Government Should Stay Out of Auto Business

This past Sunday on Meet the Press, President-elect Barack Obama told Tom Brokaw, “We don’t want government to run companies.  Generally, government historically hasn’t done that very well.”  Obama is absolutely correct!  Government has been shown to be a miserable corporate manager.  We should never want politicians or federal bureaucrats managing private companies.

 

Unfortunately, that is exactly what House Speaker Nancy Pelosi and her fellow liberal Democrats in Congress are about to do.  Under the plan being submitted by Congressional Democrats “would mandate, or at least heavily influence, what kind of cars companies make, what mileage and environmental standards they must meet and what large investments they are permitted to make.”

 

The latest bailout plan, which the Congress hopes to vote on Wednesday, calls for an initial $15 billion for General Motors and Chrysler.  Everybody seems to agree that these figures are just a down payment.  The plan will be overseen by an official, appointed by President George W. Bush, whom congressional lawmakers describe as an “auto czar.”  This person will act as a kind of trustee with authority to bring together labor, management, creditors and parts suppliers to negotiate a restructuring plan.  He or she will also be able to review any transaction or contract valued at more than $25 million.

 

Nobody is saying what will happen if Ford were to choose not to take the money at this time.  Ford’s CEO has said that they do not need the money at this time, but is requesting a $9 billion line of credit. Ford is supporting the other two auto makers getting a bailout because a failure of either or both would affect Ford so negatively.

 

It still poses an interesting question, though.  Will Ford be exempt from the rules and meddling of members of Congress and the Auto Czar?  If so, will they then have an unfair advantage?  Will they be forced to follow the same rules and regulation to be eligible for the line of credit they are requesting?  None of that is clear at this point.

 

If General Motors and Chrysler (and/or potentially Ford) get the bailout that the chief executives are asking for, you can potentially kiss the companies good-bye.  It won’t happen overnight, but the demise will be virtually guaranteed.

 

With or without an Auto Czar and with or without the bailout, Detroit will need to drastically restructure itself.  Detroit needs a turnaround, more than a check.

 

Detroit’s problems are structural and cannot be cured simply by an injection of taxpayer money.  There are other auto makers (such as Toyota, Honda and BMW) building cars on American soil and actually making a profit by doing so.  The biggest problem for the Big Three is their completely uncompetitive labor costs which come to more than $70 an hour.  Some people have disputed this number, but have not been able to provide any evidence that refutes it.  The numbers break down this way:  about $30 in base pay becomes $40 after average overtime pay is included; then another $33.58 is tacked on in benefits which include health care, dental, life insurance, disability, unemployment insurance, pension payments and payroll taxes.  These numbers come from GM itself!

 

All of these costs are for current employees and do not include any payments or benefits for current retirees.  If you were to figure in the $4.9 billion that GM paid to retirees and surviving spouses in 2006, the hourly wage goes up another $31 leaving GM with labor costs of $100 an hour!  Contrast these numbers with the $43 an hour that Honda is paying its workers and the problem becomes clearer.

 

That extra burden is estimated to be more than $2000 per car.  Think what that means:  Ford, for example, needs to cut $2000 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 $2000 more put into each one!  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.

 

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

 

Management, whether the existing group or new managers, must work with labor leaders to see an end to the enmity between labor and management.  The division is a holdover from the last century and companies in the 21st century cannot perpetuate the destructive labor relations of the past.  This may mean a totally new direction for the U.A.W., perhaps in profit sharing or stock grants to all employees or perhaps something else.

 

Investments need to be made for the future.  Investments should be made 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.

 

The federal government should invest substantially more in research—on new energy sources, fuel-economy technology, materials science and such—that will ultimately benefit the automotive industry.  That is where Congress can help rather than dictate.  Washington is spending about $4 billion on energy research today and should commit to investing at least $20 billion a year.  The research could be done at universities across the nation, at research labs and even through public/private collaboration.

 

Another way Congress could assist the automakers is to rectify the imbedded tax penalties that favor foreign carmakers.

 

The American auto industry is vital to our national interest as 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 could, and should, provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.

 

Whether through a managed bankruptcy, or simply through their own restructuring (which Ford seems to think they are doing), the federal government could assist and propel newly competitive and viable automakers, rather than sealing their fate with a bailout check.

 

I would hope that, rather than rushing to send a check, some in Washington will consider that there are options other than government taking over the business of business.  Apparently, I won’t get what I hope for from Congress…again.

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