentiments on the situation, in a succinct, and palatable format. Well written.

    I’ve a design I’ve drafted up loosely for a synergistic multi-input wind/solar/steam vehicle I’d love to get prototyped, however the legal restrictions in place for even manufacturing a protype are beyond restrictive.

    Also, speaking towards monopolistic industry control, BMW has ownership over many of the patents related to regenerative steam powered systems, and RIVA India air compression propulsion patents.

    The bigger open question in regards to the aforementioned patent squatting is as such:

    Can the corruption of the USPTO and related bodies be challenged sustainably, and sucessfully devolved to promulgate a true alternative energy vehicle market for the US and the industrialized nations of thrle world?

  • It’s amazing how many market segments in the US are not “free” markets at all but actually government mandated and controlled Pigopolies. And this in the apparent home of extreme libertarian economics.

    There’s a nasty cycle in the US driven by lobbying.
    – Agricultural lobbying
    – Agricultural protectionism
    – Tax breaks and rule bending for Agricultural vehicles
    – SUVs and Flatbeds termed agricultural vehicles and so mpg exempt
    – Huge sales of astonishingly inefficient SUVs and flatbeds
    – Resulting high oil consumption leads to ethanol, more agri-lobbying, corn wars
    – go back to start and repeat

    And that’s before you get into the Detroit lobbying.

    It’s enough to almost want a return to Thatcher-Reagan and to drive the excessive union power and inefficiency out of the system by just lettting it fail.

  • Nick Owen

    GM should go into a managed bankruptcy and be split into 4-5 different companies. The government can provide financing to private equity firms or tax breaks to help save jobs, but in the end what we want as a country is a strong auto industry, which means more competition, not less.

  • I don’t buy the “too big to fail” argument. This is a fear that the Auto industry (and in many ways banks before that) wants to induce for the public and politicians to grant a state of execution – because really that’s all that a bail out, no matter how big, will do.

    I agree with Nick’s comment to let bankruptcy law do what it is intended for.

    This is the end of an era for the American industry and the beginning of a new one (Tesla, Better Place) and putting GM, Ford and Chrysler on life support may delay this transition but won’t prevent it. I’d rather make better use of my tax payer dollars…

  • bowerbird

    > to drive the excessive union power and inefficiency
    > out of the system by just lettting it fail.

    whoa. wait just a minute. surely you’re not blaming
    _the_unions_ for the problems that detroit is having.

    because if we compare the fat on the union side with the
    excess on the management side, there’s no comparison…

    none of the workers — even the ones supposedly being
    paid to do nothing — fly around in jet airplanes or live
    in big mansions or receive multi-million dollar salaries.

    the problems with the auto industry are _squarely_ on
    the shoulders of the vision-less management in place.
    the union workers are just doing their job as instructed.

    and i bet you they are paid less — and work harder,
    at more boring jobs — than most of the people who
    are laying down words on this blog, thank you much.

    direct the blame at the right place, or you will _never_
    solve the problem.


  • Mat

    I’d say: if you bail them out, split them up, so they are the next time not “too big to fail”.


  • “They may be too big to fail – but they are too big, bloated and corrupt to succeed. If we are the taxpayers funding the bailout, what are the alternatives?”

    I think it is called “anti-trust” … since they are on the verge of bankruptcy let us do what we did with AT&T: dismember them into numerous smaller companies (they’re conglomerates anyway) and give each unit a fighting chance to succeed or fail on its own merits!

    Yes, they need capital, so dissolve the current entities and their stock, give each new “Baby Ford” some additional cash, new management, new board, in exchange for a bunch of Uncle Sam Preferred stock, and with any luck we can break even or profit down the road, and cash out of whichever companies succeed!

    Oh, and tighten emissions standards along the way.


  • Tom Potts

    “The Free Market” – espoused by big business and avoided at all costs – normally ours.
    The US has always used Keynesian methods of boosting the market (non-freely) with NASA and military spending.
    Its interesting to see that in Europe the most stable country is the most protectionist going – France!
    The biggest problem comes from the fact that the financial market gave up investing in wealth creation a long time ago – if it ever really did.
    When the dust settles in 3-5 years time it should be interesting to see what’s left: Democracy or finance.

  • Kurt Cagle

    I believe that the next decade is ultimately going to be about decentralization. What that means in practice is that oligopolies will be forced financially to deconstruct themselves or go out of business trying, and no amount of “bailout” money is going to change that significantly. The real free market will likely prove very hostile to these conglomerates.

    This phenomenon is happening in publishing – expect that most of the major media conglomerates to be out of business by the end of the decade, victims of taking on too much debt in order to finance their acquisitions.

    This phenomenon is happening in health care – the insurance and HMO industries are effectively broke, and health care is likely to become more decentralized for much the same reason .. people need health care, but when it becomes too expensive, then they find alternatives.

    This phenomenon is happening in energy, the transportation grid, the educational system. It will be painful, there will definitely be winners and losers, and I do not doubt that our government, with all the right intentions, will stand in the way of that decentralization and will prove ineffective.

    Decentralization and deflation tend to go hand in hand. It should be an interesting decade.

  • I recently wrote the 6 steps for the big three to get out of where they are now. In case you’re interested, here’s the link:

    The point of the writing is that the upper management/executives are not interested in any of the outcomes that would actually benefit workers, but rather the outcomes that would benefit them personally first, and then, if any leftovers happen to drop off the table kick them to the workers’ curb.

    The problem, the way it looks from here, is that any automaker is like a car. The larger it is, the harder it is to maneuver. The big three take too much space on the road and are almost completely uncontrollable. This insanity should be stopped as soon as possible.

  • Thanks for all the great comments –
    Vlad – I couldn’t agree more that leadership in the auto industry has pursued short-term strategies of profit over innovation – see this article in the Times on that score:
    I will check out your post now.

    Kurt – I agree that we will continue to see disaggregation of businesses that fail to pursue longer term value-creation – but I think that big, economy-manipulating companies will continue to thrive (Boeing, GM, Google, AT&T)…

    Daniel – I agree that smaller companies competing makes a lot of sense – What kills me about all of this is that they come to Congress with an ultimatum saying that they will not survive 6 weeks (GM) without the cash… feels like blackmail since there is then no time to create a structurally appropriate package as many commenters here have suggested

    Bowerbird – I agree that Unions shouldn’t be at the forefront of the grievances list. That said, the terms for auto workers that were establised in the 50s puts a crushing burden on the industry as fewer current workers need to support a massive retired population. It is called a dependency ratio and research shows that no industry or country can flourish when the rates crest over a certain point. See here for a Malcolm Gladwell article on it:

  • bowerbird

    > It is called a dependency ratio and

    gee, i wonder if the social security people know about this…

    i repeat, the problem is management mismanagement.


  • Shaan

    Anything to say about the state laws that make it so difficult for car makers to actually reduce their size? I was watching Charlie Rose a couple weeks back and one of his guests said it can cost a car company a million bucks PER DEALERSHIP that it wishes to close down–perhaps the Supreme Court needs to weigh in on these laws regarding their constitutionality.

  • Bill Drude

    None of the auto bail-out arguments mentions the ultra modern Ford plant in Brazil. I understand the auto unions would not allow a plant like this in the United States?

  • Alternative would be to resurrect public transport (see “City is a solution and not a problem” on TED) and actually let this auto giants fall. I lived in the falling giant called USSR and compared to that some Ford or GM is a very minor scale. Qualified workers would be able to switch to new Tesla type vehicles and useless managers deserve to go in the first place.
    American people trust with their money to car manufacturers, then after bail out would you have lower tax and mortgage interest rates? Or will it results in the same price for the car, chunk of imaginative “profit” to shareholders and a lot of expenses for rising again gas prices?
    And next question who is owning this “bailed-out” companies? Are they nationalized, so their profit go back into some national (public) transport scheme?

  • Mark Thoma made a good point,
    “One question to ask is how we ended up putting ourselves into a position where we could not allow firms to fail. There are lots of reasons, but if we had better social insurance, good enough so that the health and welfare of workers and their families was not threatened by the failure of the automakers, it would be a lot easier to avoid a bailout.”

    OTOH there is still the problem of destroying a significant fraction of the industrial base of the country.

    I like Alexander’s point too, “nationalized, so their profit go back into some national (public) transport scheme”
    Makes sense to me.

  • bernie good

    You would have thought that Detroit would have twigged when no one outside the United States wanted to buy thier cars (Ford Accepted). But I guess thats what you get in a closed market. In the rest of the worls brands such as Dodge, Buick, Pontiac are toxic and un-sellable.

  • Yuhong Bao

    I think the first thing to fix is the short-termism of Wall Street, it constitute a big part of the problem.

  • Robert Taylor

    The automakers that can no longer peddle their product should be allowed to go through bankruptcy…not bailouts. CAFE fuel economy standards should be thrown out and the Wagner Act should be outlawed. It’s totally asinine to pay someone $40 to $50 dollars per hour to screw an antennae to a vehicle. There are plenty of workers in Right-to-Work states that would be glad to have the automakers move their plants from Detroit to Tennessee or Texas, etc.
    What the automakers need is a dose of freedom…not more and more and more regulation.