Detroit Auto Makers Need More Than a Bailout [/size]
By PAUL INGRASSIA
WSJ 11/10/08
As President-elect Barack Obama prepares to enter the White House, he must ponder what to do about the world's trouble spots: Iran, Iraq, North Korea, the Caucasus. And, oh yes, Detroit.
On Friday, General Motors and Ford announced more multibillion-dollar losses in the third quarter; closely held Chrysler doesn't publicly report results. When GM, which seems in the worst shape, was 45 minutes late releasing its results, rumors spread that a bankruptcy filing was imminent. It wasn't, but the company says it could run out of cash in the first half of next year. Make that the first quarter if the current cash bleed continues. GM is lobbying furiously for emergency federal assistance, with Ford and Chrysler close behind.
Let's assume that the powers in Washington -- the Bush team now, the Obama team soon -- deem GM too big to let fail. If so, it's also too big to be entrusted to the same people who have led it to its current, perilous state, and who are too tied to the past to create a different future.
In return for any direct government aid, the board and the management should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver -- someone hard-nosed and nonpolitical -- should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible.
That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits. The same basic rules should apply to Ford and Chrysler.
These are radical steps, and they wouldn't avoid significant job losses. But there isn't much alternative besides simply letting GM collapse, which isn't politically viable. At least a government-appointed receiver would help assure car buyers that GM will be around, in some form, to honor warranties on its vehicles. It would help minimize losses to the government's Pension Benefit Guaranty Corp.
But giving GM a blank check -- which the company and the United Auto Workers union badly want, and which Washington will be tempted to grant -- would be an enormous mistake. The company would just burn through the money and come back for more. Even more jobs would be wiped out in the end.
The current economic crisis didn't cause the meltdown in Detroit. The car companies started losing billions of dollars several years ago when the economy was healthy and car sales stood at near-record levels. They complained that they were unfairly stuck with enormous "legacy costs," but those didn't just happen. For decades, the United Auto Workers union stoutly defended gold-plated medical benefits that virtually no one else had. UAW workers and retirees had no deductibles, copays or other facts of life in these United States.
A few years ago the UAW even waged a spirited fight to protect the "right" of workers to smoke on the assembly line, something that simply isn't allowed at, say, Honda's U.S. factories. Aside from the obvious health risk, what about cigarette ashes falling onto those fine leather seats being bolted into the cars? Why was this even an issue?
When GM's bond ratings plunged into junk territory a couple years ago the auto maker sold 51% of its financing arm, GMAC, to Cerberus, a private-equity powerhouse. Then last summer Cerberus bought 80% of Chrysler from Daimler for just 25% of what the German company paid for the company a decade earlier. It looked like a great deal at the time, like buying a "fixer upper" house at a steep discount. Until, that is, you have to shell out big bucks to shore up the foundation, repair the leaky roof, etc.
Cerberus tried hard in recent weeks to sell Chrysler to GM, with government financial assistance. Controlling GMAC's lending to GM dealers and customers gave Cerberus enormous leverage at the negotiating table. Cerberus squeezed hard, say industry analysts and insiders, but the GM board balked. Last Friday the companies said the talks were off -- "for the moment," as the company's chief operating officer put it.
For the moment? How about, like, forever? Buying Chrysler would just give GM an excuse to delay the fundamental task of putting its house in order. Management would turn its energy to producing pretty PowerPoint slides with all the requisite buzzwords: synergies, transformation, downsizing, rightsizing and exercising. What's needed, instead, is exorcising.
A thorough housecleaning at GM is the only way to give the company a fresh start. GM is structured for its glory days of the 1960s, when it had half the U.S. car market -- not for the first decade of this century, when it has just over 20% of the market. General Motors simply cannot support eight domestic brands (Cadillac, Buick, Pontiac, Chevrolet, GMC, Saturn, Saab and Hummer) with adequate product-development and marketing dollars. Even the good vehicles the company develops (for example, the Cadillac CTS and Chevy Malibu) get lost in the wash.
Nevertheless, the current board of directors and management have stuck stubbornly to this structure. The lone exception was a dissident director, Jerome B. York, who resigned a couple years ago. He warned that without fundamental changes the "unthinkable" might happen to GM. Well, here we are.
Which brings us back to what the government should do. If public dollars are the only way to keep General Motors afloat, as the company contends, a complete restructuring under a government overseer or oversight board has to be the price.
That is essentially the role played by the federal Air Transportation Stabilization Board in doling out taxpayer dollars to the airlines in the wake of 9/11. The board consisted of senior government officials with a staff recruited largely from the private sector. It was no figurehead. When one airline brought in a lengthy, convoluted restructuring plan, a board official ordered it to come back with something simpler and sustainable. The Stabilization Board did its job -- selling government-guaranteed airline loans and warrants to private investors, monitoring airline bankruptcies to protect the interests of taxpayers -- and even returned money to the government.
As for Ford and Chrysler, if they want similar public assistance they should pay the same price. Wiping out existing shareholders would end the Ford family's control of Ford Motor. But keeping the family in the driver's seat wouldn't be an appropriate use of tax dollars. Nor is bailing out the principals of Cerberus, who include CEO Stephen Feinberg, Chairman John Snow, the former Treasury secretary, and global investing chief Dan Quayle, former vice president.
Government loan guarantees, with stringent strings attached and new management at the helm, helped save Chrysler in 1980. But it's now 2008, 35 years since the first oil shock put Japanese cars on the map in America. "Since the mid-Seventies," one Detroit manager recently told me, "I have sat through umpteen meetings describing how we had to beat the Japanese to survive. Thirty-five years later we are still trying to figure it out."
Which is why pouring taxpayer billions into the same old dysfunctional morass isn't the answer.
Mr. Ingrassia is a former Dow Jones executive and Detroit bureau chief for this newspaper.
Write to Paul Ingrassia at paul.ingrassia@dowjones.com
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