Sunday, November 23, 2008

As we melt down...

A friend of mine in the US wrote the following letter to the editor.

Dear Sir:

The debate about whether or not to bail out the Big 3 very quickly gets around to the issue of the merits of bailing out “lousy companies like GM” even as be bail out “great companies like Citi Bank and Bank of America.”

It is hard to defend a company whose market share has be halved in the last 20 years and is clearly on the way to bankruptcy without external help. But “a lousy company?” Let’s think for a second about what it takes to produce a successful car.

Five years before launch, the marketers need to anticipate consumer desires, competitive offerings, the regulatory environment and the price of gas. Then the product development engineers and designers get involved with everything from power plant choice to body shape to number of cup holders required. Once they come up with something everyone likes, the production, manufacturing and sourcing people get really busy. As launch date approaches, sales and marketing revs up again to build a little buzz and and hopefully get off to a fast start, despite automotive writers’ blatant attraction to expensive foreign vehicles. A successful car needs to look good, feel good, work well, have almost no quality issues either initially or for the the first few years and of course has to evoke the right emotions.

Banks by comparison need to do three things well to be successful. They need to convince people to deposit their money. For that there is and always has been FDIC (government) help. They need to convince people to borrow. For that there is interest deductibility and other incentives. The third and final requirement is properly assessing credit risk.

US car companies have gotten it right much more often than wrong lately, although the often subsidized foreign competition keeps raising the bar.

Banks on the other hand seem to have difficulties executing more than two out of three fundamental tasks.

Might it be that we are being overly critical of the wrong industry?

My friend notes that merely asking "are you good for this money - prove it" - would have gone a long ways to avoiding the melt down that's underway. That way school teachers wouldn't have been owning $2 million homes and driving Mercedes.

Good news here. Canadian banks always have and still do (according to another friend who just renewed his mortgage) ask that.

I wonder if that will make any difference now?

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