Thursday, December 4, 2008

To the Big Three: For God’s Sake, Just Agree to Bankruptcy Reorganization

General Motors, Ford, and Chrysler are plagued by three deeply rooted, difficult-to-address sources of woe:

1.  Nobody wants to buy their products.  It’s true that automakers all over the world have seen huge sales drops with the onset of the current downturn, but the demand story for Big Three products is far more troubling.  The companies have been hemorrhaging market share for decades (their failure to anticipate the recent trend toward smaller, more fuel-efficient cars is only the latest in a long series of serious missteps), and right now there are few signs that those declines will stop in the near future.

2.  Their Labor Costs Are Insane.  You know the statistics by now:  the bottom line is that the companies, on the whole, spend roughly $75 per worker per hour, while Toyota, Honda, etc. spend less than $50 for their (non-unionized) American workers.  According to the companies’ own numbers, the Big Three make medical, retirement, or other payments to almost 2 million Americans, while the companies now have fewer than 400,000 actual employees.  Recently the unions have finally agreed to major cutbacks and adjustments (not that the companies really pushed them much before this year), and more are on the way, but the full impact of those concessions won’t be felt for years.

3.  They’ve Got Way Too Many Top-Level Brands and Way, Way Too Many Dealerships.  Try this mental exercise: try to remember of all the names under which Toyota sells its vehicles in the U.S.

Now do GM.


For the latter you should have come up with Buick, Cadillac, Chevrolet, GMC, Hummer, Pontiac, Saab, and Saturn.

To reduce brand confusion, GM would like to get rid of some or most of these.  But it is effectively prevented from doing so by state laws that are in place to protect the interests of car dealerships.  (The recent elimination of the Oldsmobile brand alone took years to complete and cost GM about $2 billion.)  And while we’re on car dealerships, GM has far, far more associated with it than demand requires, hurting both GM (though various payments it has to make) and the dealers.

And that’s just GM.  


So what is to be done about these fundamental problems, which have made the difference for the Big Three between suffering-but-surviving (like Toyota, etc.) and the companies’ current verge-of-collapse status.  The most obvious option is Chapter 11 bankruptcy reorganization. Creditors would be kept at bay for a bit, those damaging union contracts that the companies so foolishly agreed to would essentially be junked, and state laws preventing the companies from fixing their brands and dealership structures would be overridden.  (Reorganization wouldn’t directly help the companies develop desirable products, but nothing but internal management change can do that.)  As with so many other companies in so many other industries, bankruptcy reorganization might offer the Big Three something of a fresh start.

And yet, as you know if you’ve kept up with the news, executives at GM, Ford, and Chrysler have been saying till they are blue in the face that bankruptcy is not an option.  Why?  In short, they contend that consumers wouldn’t be willing to buy cars from makers in bankruptcy protection.  Uncertain that warranties would be honored, parts would be available, etc., buyers would turn toward competitors, leaving recovery for the companies impossible and liquidation the only option.

But even conceding that bankruptcy reorganization is a bigger risk for an automaker than an ordinary company (which would be a concession on a hotly contested point), the obvious question is “What other choice do they have?”  GM says it may not last the year, Ford is in only very slightly better shape, and Chrysler is a cancer on the private equity firm that bought it.  What’s the alternative?

And that’s where the taxpayers come in.

The reason that auto executives continue to swear off the need for bankruptcy is because they still entertain the hope that Congress will rescue the companies from their self-made problems with tens of billions in public money.  No need to undertake the risks and indignities (and, let’s no forget, likely management shakeups) that would come with bankruptcy if Congress is willing to step in.  Of course, some of the needed fundamental changes that could get done through bankruptcy wouldn’t get done with a bailout, but that’s a problem that can be kicked down the road.  And if six months from now the companies need more money, why, Congress would surely be reluctant to see its previous investments go down the drain.

As long as the companies believe that Congress will pony up funds for them to stay solvent, they likely won’t make the painful changes that they need to make if they are to be viable in the long-term.

No one is saying that bankruptcy reorganization is without risk for the Big Three.  Moreover, it is true  (due in part to the still-damaged state of the credit markets) that even with reorganization some or all three of the companies would need a bridge loan of some size from the federal government to get through the first few months.  But with bankruptcy reorganization those federal funds might actually turn out to be a decent investment for taxpayers.  Without bankruptcy reorganization, we’d likely be hearing the same cries of distress from the Big Three again quite soon, and would face the choice of making them long-term wards of the federal government or forcing them to finally get serious about their problems after their problems had perhaps made the companies unrecoverable.

Washington must send a clear message to Detroit now:  No bankruptcy, no bailout.

1 comment:

Anonymous said...

And it looks like Washington is going to punt: give the Big/Detroit 3 just enough ($15 billion) to tied them over until Obama and the new Congress take over.

But who knows? Maybe we'll get lucky, and this "car czar" that they're talking about setting up will actually get something constructive done.

Oh, and to give credit where credit is due, the independent observers (such as J.D. Powers and Consumers Union) seem to agree that Ford has made major strides (across the board) in their product lines. They're not in the top three (at least not according to Consumers Union), but they're not in the bottom three (like Chrysler and GM), either.