Future White House Chief of Staff, Rahm Emmanuel, was recently quoted as saying "You never want to let a crisis go to waste...it's an opportunity to [get things done]...." I sure hope that Barack Obama is smart enough and courageous enough to listen to his appointed advisor. There are two immediate areas where we have the chance to be opportunistic in a crisis scenario and move the country forward. These chances don't come along very often. Since Barack Obama is at the dawn of his presidency and his early decisions will set the tone, I urge him to do the right thing now and put his administration in motion the right way. This opportunity will probably not come again.
Detroit: To Bailout or Not To Bailout
I've written about this issue previously but I'm even more concerned now. GM is the poster child of a storied American auto industry that reached its peak in the 50s and 60s and has
been declining ever since. In the first half of the 20th century, America was the auto industry. We invented the things and made them better and more efficiently than anyone else for a long time. Starting in the 70s, though, that began to change (see chart). While their market shares were consistently declining, Detroit automakers fought tooth and nail in Washington to avoid more aggressive fuel efficiency standards, in turn, exponentially growing our demand on foreign oil and generally being a nuisance to the environment and the long-term sustainability of our economy. To make matters worse, in 1999, GM decided to buy Hummer and start production of a vehicle that goes 9-10 mpg, and is exempt from federal fuel standards.
GM currently burns (loses) $2B of cash per month! Being in the startup/venture world, I know a little about burn rates, and GM's is outrageous. Their operating costs, driven largely by UAW demands, are universally 2x above market rates. With this setup, they will never compete favorably with Toyota, Honda and new emerging car-makers in Korea and China. This past week, Detroit auto execs flew down to Washington to plead their case. They each flew their own private jets to a meeting for which they were not prepared and did not have a plan. At roughly $2,500 per hour, the airfare alone cost the companies roughly $30,000. Now, forgive me for judging, but if I were a CEO with less than six weeks of capital in the bank going to meet with the only venture capitalist left who is considering funding my company, I'd prepare a detailed presentation for the meeting and would probably not lavishly and publicly waste my firm's capital on my way to town. No venture capitalist I know would consider giving that management team a second meeting so why is Ms. Pelosi? Hedge fund managers currently oversee about $2 trillion and private equity adds roughly $1 trillion more. As far as I can tell, not a single one of these investors is jumping at the opportunity to own a big chunk of GM. Why? Because investing in GM means investing in America's past. No smart investor wants to invest in the past. If the U.S. treasury wants to use our tax-payer dollars to make good investments, let's invest in Google, Apple or RIM. Let's prop up levered industries like real estate that are suffering right now. Let's invest in geothermal, solar and wind energy. Let's invest in America's future, not it's past.