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Let Detroit Go Bankrupt


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IF General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.

I love cars, American cars. I was born in Detroit, the son of an auto chief executive. In 1954, my dad, George Romney, was tapped to run American Motors when its president suddenly died. The company itself was on life support — banks were threatening to deal it a death blow. The stock collapsed. I watched Dad work to turn the company around — and years later at business school, they were still talking about it. From the lessons of that turnaround, and from my own experiences, I have several prescriptions for Detroit’s automakers.

First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota’s Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable.

Second, management as is must go. New faces should be recruited from unrelated industries — from companies widely respected for excellence in marketing, innovation, creativity and labor relations.

The new management must work with labor leaders to see that the enmity between labor and management comes to an end. This division is a holdover from the early years of the last century, when unions brought workers job security and better wages and benefits. But as Walter Reuther, the former head of the United Automobile Workers, said to my father, “Getting more and more pay for less and less work is a dead-end street.”

You don’t have to look far for industries with unions that went down that road. Companies in the 21st century cannot perpetuate the destructive labor relations of the 20th. This will mean a new direction for the U.A.W., profit sharing or stock grants to all employees and a change in Big Three management culture.

The need for collaboration will mean accepting sanity in salaries and perks. At American Motors, my dad cut his pay and that of his executive team, he bought stock in the company, and he went out to factories to talk to workers directly. Get rid of the planes, the executive dining rooms — all the symbols that breed resentment among the hundreds of thousands who will also be sacrificing to keep the companies afloat.

Investments must be made for the future. No more focus on quarterly earnings or the kind of short-term stock appreciation that means quick riches for executives with options. Manage with an eye on cash flow, balance sheets and long-term appreciation. Invest in truly competitive products and innovative technologies — especially fuel-saving designs — that may not arrive for years. Starving research and development is like eating the seed corn.

Just as important to the future of American carmakers is the sales force. When sales are down, you don’t want to lose the only people who can get them to grow. So don’t fire the best dealers, and don’t crush them with new financial or performance demands they can’t meet.

It is not wrong to ask for government help, but the automakers should come up with a win-win proposition. I believe the federal government should invest substantially more in basic research — on new energy sources, fuel-economy technology, materials science and the like — that will ultimately benefit the automotive industry, along with many others. I believe Washington should raise energy research spending to $20 billion a year, from the $4 billion that is spent today. The research could be done at universities, at research labs and even through public-private collaboration. The federal government should also rectify the imbedded tax penalties that favor foreign carmakers.

But don’t ask Washington to give shareholders and bondholders a free pass — they bet on management and they lost.

The American auto industry is vital to our national interest as an employer and as a hub for manufacturing. A managed bankruptcy may be the only path to the fundamental restructuring the industry needs. It would permit the companies to shed excess labor, pension and real estate costs. The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.

In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.

Mitt Romney, the former governor of Massachusetts, was a candidate for this year’s Republican presidential nomination.

Link: http://www.nytimes.com/2008/11/19/opinion/...amp;oref=slogin

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Pretty good summary, except for this:

"That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota’s Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable."

Mitt is half right here. By my rough calculations GM's recent losses divided by cars sold works out to about $2,000. So yes, that $2,000 needs to be cut ouf of the features and quality of the car (to break even... $3,000-$4,000 for a reasonable profit). But no, it hasn't been done yet. So things are going to get that much worse if they are able to stay the course through bailouts.

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Investments must be made for the future. No more focus on quarterly earnings or the kind of short-term stock appreciation that means quick riches for executives with options. Manage with an eye on cash flow, balance sheets and long-term appreciation. Invest in truly competitive products and innovative technologies — especially fuel-saving designs — that may not arrive for years. Starving research and development is like eating the seed corn.

Can't do that....

Wall Street won't shut the hell up long enough to let us... Same thing with the media and their 3 years "bankruptcy" tirade.

I get the feeling he wasn't paying attention to the changes made over the last 18 months that already set up what he asks for.

Nah... Like most politicians, he was too busy kissing ass to fund his campaign. It's kinda like a bus driver who decides to try and drive a bus load of kindergartners while writing a thesis. Too much time, too much distraction and too little focus. All in the name of advancement of self.

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i wonder what oven mitt's take on the bank bailouts was?

The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.

In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.

there you go. i think this is what is going to happen. its nice to know that at least that astra i get will still have a warranty. seriously, when someone as high profile as mitt is saying that govt will back the warranties, i think you see they do want to make sure people have the ability to be confident about the product and the company being around.....they just want to bust the union.

in all seriousness, it sounds more and more like this is the deal. Make them go bankrupt, they want to do two things. Bust the union, and the events will mean Obama has a rougher start, so he can have less chance to succeed.

The UAW should be very afraid. this may be their death knell. looks like the repubs want to speed up the process by letting GM run out of money before the dems can grab the reigns and go the other way.

by the way, i'd still buy a taurus over an avalon the way it is. with another 2k to make it better, why is the avalon even on the radar?

notice how the republican didn't bring up one other white elephant. HEALTH CARE. Mr. Republican, perhaps you could do these companies a favor by taking the health care responsibility off the employers back? Not that i neccessarily agree with national health care, i am just saying that its another disadvantage that would really help the automakers. Do you really think a republican would broach that idea?

Edited by regfootball
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I am at the point where I don't think $25 billion is going to be enough... that's less than a year of cash burn. GM probably needs more time than that. Why not just get rid of the union and all the associated costs now, and start fresh ASAP? Might as well declare bankruptcy, start with new management, and get some sort of loan from the government to start out. How about $50 billion? At $1 billion/car, that should give you enough money for 50 great vehicles.

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This is really part of the problem, the fact that most people throwing their opinion around have not ever actually worked a day in their miserable lives. I couldn't even listen to Chris Dodd. He's one of the biggest buffoons in Congress. Between him and Barney Frank, they don't set a good example for the Dems. I'm hopeful they'll come up with a plan that salvages the US auto industry and then turn their "fix it" mental on the Congress itself.

This just shows that the 'lib media' is not #1 enemy as some on here are constantly claiming. It is the rich fat cats that want to break unions and really off shore all 'fly over jobs'. They think all people can work as 'consultants' selling 'ideas'?
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His dad ran American Motors? GOOD GRIEF. That explains a lot. I stopped reading after that. Talk about pre-conceptions.

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I am at the point where I don't think $25 billion is going to be enough... that's less than a year of cash burn. GM probably needs more time than that. Why not just get rid of the union and all the associated costs now, and start fresh ASAP? Might as well declare bankruptcy, start with new management, and get some sort of loan from the government to start out. How about $50 billion? At $1 billion/car, that should give you enough money for 50 great vehicles.

Exactly someone hit the nail on the head.

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His dad ran American Motors? GOOD GRIEF. That explains a lot. I stopped reading after that. Talk about pre-conceptions.

yeah but since his dad ran the joint that makes him automatically qualified to critique other automaufacturers leadership skills... cause i mean the industry is still exactly like it was back then... right?.... right?

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>>"His dad ran American Motors? GOOD GRIEF. That explains a lot. "<<

His father George W Romney oversaw AMC when it was created via the merger of Nash & Hudson in 1954, thru 1962. Note that under his leadership, Rambler did reach #3 in sales in the U.S. market in '61 and held as least as high as #6 thru '59-62. By '67, AMC was running in the #12 spot. Romney left AMC to enter politics.

Romney was the protege' of his boss, George Mason, who's vision was to create a 'Big 4th' AMC : Rambler, Studebaker, Nash, Hudson, Packard, to line up with GM, but Packard boss James Nance turned down the proposed merger, perhaps unwisely, since 3 of the 5 were dead by '58.

Ironically, George Romney ran for President in '68, but lost the Republican nomination to Nixon.

Edited by balthazar
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You know, originally I was 50/50 for the loan, but am kinda backing off from it today after hearing the House session with Wagoner, Nardelli and Mulalley. It just doesn't sound like they will try to change, more Wagoner than anybody else.

As long as GM will keep going, I'm all for Chapter 11. I know it's going to be difficult for many, but it's going to be that way for many either way. And I don't trust the gov't enough to set enough legislature to keep the exec's from continuing on the same path

Look... GM has a fantastic engineering/design dept. But managment/bean counters need to go, along with all the beaurocracy.

PS.. I know my spelling sucks.

Edited by BuddyP
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You know, originally I was 50/50 for the loan, but am kinda backing off from it today after hearing the House session with Wagoner, Nardelli and Mulalley. It just doesn't sound like they will try to change, more Wagoner than anybody else.

As long as GM will keep going, I'm all for Chapter 11. I know it's going to be difficult for many, but it's going to be that way for many either way. And I don't trust the gov't enough to set enough legislature to keep the exec's from continuing on the same path

Look... GM has a fantastic engineering/design dept. But managment/bean counters need to go, along with all the beaurocracy.

PS.. I know my spelling sucks.

No you are right on. I know times will be tough but better to get it over with and have a GM that comes back better than ever before.

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You know, originally I was 50/50 for the loan, but am kinda backing off from it today after hearing the House session with Wagoner, Nardelli and Mulalley. It just doesn't sound like they will try to change, more Wagoner than anybody else.

As long as GM will keep going, I'm all for Chapter 11. I know it's going to be difficult for many, but it's going to be that way for many either way. And I don't trust the gov't enough to set enough legislature to keep the exec's from continuing on the same path

Look... GM has a fantastic engineering/design dept. But managment/bean counters need to go, along with all the beaurocracy.

PS.. I know my spelling sucks.

No you are right on. I know times will be tough but better to get it over with and have a GM that comes back better than ever before.

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At this point, we jsut need GM to stay around. A major reorganization is in the works whatever the case.

There is an ancient Chinese curse which goes something like "may you live in exciting times"

These days are anything but dull.

66

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we're accelerating the path to china buying our automakers.

that's fine. all those who bought those lexus with their home equity loans.

"..... let the trade deficits begin..... (to double....) "

How long will it be before the only manufacturing industry we have in the US is the military contractors?

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