Arkansas Blog

Auto-Bailout Mechanics
Industry insiders say "burn them down and start over."

By Henry Payne

Detroit, Mich. - General Motors is not competitive.

That is the conclusion, not of conservative D.C. critics or Wall Street investors, but of officers with the Detroit auto-parts suppliers who do business every day with America's largest car company - and with its Japanese competitors.

It is an open secret in the Motor City that - even leaving aside its high labor costs, surplus of brands, and bloated dealer network - GM's manufacturing culture is inefficient compared to foreign rivals Toyota and Honda. Conversations with numerous supplier reps confirm an antiquated Detroit culture that does not thoroughly engineer products before contracting production with suppliers. As a result, production runs for Detroit automakers like GM are frequently interrupted to change specifications. Those interruptions add costs - costs that Japanese manufacturers rarely incur. The problem is so prevalent that employees for JCI - major international supplier Johnson Controls, Inc. - often joke that their acronym stands for "Just Change It" because its American clients routinely run up unnecessary costs by altering production contracts.

Can a $25 billion taxpayer bailout help General Motors change its culture? "No," says one supplier executive. "You have to burn them down and start over."

But with Washington now in union-beholden Democratic hands, that scenario - bankruptcy - is not going to happen. In the current downturn, many financial experts predict that a GM bankruptcy would be a dicey scenario not just for the industrial heartland, but for the country as a whole - and so argue that Washington faces a Hobson's choice as it considers a bailout for Detroit automakers. The question is when, not if.

But handing over $25 billion to U.S. automakers may be a short-term national benefit - but it would only draw out Detroit's slow slide to failure, with no return on the public's investment. On the other hand, not breaking the Detroit Three's free-fall into bankruptcy (or some form of government receivership) might be painful for the nation in the short run, but would offer the best route to industry revival over the long haul.

Thirty years ago, the federal government successfully bailed out Chrysler Corp. But today's landscape looks very different from that of the late 1970s. At that time, the Big Three's Japanese competitors did not operate a single manufacturing facility in the U.S. Today, Japanese, German, and Korean manufacturers all operate plants here - employing 93,000 American workers from Kentucky to Alabama. In other words, a bailout for a Detroit company is no longer essential for maintaining America's auto-manufacturing base.

This time the bailout's focus is on GM, which is projected to exhaust its cash reserves by year's end. [Ford's cash - thanks to a shrewd mortgaging of company assets two years ago - will last into 2009. Chrysler is already assumed to be lost - as its owner, Wall Street equity firm Cerberus, is desperate to abandon the auto business.] GM argues that it has taken steps to become more competitive and that it only needs federal money to bridge the current, freak financial crisis so that its cost reforms can go into effect as scheduled in 2010. The company is correct up to a point.

Critics such as columnists Robert Samuelson and Charles Krauthammer are not entirely correct in saying that GM hourly labor costs are $25-per-hour higher ($73 v. $48) than their Japanese competitors. In fact, 2007's historic, contentious labor pact provides for a "two-tier" wage scale that reduces employee costs to $55 per hour - within striking distance of non-union Japanese plants.

Striking distance isn't enough, though, and industry analysts agree that GM must do more. But in its appeal to taxpayers for $25 billion, GM has arrogantly refused to provide a revised business plan in return for the money. Instead, it has played the fear card, arguing that withholding the funds will lead to a national depression. But GM's excessive overhead costs demand explanation.

Writing for the Wall Street Journal, Michael Levine of NYU's School of Law points out that GM and its chief competitor, Toyota, have nearly identical U.S. market share (20 percent for GM, 19 percent for Toyota). Yet GM has eight brands and Toyota only three. GM also had 7,000 dealers (due to state franchising laws) versus only 1,500 for Toyota. These problems cry out for restructuring, yet GM insists on postponing hard decisions hoping instead for an infusion of taxpayer booty.

Worse, federal cash will come with strings attached, thanks to a liberal Congress that wants to turn Detroit into ground zero in its battle against so-called global warming. The result would be Nancy Pelosi-imposed targets forcing automakers to make more high-mpg cars whether there is market demand for them or not. Absent structural reforms, mandating money-losing small cars would only hasten Detroit's demise. Even left-wing New York Times reporter Keith Bradsher - author of the SUV-bashing book, High and Mighty - has documented how congressional fuel mandates have put Detroit at a competitive disadvantage ever since their inception in 1975.

Short of "burning them down," then, what is the solution? A Democratic Washington has many in Detroit resigned to a bailout that will preserve the viability of their 401ks if not the American auto industry.

But if bankruptcy is out of the question, its government-ordained cousin - public receivership - has precedent. A receivership modeled after the airline stabilization board that helped rescue U.S. airlines in the aftermath of 9/11 could have the effect of both restructuring GM as well as assuring its survival after reorganization. Analysts from NYU's Levine to former Wall Street Journal business editor Paul Ingrassia have endorsed this approach.

It would be painful, but it would also be the transformational moment that U.S. automakers have promised for far too long.

- Henry Payne is a writer and editorial cartoonist for the Detroit News.

We Should Not Bail Out The Auto Industry
Nov. 14, 2008
(National Review Online) This column was written by Charles Krauthammer.
Finally, the outlines of a coherent debate on the federal bailout. This comes as welcome relief from a campaign season that gave us the House Republicans' know-nothing rejectionism, John McCain's mindless railing against "greed and corruption" and Barack Obama's detached enunciation of vacuous bailout "principles" that allowed him to be all things to all people.

Now clarity is emerging. The fault line is the auto-industry bailout. The Democrats are pushing hard for it. The White House is resisting.

Underlying the policy differences is a philosophical divide. The Bush administration sees the $700 billion rescue as an emergency measure to save the financial sector on the grounds that finance is a utility. No government would let the electric companies go under and leave the country without power. By the same token, government must save the financial sector lest credit dry up and strangle the rest of the economy.

Treasury Secretary Henry Paulson is willing to stretch the meaning of "bank" by extending protection to such entities as American Express. But fundamentally, he sees government as saving institutions that deal in money, not other stuff.

Democrats have a larger canvas, with government intervening in other sectors of the economy to prevent the cascade effect of mass unemployment leading to more mortgage defaults and business failures (as consumer spending plummets), in turn dragging down more businesses and financial institutions, producing more unemployment, etc. - the death spiral of the 1930s.

Bush is trying to move the LIBOR or the TED spread, which measure credit flows. The Democrats' index is the unemployment rate.

With almost 5 million workers supported by the auto industry, Democrats are pressing for a federal rescue. But the problems are obvious.

First, the arbitrariness. Where do you stop? Once you've gone beyond the financial sector, every struggling industry will make a claim on the federal treasury. What are the grounds for saying yes or no?

The criteria will inevitably be arbitrary and political. The money will flow preferentially to industries with lines to Capitol Hill and the White House. To the companies heavily concentrated in the districts of committee chairmen. To clout. Is this not precisely the kind of lobby-driven policymaking that Obama ran against?

Second is the sheer inefficiency. Saving Detroit means saving it from bankruptcy. As we have seen with the airlines, bankruptcy can allow operations to continue while helping shed fatally unsupportable obligations. For Detroit, this means release from ruinous wage deals with their astronomical benefits (the hourly cost of a Big Three worker: $73; of an American worker for Toyota: $48), massive pension obligations, and unworkable work rules such as "job banks," a euphemism for paying vast numbers of employees not to work.

The point of the Democratic bailout is to protect the unions by preventing this kind of restructuring. Which will guarantee the continued failure of these companies, but now they will burn tens of billions of taxpayer dollars. It's the ultimate in lemon socialism.

Democrats are suggesting, however, an even more ambitious reason to nationalize. Once the government owns Detroit, it can remake it. The euphemism here is "retool" Detroit to make cars for the coming green economy.

Liberals have always wanted the auto companies to produce the kind of cars they insist everyone should drive: small, light, green and cute. Now they will have the power to do it.

In World War II, government had the auto companies turning out tanks. Now they would be made to turn out hybrids. The difference is that, in the middle of a world war, tanks have a buyer. Will hybrids? One of the reasons Detroit is in such difficulty is that consumers have been resisting the smaller, less powerful, less safe cars forced on the industry by fuel-efficiency mandates. Now Detroit would be forced to make even more of them.

If you think we have economic troubles today, consider the effects of nationalizing an industry of this size, but now run by bureaucrats issuing production quotas to fit five-year plans to meet politically mandated fuel-efficiency standards - to lift us to the sunny uplands of the coming green utopia.

Republican minimalism - saving the credit-issuing utilities - certainly risks not doing enough. But the Democratic drift toward massive industrial policy threatens to grow into the guaranteed inefficiencies of command-economy maximalism.

In this crisis, we agree to suspend the invisible hand of Adam Smith - but not in order to be crushed by the heavy hand of government.

"Republican minimalism -"

What a HOWLER! Let's hear it once more for how those are "free markets" and will save us from our selves!

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"(the hourly cost of a Big Three worker: $73; of an American worker for Toyota: $48), massive pension obligations, and unworkable work rules such as "job banks," a euphemism for paying vast numbers of employees not to work."
by: PumpkinCarver

YES! YES! It's labor's fault...
"CEOs are paid too much for what they do; too much more than their average worker
Pay for Performance According to Business Week, the average CEO of a major corporation made 42 times the average hourly worker's pay in 1980. By 1990 that had almost doubled to 85 times. In 2000, the average CEO salary reached an unbelievable 531 times that of the average hourly worker."

If you can pay an American worker a decent wage...get out of the business!
Thank you Reagan, outright union busting, with scabs, injunctions and mass police attacks!

Oops "if you can not pay"

Pumpkinhead might not be aware of the studies that show that when Toyota has been in the US as long as any of the big 3 and thus have as many people on their pension plans, they will also equal the average hourly wage paid by the big 3.

But, But, But (I hear the carver sputtering) they don't have those expenses in Japan. No, they don't orange fella, in the mother country the government has single payer and all the health expenses are shared among the entire populace.

Oh no!

Poorly run businesses are hurting! We can't let the car guys go bankrupt!

Click my name.

If the cost of healthcare for GM workers (as I heard this AM) adds $1600 to the price of GM cars, I wonder how many thousands are added to the price of cars for upper management salaries and perks. I'm all for saving the auto industry, but I think the quid pro quo must be the termination of all upper management and some sort of banner that should hang in each plant and each office stating that the next time some foreign auto maker gets ahead of American auto makers in quality and technology - the American auto makers sink or swim all on their own. They are still advertising Hummers on TV daily.

Fools! Utter fools!

Yes, it's going to be an interesting few years. At least now the culture war has consequences that people care about. It should focus the mind; Heaven forbid, even lead to compromise.

So, basically when these shysters tell me they're taking $3,500 off the sticker, they're really sticking it to me through my and your taxes because they can't run their business efficiently. I'll be every one of the CEOs and CFOs and upper-level management live quite happily, don't they? Steve Landers and his boisterous offspring seem to have done well too, come to think of it.

I say frick 'em and feed 'em fish heads.

I'll be buying Toyota or Acura next time anyway, instead of the Chrysler piece of crap jeep I've got, where I've had to pay $400 each time one of the power windows goes out. I haven't even had the damn thing four years. Bring that up with the Cooks next time you deal with them: See if they'll take an additional $800 off the list price for the money you're going to have to spend to fix their third-rate power window motor that breaks before you even hit 70,000 miles. There's lots more I can add, but this is a good start.

Chrysler. Frick 'em. Ford too.

If you want to save the big 3, buy their cars. If you aren't willing to put up your own money, then get your greedy hands off my tax dollars.

As Arlen Specter said "Where is the plan?" IF I could support them being "rescued," I'm with Thomas Friedman, ONLY if the entire management structure is thrown in the scrap heap - a few months after reducing their compensation to that of the lowest-paid OFFICE worker. They should be forced to use the program that is designed for when you spend more than you can make - Bankruptcy! Reorganization. IF that fails, then they are failures; case closed.

Where does the "socialism" end, and who decides? There should have been NO bailouts/rescues/whatever until their were assurances, and I'm not smart enough to know what those ensurances are, but this is becoming just like the "War" on drugs - throw massive amounts of money down a rat hole, cover all orifices and "hope." Like DBI said a while back: shit in one hand, hope in the other - which fills first?!!!

What happens when the rescue doesn't work? Another one? We HAVE NO MONEY thanks to Bushco, enabled by gutless Dems - like ours and most others. This has to stop. "Let 'em eat cake!" It's not the unions OR the benefits OR the government enabling OR the incompetent management/boards OR us who want to buy a better product - it's ALL OF THE ABOVE. Where does "the saviour" come from?!!
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Ernie's Alzheimer's is getting worse. Bear Stearns wasn't bailed out. It went under.

Lehman Brothers wasn't bailed out.

Larry - I'll disagree with you on this one. The fallout from all of the business that are an offshoot of the auto industry is huge. You will bankrupt them as well as the autos. And hurt business people in small communities that are not even remotely tied to auto manufacturing.

I lived in South Bend, Indiana when Studebaker and Bendix Brakes went bankrupt. Not pretty times. My Dad was one of the 50's and 60's whiz kid defense contractors who had a manufacturing business in South Bend. When those two failed, every bit of skilled labor moved to other states. Now when that happens, you don't manufacture anything, not even a ball bearing. You walk into the bank and say "I'll honor my commitment, but here's the keys to the house and car as we're moving to another state for employment".

That was when I was in the third grade, but by the time I was in the tenth grade we finally got to buy another house. Every dime was paid back. And my brothers and I all got to pay for our own college. It was a great learning lesson for all of us.

I'm not "hard line" on this, but what is the PLAN to make the best possible success of any rescue? All I hear is ........................................ a deafening silence... It sounds like "give me a pile of dough and HOPE. I'm not for that!
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"Bear Stearns wasn't bailed out. It went under."
by: Prouster

HUH? I know it's hard to keep up but...

"Bear Rescued from Failure
It's not clear what had changed so dramatically at Bear to necessitate the emergency bailout, in which JPMorgan is providing a secured line of credit to the beleaguered investment firm. But events appear to have moved quickly on Mar. 13. People familiar with the situation say Bear officials called the Fed late in the day, saying the firm had a funding problem. Officials from the Fed were at Bear's spacious offices on Madison Avenue all night, scouring its books and trying to devise a rescue plan. The Fed and Bear then reached out to JPMorgan, seeing if the big bank led by CEO Jamie Dimon could help out. JPMorgan, which has multiple business relationships with Bear, was inclined to do so. But only with some guarantee from the Fed that it would make JPMorgan whole if Bear were to fail and couldn't make good on its obligations. So if Bear fails, everyone in the U.S. will indirectly own a little piece of the company."

SURE they muct be saved but NOT BY THE TAXPAYERS!
The bums should be fired.