Wednesday, November 19, 2008

What's good for GM is good for ...?

What's good for GM is good for America. We all learned that as kids. Now GM along with the "competition" - Ford & Chrysler - are asking for Congress to do what's good for GM. But is what they ask good for America?

No, says Mitt Romney. Romney was not my favorite Republican presidential candidate, but if any of them knows anything about the car industry and what this bailout will mean, he's the one.

Romney says that the current management must go and the unions must be brought to heel. The costs of cars produced by the big three are simply too high.
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.
I wonder if Romney would have written those words if he was still courting Michigan's voters, but it does seem to make sense that the big three cannot keep producing cars that are too expensive.

So, what should be done if not the bailout. Again, Romney serves up a succinct plan for the Federal Government.
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.
And what of GM? Micheal Levine writes in the Wall Street Journal that a managed bankruptcy is the best option for GM.
The social and political costs would be very large, but if GM fails after getting $50 billion or $100 billion in bailout money, it'll be just as large and there will be less money to soften the blow and even more blame to go around. The PBGC will probably need money to guarantee GM's pensions for its white- and blue-collar workers (pension support is capped at around $40,000 per year, so that won't help executives much). Unemployment insurance will have to be extended and offered to many people, perhaps millions if you include dealers, suppliers and communities dependent on GM as it exists now. A GM bankruptcy will make addressing health-care coverage more urgent, which is probably a good thing. It would require job-retraining money and community assistance to affected localities.
Okay then. Deep breaths everyone. Now pull the plug.