Hostess and the GM Bailout: Why the Chevy Volt Shouldn't Exist but Twinkies Still Will

schaeffersresearch.com ^ | November 19, 2012 | Minyanville

Reports of the death of Twinkies have been greatly exaggerated. You can bet your less-than-a-UAW-worker's next paycheck that the delightfully unnatural confections and wondrous white breads from Interstate Bakeries Corp. are not going away, news stories to the contrary notwithstanding.
I wish we could say the opposite about the financially disastrous, U.S.-government-subsidized Chevy Volt, but we can't. The fact that the Invisible Hand will ultimately keep us in golden sponge cake reveals everything about what goes wrong when the bumbling hand of politics intervenes in free markets, as it did in the case of General Motors (NYSE:GM).
As you've by now read over and over via the past few days' dominant Facebook (NASDAQ:FB)/Twitter meme, we are about to see the death by liquidation of Interstate Bakeries Corp., maker of Hostess Twinkies, Ding-Dongs, and Wonder Bread, among other nutritionally vacant delights. The sentiment behind most of the posts is one of sadness at the pending disappearance of the products, along with rampant nostalgia for the days when we all carried them in our lunchboxes.
Dry your cream-puffed eyes, my friends. The spongy confections with all the qualities of tasty blown-in foam insulation will almost certainly not disappear from store shelves for very long, if at all.
Why not? Because the economics of selling Twinkies still work just fine. The economics of making Twinkies with a grumpy, highly unionized labor force don't. And our system can and will correct that.
Interstate said its Bakery, Confectionery, Tobacco Workers and Grain Millers International Union-member line workers would need to take significant wage and benefit cuts to allow the company to bring its operating costs into line with other industry players. As a result, the workers told the company where it could shove its Twinkies. Interstate's ownership group essentially responded by saying, "You Ding-Dongs -- forget it. We're closing it all up and selling off the assets."
Which virtually guarantees Twinkies will survive. Given their notoriously long shelf life, my guess is they'll be back in production before your stash even runs out. Why? Because the products made by Interstate are still in high demand. They wouldn't be on every store shelf in America if they weren't, so the brands will be revived and improved.
I guarantee every private equity firm in the country that likes the consumer products industry is taking a hard look at making a bid for all the Twinkie-related assets -- the recipes, the brand name, the equipment that mixes whatever chemical soup goes into those little buggers -- and that within a few months we'll hear who the successful bidder is. They'll bring in a smart, lean management team, and that team will likely contract out Twinkie production to a highly mechanized, software-savvy, non-union baking firm that will pump out those golden babies at a fraction of the cost of the old ones, but with the exact same (or higher) quality.
Twinkie drought solved, new company created, old industrial economy hangover cured. The economy streamlines, Twinkie-per-worker output will doubtless soar (I'm sure there were a pile of ridiculous work rules that governed who could press the "on" button of the Twinkie-lator), and the new investors will make a pile of dough, so to speak.
Because that's how capitalism works. When something in demand has a lousy, expensive process or management team wrapped around it, the company can go bankrupt but the product can live on. It's happened thousands of times in our system before -- if you wear Converse (NYSE:NKE) sneakers or Hugo Boss (PINK:BSHI) shirts, ride a Schwinn (PINK:DIIBF) bicycle, or stick Ray-o-Vac (NYSE:SPB) batteries in your flashlight, to name just a few -- thank the buyer who bought the assets or backed the company out of bankruptcy. They kept what was right and shed what was wrong.
The result? A vibrant new product line and a vibrant new company. A more efficient economy and happier consumers. That's the way the American system works -- except when the government intervenes.
In the case of General Motors, the Obama Administration determined that it was more important to save United Auto Workers jobs than it was to have the painful but ultimately highly beneficial process of free market restructuring go forward. If GM had been "allowed" to have a normal bankruptcy process, just as in the case of Interstate Bakeries, private equity and strategic industry buyers would have been lined up ten-deep to get a crack at making a major play for the valuable brands and technology assets, distribution networks, and manufacturing plants where the cars were made.
What they wouldn't have wanted or kept were the wildly-overpaid UAW workers and their sleeping-in-the-back-room work rules. They wouldn't have wanted electric car projects like the Chevy Volt that pandered to "green" politicians while losing immense amounts of money on every vehicle made and sold, so they'd have left that "asset" behind, unloved and unbought.
They'd have slimmed down, modernized, and de-calcified an industry that found itself so fundamentally screwed-up and upside down that it managed to take down its entire home city with it. They'd have invested in new, labor-saving and quality-improving technologies, and rather than a perpetually ailing "Sick Man" of the auto industry, we'd have a more focused, more efficient, and more innovative industry powerhouse on our hands. The new company's suppliers would likely mirror that investment, too, with new plants and new jobs to fuel a resurgent American auto industry.
That, in turn, would have benefited our entire national economy, helping it prepare for an ever more competitive future, and ultimately throwing off greater income and wealth for its workers, investors, and suppliers. In short, it would have helped contribute to the prosperity of every American.
Giving them money to buy more Twinkies. The system works brilliantly, if it's allowed to.