Wednesday, December 10, 2008

Don Weil on the Auto Industry

Yes, the politicians are talking themselves into bailing out the big three when what the big three desperately need is a trip through chapter 11.

In fact, it is probable that these companies can be nicely reorganized and even refinanced as a group of separated companies worth much more than the original entities.

At the end of the day, I believe there is great merit in GM splitting into seven separate companies. They are there in practice and are burdened by an actual lack of internal competition. GM is set up to do just that.

The driving force behind gigantism in industry came from the huge need for capital to carry huge inventories literally from mine face to end buyer. This has abated thanks to modern industrial practice. It makes total sense for a stand alone auto company to design a model line and run a nimble assembly line using parts suppliers who are now already well established.

Multiple auto companies would spread the financial risk which surely is a benefit to the nation. We are getting this through the back door as foreign automakers continue to set up shop here.

Four Big Lies about the Big Three Automakers

Monday, December 8, 2008 3:58 PM
By: Dan Weil

With Congressional Democrats and the Bush administration agreeing in principle over the weekend to drop a few billion on General Motors and Chrysler, all signs point to a government-backed auto industry bailout. But could the crisis in Detroit be the product of myth, spin and outright lies?

As the nation inches closer to an unprecedented investment in private industry, Newsmax has examined the falsehoods being spread to promote the deal. Indeed, the exact amount of money to be doled out isn’t clear yet. GM and Chrysler executives testified before Congress last week that they need $14 billion to survive until March 31.

Whatever the total, a number of financial experts say it would be money better left unspent until the Big Three and their supporters agree to level with the American taxpayers. Until the car makers can offer convincing proof that they will be able to produce cars at a reasonable price that customers will want to buy, here are four of the biggest whoppers they are relying on to get a massive infusion of American tax dollars:

1. Detroit’s wages really aren’t out of synch with those of auto workers in other countries.

It has been well established that total compensation for U.S. auto workers, including pensions and benefits, comes in around $70 per hour. That compares to $45 per hour for Japanese workers.

But some auto industry supporters have distorted the argument. They use the American workers’ hourly wage without benefits – about $30 an hour – and compare that number to the $45 hourly total compensation for Japanese workers. Then they claim that U.S. auto makers are actually more labor efficient than their Japanese counterparts.

Obviously that’s not comparing apples to apples. If you are looking at apples versus apples, a new auto plant in India offers hourly pay of only $19.
And it’s not just line workers who are overpaid. Ford’s chief executive Alan Mulally earned $22 million in total compensation last year – a year that helped push the company toward oblivion. Asked last month if he thought he deserved a pay cut, Mulally said, “I think I’m all right where I am.”

Top executives at Bear Stearns, AIG, Lehman Brothers and Merrill Lynch probably felt the same way right before their companies went under.

2. The auto industry is unique and therefore must be bailed out.

It’s true that auto companies, including suppliers etc., account for about 3 percent of economic output and employ at least one million people. But those numbers aren’t dependent on the financial status of the Big Three.

If the companies go into bankruptcy and come out stronger, the industry will employ about the same amount of people. If not, foreign auto makers will produce more cars in the U.S. and pick up many of these workers.

Plenty other uniquely American industries are taking it on the chin, and no one is calling for a bailout of those sectors. Take newspapers for example. One could argue they are far more important for the functioning of our democracy than the Big Three auto companies.

Newspapers are firing workers right and left and shifting more of their operations to the Internet. And they will have to continue doing so until they can put out a news product cheaply enough and well enough so that readers will pay to read it, and advertisers will pay to appear in it.

That’s called adjusting to a changed market place, something the Big Three have largely failed to do since first facing foreign competition in the 1970s.

3. Bankruptcy for the Big Three will mean the end of the U.S. auto industry.

That is simply poppycock. A prepackaged bankruptcy could actually leave the major auto makers in better shape than they were prior to the financial crisis. Since the mid-1990s, the Big Three made most of their money on gas guzzling SUVs and trucks. That simply won’t cut it anymore. Bankruptcy will force the auto makers to quicken their shift to smaller cars.

Plenty of companies have emerged stronger from bankruptcy. Nearly all the major airlines have gone through that process and came out stronger than when they entered. Some industry apologists have argued that American consumers won’t buy any cars from the Big Three if they are in bankruptcy because of concern that warranties won’t be honored.

But as long as the companies offer quality autos at reasonable prices and make it clear that warranties will remain in place no matter what happens to the companies themselves, American drivers will want the cars.

Meanwhile, bankruptcy would give the Big Three an opportunity to rework their labor contracts, cutting compensation, and to jettison incompetent executives.

4. A limited aid package now will insure the industry’s long-term future.

The amount of money being bandied about, $15 billion to $25 billion, is chump change. GM and Chrysler are bleeding $2 billion in cash per month. So the high end of the bailout range keeps them in business for about a year. Then what? Without major changes in their business model, they’ll simply be coming back to Washington with their hands out again.

The Big Three have had so many opportunities to change their practices since the first oil crisis of the early 1970s, yet they have been reluctant to budge. GM still has eight brands of cars, even though critics have pointed out for years that’s probably about seven too many.

As recently as last month, GM CEO Rick Wagoner had the gall to tell Congress: “What exposes us to failure now is not our product lineup, or our business plan, or our long-term strategy.”

Until Wagoner and others at the Big Three come to realize those are exactly the factors that have put the industry on the brink of failure, there is no hope for improvement. And it’s not a bailout that’s going to make auto companies implement the adjustments they need to survive.

And remember, this current "bailout" bears no resemblance to the rescue of Chrysler in 1980. In 1980, Congress passed, and President Carter signed, a law giving a U.S. government guarantee of a private $1.5 billion loan to Chrysler. Not one dollar of taxpayer funds was ever used in the deal. It's also important to remember that import tariffs sheltered Chrysler and the Big Three from Japanese competition in the 1980s. And unlike today, Chrysler also had a clear plan to make a comeback and the loan was relatively small.

All of the automakers should follow Chrysler's 1980s success story: create a viable business plan for the future and get private sources to fund it.

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