Solving The Real Problem

Last month, I discussed the importance of making sure that the problem you are trying to solve is the correct problem. As we all painfully know, the media has been filled with stories about whether the government should spend billions of dollars to bail the big three automakers out of their financial problems. The problem for GM, Chrysler, and soon Ford, is that they are running out of money and may be forced into bankruptcy.

The problem for the U.S. economy and our government is that if we don’t spend billions to bailout the automakers, millions of autoworkers, not to mention car dealers and auto parts suppliers, will lose their jobs. That will cause more unemployment, less tax revenue to our troubled states, more foreclosures, and the list goes on and on.

THE REAL PROBLEM
This billion-dollar bailout solution our government has been considering does not solve the real problem! The real problem is that people are not buying cars. If people were buying cars, the automakers would have the money they need to continue to operate. Giving billions of dollars to the automakers will not dramatically increase car sales. They will still have to close plants and layoff millions of workers because their cars are not selling.

Why have car sales for the big three declined so dramatically? After all, other manufacturers (such as Toyota) have not asked for a bailout, they have been hiring and planning to open new plants.

For 2007 and the majority of 2008, the answer to poor sales was high fuel costs and a lack of fuel-efficient vehicles to choose from. As the credit crisis hit and the word recession entered the news, declining fuel costs were not enough to bring buyers back to the big three. And for people wanting a new car, getting a loan has now become a major new barrier for all automakers. Giving the big three money will not solve the credit crisis, it won’t make loans easier to get, it won’t give them economical, fuel-efficient cars to sell for quite some time, and it will not make people feel the economy has improved.

If the government did feel it was important to save the millions of jobs the auto industry represents, we should ask ourselves: What would it take to increase car sales?

One answer would be for the government to provide a $5,000 to $10,000 subsidy, depending on the price of the car, to anyone wanting to buy a new car. This would stimulate car sales, keep autoworkers at their jobs, stop plants from being closed, provide needed revenue to the manufacturers, increase confidence in lending money to the manufacturers, and keep the car dealers and parts suppliers employed. In addition, this would make car loans smaller and easier to obtain.

Another answer would be to require banks that are receiving Federal bail out money to use a portion of that money to make loans for qualified buyers. We have already found out that giving banks billions of dollars with no requirements will not ease the credit crisis.

These are just a few ideas. The key is to make sure we are solving the correct problem.

THINKING BEFORE DOING

A few days ago, I met with the top executives of a Fortune 100 company. (These executives were very busy as you might imagine.) It was not easy for them to devote an entire day to step back and examine what I call “The New Big Picture” and the rapidly emerging risks and opportunities associated with seeing it.

I started out by asking them if they thought the big three auto executives and all of their direct reports had been very busy the past five years. They all laughed as they agreed. Being too busy to think strategically about future risk and opportunity is often at the center of our biggest problems.

NOT THINKING

It seems the big three auto executives weren’t thinking when they all flew separately to Washington in private jets. Driving to Washington in each of their company’s most fuel-efficient car might have sent more of a “we’re working on it” message.

Not having a detailed spending plan for the billions of dollars they were requesting was another example of not thinking. Having a detailed plan as to how they would spend the money would have at the very least provided confidence.

Not connecting the rapid increase in automobile ownership in both China and India to the resulting increase in the demand and price of fuel was another amazing mistake. The irony in this becomes clear when you consider all of them were actually selling cars in those markets and were excited about the unprecedented increase in demand for cars. More cars mean more fuel, who would have thought of that?

The point is that being busy and not thinking can get you into big trouble.

During my meeting, one of the executives posed the following question. “If our government was to give the automakers the money, what do you think they should do with it?”

I suggested that everyone was focused on the wrong problem. The reason for the bailout was to prevent massive layoffs. The reason people aren’t buying the big three’s cars isn’t because the big three is low on cash. It is because the majority of the cars they make are gas hogs and many of the people who want to buy a car can’t get loans because of the financial crisis. Giving the big three money won’t solve the financial crisis and it will take years to redesign and build fuel-efficient cars. In other words, they will still have to lay off masses of people. It would be better for the government to give anyone who wants to buy a car a subsidy reducing the price of the car by up to $10,000, less for lower end cars. This would keep cars selling and workers working.

I know you are all very busy doing a lot of things as we face a growing recession. Let’s make sure we take the time to think about the risks and the opportunities, the present and the future before we do too much.