Wednesday, November 19, 2008

Bailout fever, catch it!

Is General Motors too big to fail? What about Ford and Chrysler?
The answer is yes and no. Yes, because the auto industry is the manufacturing backbone of the US economy and the workers, material suppliers, dealers and associated businesses that would be hurt if the Big Three closed their doors would act as an anchor on our economy for years. No, for the plain fact that if your business is encumbered by unsustainable labor contracts and a corporate mindset that has not changed with the US auto market, no amount of bailout money will save it.

Trying to save the big three by giving them money is like trying to lift a bucket while you're standing in it. Just as politicians are allergic to reality and telling their constituents bad news, GM has not stood up to the UAW or to the shareholders and said, this is just plain crazy. No one at the top of the big three has the courage to say we cannot sign these labor contracts, if you want to strike, strike. If we make it through fine, but to sign these labor contracts would be suicide for our company and just won't do it.

Mitt Romney's editorial in the Times is a great piece, you should read the whole thing.

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.
Think about that. GM is in the hole $2,000 before they tighten a bolt on a new car. The other great point Mitt makes is the leadership must change, and not just new people who have been raised in this big three culture, they need new blood with a track record of reinventing companies. Someone from the outside who has worked hand in hand with labor and has sat down and showed them the books. Someone who will tell the UAW that you can shear a sheep year after year, but you can only slaughter it once. The AUW has a job to do, get as much money as they can for their members, but what happens when they demand so much that their member's jobs simply vanish? Is this what their members want? Is this what labor negotiations have come to?

We want what we want, and if it drives you out of business, oh well.

Back to the bailout, if GM and the rest of the big three have a burn rate of billions of dollars a month, what use is giving them 25 billion more? This is like giving someone a third mortgage on a house in foreclosure, it might keep the lights on for a little while but it doesn't change the fact that they are going broke because they spend more than they make.

It's called reality. Get used to it. Sell the corporate jets, cut your upper management, cut your executive's salaries, and then ask the UAW to rework their contracts.

It is the only way it will work. Even with the bailout, this will still need to be done to save the domestic auto industry, they will just be a year further in the hole and the taxpayers will be $25 Billion poorer.

The first rule about holes is, when your in one, stop digging.

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