Wednesday, November 19, 2008

No Bail

Mitt Romney has written a piece for the NY Slimes about the automotive industry bail out. I am surprised they printed it.

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 never knew that his father was once the CEO for Ford.

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.

Guess what the first recommendation is? Starts with a "U", ends with a whimper as the auto giants go bankrupt from jacked up wages demanding more pay for less work. At the same time, the company executives also need an ass kicking. The fact that the three major automotive CEO's flew their private $36 million corporate jets to Washington, DC, at an estimated cost of $20,000 for each flight is a travesty. They need their egos trimmed and their golden parachutes deflated.

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.

Isn't it funny how the other American automotive manufacturers like Toyota and Honda are not asking for bail outs? And please don't bother with the ridiculous argument that these companies are foreign owned and supported and yad yada yada. The Big Three blew it big time. And how is that?

The domestic manufacturers squandered their dominant position in the U.S. market en masse because they were consistently the highest-cost, lowest-quality producer in a game that the Japanese had single-handedly redefined to be one of lowest cost, highest quality. And now we are well into the second generation of buyers who, thanks to the Toyotas of the world, have never owned a domestic brand of car or truck.

But back to Romney. I think he wanders off the reservation here. He is alluding to some kind of a restructuring of the corporate structure and labor contracts. I don't think that is going to happen. The industry has been grabbing its ankles for far too long for the unions to let up now.

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.

Unfortunately he is referring to his father's generation, a generation that knew hardship, sacrifice - and leadership. Those people are almost all gone now. The "me" generation is now in charge and I have little confidence in its ability to turn this situation around without first milking it for all it's worth, just as they have been doing for quite some time.

But except for the federal guarantees, I do agree with Romney's call that bankruptcy is the only salvation for these companies. Let them use this to reorganize they way they do business.

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.

Remember all those computer companies that were around in the late 1980's? How any of them went under? Tons.

I remember we had a large Wang optical disk document storage system in our department and we were concerned about the company being bought out. Then the company that bought it out was bought out. Eventually what was left of Wang ended up with Bull, Inc. Our tech guy nailed it almost twenty years ago - there were just too many systems around for someone not to pick them up and maintain them. There was too much money to be made.

The same applies to the Big Three. Let the market determine what will happen to the US automotive industry and not congressmen nestling in someone's back pocket.

No comments: