President Donald Trump on Friday used the Defense Production Act (DFA) to compel General Motors (GM) to immediately produce ventilators. Originally, GM voluntarily offered to produce as many as 40,000 units “very quickly.” Trump thought having them produce ventilators voluntarily is always the best way to go.
But GM dragged its feet. And they wanted some very substantial revenue guarantees. The number was approaching $1 billion. And the definition of “very quickly” turned out to be “not so fast.’ The President again utilized his business acumen to get the needed result.
Remember Trump is a businessperson and not a politician. Politicians, typically, would take one of two possible positions, neither of which usually leads to an optimum outcome. One choice, often taken by Republicans, is to negotiate with business. These negotiations are time consuming and always seem to contain at least one questionable component.
The second option, often adopted by the Democrats, is to have the government tell the company exactly what they are going to do. This is done during wartime when the survival of the nation could be threatened. As long as the company is motivated, as they would be during wartime, the outcome is good.
If, however, the company is not really motivated, the outcome is less than optimal. Trump takes a businessperson’s approach which is focused solely on outcomes. Political fallout is minimally considered. With this president, is it very minimally considered.
Trump approached GM in a very businesslike manner. GM said they are willing to produce 40,000 ventilators very quickly. When negotiating contracts, time is usually needed to work out the price and all of the “what if this happens” type issues. Unfortunately, there was no way to accurately forecast exactly how much time there was and how many units were needed.
Trump and his advisors examined the data that showed the number of people tested, the number of people testing positive and the number that required ventilators. The future projections were difficult because the rate of increase is simply not known. After all this 15 day distancing period will reduce the spread of the disease. But how much?
Trump waited and watched as GM did not quite understand the sense of urgency. Nor did they seem to understand the concept of reasonable revenue guarantees. Based on the estimated units on hand, the current usage of ventilators, the projected need and the ingenuity of the medical profession, the time to act was now.
From a business perspective, GM performed very poorly. They had an opportunity to profitably fill excess capacity while at the same time building their brand. Americans, who purchase GM cars, would see that GM halted its production, revamped their entire production process and quickly supplied ventilators to very sick and mostly elderly Americans. GM voluntarily acted and saved thousands of our fellow Americans.
GM likes to emphasize the sense of community in their advertising strategy. Hundreds of millions of advertising dollars couldn’t buy the brand equity that voluntarily producing life-saving ventilators would have brought.
Trump believed he was dealing with savvy businesspeople who understood the urgency of the problems of the day and would see the opportunity for a company like GM. He misjudged them, but he did use the DPA at exactly the right time.
It will be interesting to see how quickly the other auto companies act. Any business person knows the last thing they want is government involvement in their business.
Ronald Reagan used to say the most terrifying words in the English language are, “I’m from the government and I’m here to help.”
Dr. Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.
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