The uncharted waters of government ownership
Government ownership of General Motors (60% U.S. and 12% Canada) will be fraught with difficulties.
Given the large taxpayer stake in the company, it will be impossible for elected officials to stay out of the fray. Congress inevitably will interject itself in business decisions affecting employment, the kind of vehicles the company builds, or the company’s position on nationalizing health care – just as it is now asserting itself on the question of dealership closures.
Imagine the new General Motors (i.e., the government) attempting collective bargaining with the United Auto Workers’ union (on whose behalf the government stepped into the fray in the first place).
Consider the company lobbying Washington on an issue favored by the government (e.g., tax policy or the elimination of secret ballots for workers) but ill-suited for the company. And there there’s the matter of types of vehicles to be built.
With a strong environmental agenda, the government will understandably favor alternative fuel vehicles. Yet, there is no company in the world making any real money on such vehicles, given the current economics of alternative propulsion methods.
The government points to Toyota as a car company that has been responsive to the need for small, fuel-efficient cars, but Toyota reported a first quarter loss much worse than that of General Motors. That’s because the vehicles that keep these businesses viable — larger cars, SUV’s and trucks — are not selling in sufficient volume during this consumer credit crunch.
If GM’s new owner find that the company’s products are not selling well (while competitor vehicles are selling better) it may decide to institute expensive purchase-incentive programs. When those programs are matched by the competition (which is what happens in normal competitive marketing), thereby eroding the profitability of the healthier competitors, where do those stronger companies go to complain about predatory pricing practices by their government-owned competitor?
I think the current approach to “saving General Motors” will prove untenable.
If the government truly believed that America needed to save its domestic auto industry, it would have been far wiser if the U.S. Treasury served simply as a lender of last resort. It then could have granted the ailing automakers interest-bearing bridge loans with restrictive covenants requiring sacrifices from management, the union, the bond-holders, and suppliers — and then let professional managers run the private businesses.
Then when the demand for automobiles rebounds (as it always does following a recession), the taxpayers would be the first to be repaid.
But by becoming an owner, a role for which government is singularly ill-suited, the federal government has taken us into difficult, uncharted economic waters — a market-damaging move I suspect we will regret. Hopefully, the Treasury realizes this and will work to find a swift way out of its ownership position.