General Motors and Chrysler are borrowing billions of our tax dollars to fix their business models and - hopefully - return them to profitability. They have 90 days to submit a plan on how they are to do it. I’m not a “car guy” - not by a long shot - but when the auto execs came to town in their executive jets to beg for public money, I decided my ideas on what they needed to do were at least as good as theirs. Then seeing these excessively paid execs bob and weave at the witness table convinced me they haven’t a clue about how to do much of anything, except take money out of the company for their bonuses. This is not at all a kind description — What I saw was the car salesman’s image created by William Macy’s character in the cult movie “Fargo.”
Enough satire on this sad situation - with one exception: They don’t need 90 days to come up with a plan They only need about 90 minutes to do it. To shorten it for them even more, here’s what they - and we - need to do.
(1) First, the closest economic model for the current situation the carmakers are in is probably the recession of 1958 - called the “Eisenhower Recession” - when our unemployment reached 7.5 percent and there were global implications similar to what we have today, especially in lesser-developed countries. Depending on how old you are, you may remember this one, because it also had comparisons to the Great Depression of the 1930s.
In 1958, however, Ford brought out the funny-looking Edsel (and then killed it off in 1960). It was also the beginning of the end for Chrysler’s DeSoto, which ended production in 1961; Nash was gone; Studebaker and Packard were gone. In short, Detroit got way smaller - brand- and model-wise - and it must do it again. What they have to do now isn’t very hard to figure out:
GM drops Saturn and Buick, consolidates the Chevrolet and GMC truck and SUV lines. It closes some plants, hopefully in the North.
Chrysler consolidates the Chrysler and Dodge car lines, eliminating duplication in models and thereafter calls itself “Dodge/JEEP.” They consolidate their truck lines with JEEP. By the way, Chrysler as we know it is probably doomed anyway, and the JEEP and Dodge truck lines may be the only brands others in the car business would want.
That wasn’t so hard was it? And, for a reliable clue as to which specific brands, models and lines to whack, look at the number of Google hits for each to as an indicator of consumer interest. I’ll bet someone at each company will get at least a million-dollar executive bonus for thinking of doing just that!
(2) We shouldn’t let them stop with just consolidating their product line; they need to finish moving their plants out of the Northern industrial areas and into the South. However, this will probably not happen because of the political aspects of the move - which is essentially a move of auto assembly jobs from “Blue states” to “Red states.” Interestingly enough, when one looks at where German, Japanese and Korean carmakers have located their factories in the United States, it’s clear that they have avoided the “big labor” Democratic states. This aspect of the latest Detroit bailout - that it will have to continue many of the higher labor costs and inefficiencies - may cause it to fail, and the U.S. auto industry along with it.
(3) The executives and managers in U.S. companies are paid obscene amounts of money regardless of the profitability of their companies. The bailout loans will at least present an opportunity to change this. Furthermore, the entire executive compensation schemes for the bailed-out companies needs to have responsible external oversight; at least until the money is repaid. In short, no one makes the “big money” until the wheels are back on the wagon - and the money is back in the Treasury.
(4) The future of the car business is hooked to decreasing the costs associated with selling and operating cars. As far as selling them goes, the future is with real on-line shopping: We go on-line to actually buy our car, not just to be shunted into the traditional dealer showroom and the hassle of bargaining for a car. We order our car exactly as we want it and it is delivered a short time later to a scaled-down dealer with no new car inventory. We go to the dealer and drive the car away. There are several ways that a car purchased this way could be financed: A cash purchase, or one financed by the buyer with a bank or credit union would be the easiest, and the experiment should begin right away for this category of buyers.
As for the costs of operating our cars, we have recently learned (the hard way) that the price of gas at the pump has little to do with the worldwide supply of oil. Rather, we have learned that the world price of oil is driven largely by the demand from the largest consumer - us - and that even a 2 percent or 3 percent reduction in our demand for gas (such as occurred by the current recession) has a devastating effect on world oil prices and inures to our consumer’s benefit.
We should, therefore, continue to use this economic leverage (i.e., demand reduction) to our advantage by building ever more efficient automobiles, developing low-cost alternative fuels, and - perhaps just as important - begin producing most of our diesel fuel without using oil, e.g., from commercially grown algae.
In sum, our days as a major passenger car producer may be numbered, and the current crisis may be just the latest step in a process that began long ago. Nevertheless, will the bailout for GM and Chrysler succeed? Not unless the corporate governance of the companies demonstrates they are competent to lead - and so far it has not.
Daniel Gallington is a senior fellow at the Potomac institute for policy studies in Arlington, Va.