- The Washington Times - Tuesday, November 18, 2008




What headlines! General Motors announces it is running out of money. Ford and Chrysler are not far behind. What happened to these American industrial icons? And what will happen?

Nothing in politics is inevitable. However, a further bailout of GM, Ford and probably Chrysler (even though it is the only privately held U.S. car manufacturer) seems likely. Including the Big Three, the U.S. automotive industry employs over a million people and constitutes about 2 percent or more of GDP. Some argue that a collapse of these manufacturers will produce ripple effects doing grave economic damage. Like the insurance giant AIG, the industry is perceived politically as too big to fail.

If the taxpayer is to shell out another $25 billion above the $25 billion low interest loan to save the Motor City, guarantees and not just assurances are needed that this bailout will work and that the Treasury will get our money back. That means fundamental changes in the way the automotive business is conducted are crucial. And any further bailout must be backed up by real collateral in the form of hard assets.

Here are some of the intractable problems that have placed automakers on the edge of ruin. Much of the Big Three’s business philosophy still resides in the Industrial Age. Its bureaucratic structures are in many ways as bad as those of the federal government. The costs of providing for current and retired workers are unaffordable. The dealership system is cumbersome, too expensive and highly inefficient. Foreign competition that has moved lower cost assembly and production facilities here is swamping the U.S. automakers while simultaneously demonstrating that American workers outside the Big Three can build cars for Americans. On top of that, the economy appears headed for meltdown.

The results: Detroit cannot keep itself afloat. The taxpayer is asked to play lifeguard. And the fiscal and economic tsunamis build.

About the too big to fail and national security argument, 30 years ago another pillar of the U.S. industrial base was disintegrating. The maritime industries, composed of civilian shipbuilders and commercial shippers, were simply not competitive. Only very large federal subsidies sustained them. The argument was based on national security. In the midst of the Cold War, many wrongly believed that the nation needed its civilian shipbuilders and merchant marine to ensure the commercial capability for delivering the 95 percent of all trade that goes by sea.

The Reagan administration entered office and cut subsidies for the shippers. Despite howls of protests that Reagan was destroying the merchant marine as President Jimmy Carter tried to do with the Navy, the maritime industry dried up. U.S. merchant ships were registered under foreign flags of convenience and shipyard work came almost exclusively from the Navy.

Was national security hurt? The answer was no. Is Detroit too big to fail? The answer is likely to be the same. However, Congress and the Obama administration are unlikely to take that risk.

If Detroit is to be bailed out, then the U.S. government cannot repeat mistakes it is making in administering the Troubled Asset Relief Program, or TARP. First, any loans to the car companies must provide the government first call on the billions of dollars of assets in equipment and facilities owned by the Big Three. If these companies do not succeed, government will be assured of getting the lion’s share of our money back.

Second, new management is essential including changing boards of directors. That Ford and Chrysler brought in “outsiders” as CEOs who could not produce turnarounds underscores the difficulties that lie ahead, however. New management must also have full control. It must understand the market. And it must be far more entrepreneurial. 70 percent of all buyers are under 40, something that Detroit knew well and did little about.

Third, labor, meaning the unions, and the dealers must tighten their belts and in some cases forgo them. That will entail huge lawsuits that must be limited by law. For example, when GM ended its Oldsmobile line, it paid out a billion dollars to the affected dealerships in compensation. That practice cannot be continued.

Finally, Congress must examine creative alternatives to a bailout including allowing the carmakers to declare bankruptcy as the airlines and other industries have. A massive retraining program for displaced and unemployed autoworkers, including retirees, consistent with investment in repairing the nation’s failing infrastructure and the suffering environment, could prove to be a powerful engine for job creation. And it would surely cost less than this bail out.

GM advertised its Chevrolet products as the Chevy Revolution. Well, Detroit needs a real revolution and it needs one now. Otherwise, this bailout will surely fail, the Big Three will become the Lehman Brothers, Bear-Sterns and Merrill-Lynches of the auto industry, and guess who will pay the bill?

Harlan Ullman is a columnist for The Washington Times.



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