A Bail Out Plan That Might Actually Work
Autos, banks and investment firms have all benefited this year from a plethora of legislative handouts. The firms receiving our hard-earned tax dollars have all been publicly traded and have several thousand employees. More money has been set aside and spent in the last two months for distressed banks and brokers than the Iraq war has racked up in the last seven years.
I don’t particularly agree with the bailout of the auto industry. Sure I have some nostalgic love for Ford, GM and Chrysler, but my beef is that we the people are supporting a broken business model that is destined to fail even after our taxes prolong the inevitable death. After reading this article in the Wall Street Journal (as well as a few other articles) I’m willing to pronounce that one of the most efficient uses of government bailout dollars, outside the banking system, is to provide short term financing to small businesses.
What’s the Real Problem?
The real problem is not necessarily a lack of customers or progress. Mainly, it’s a short term cash problem. Business A is waiting on their accounts receivables to come in so they can pay their bills to Business B. Business B is waiting on A so they can pay C. The phenomenon continues in this cascade of capital lockup.
Businesses are largely not reporting crippling sales declines or other top line dangers. Small businesses are also some of the most efficient companies in the world so their bottom lines cannot get much leaner. They’re also the types that capital freezes affect the most. The true problem is the working capital needed to sustain their operations while the A/R - A/P cascade (above) continues.
Can The Business Models Survive?
My beef with the auto industry bailout is that the business model has been in trouble for a long time. Honda, Toyota and Kia, to name a few, have solid businesses that are using US labor and moving the cars out of the showrooms into our garages. The Big Three have labor costs that are way out of whack with the actual value the labor provides the business. Further, innovation from the Big Three has been limited in comparison to foreign auto makers.
Tangentially, saving Chevy based on the promise of the Volt is a risky bet. It would be best served by spinning the Volt off into its own company and then pursuing venture capital to execute that new business model. Venture capitalists have the stomach and smarts to fund companies with millions of dollars based on the promise that a business model will emerge when the product goes to market. Venture capital is not necessarily a responsible use of our tax dollars.
But I digress. The main point that should be made is that the business models of the Big Three auto makers is antiquated and insolvent in any economy, especially a tough one.
The Government Should Fund Robust Business Models
Banks are pulling small business lines of credit because of their own tight cash flows. This is a major contribution to the crunch on cash flow of the small business. If the government is to rescue any industry, it has the responsibility to invest wisely in businesses that will be around in a year to repay their bailout either as a loan or as a contribution to a growing economy.
Small businesses, taken as a whole, are on a growth path and are limited by short term working capital. Loaning this working capital at reasonable interest rates not only ensures these businesses survive, it is also a more diversified and responsible investment.
Small businesses are 99.7% of all private enterprises in America and employ 50% of all private sector employees (source). Rather than focusing billions of dollars on failing business models that support a fraction of American labor, I propose a more diversified, responsible investment into companies that represent the sweat and tears of America’s gutsiest.