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December 13, 2008

Bankruptcy is the Only Way to Save Detroit

One of the most chilling images of the debacle that was the Vietnam war was a US soldier using his Zippo lighter to ignite the thatched hut of a small village, setting it ablaze as residents looked on in shock. “We had to destroy it to save it,” he said.

The same is true with the big three auto makers in Detroit. Bankruptcy is the only way to save them.

THE UNIONS:
Any tax dollars spent on “bailing out” Detroit would be a waste. Sure, they might prop up a few over-paid UAW jobs and pensions for awhile and maybe keep some local auto dealers afloat, but they are all doomed.

UAW auto workers make an average of 30% more than non-union labor at Japanese auto plants in the US. Union wages and benefits add more than $2000 to the cost of a big-three built car. Sorry guys… the party’s over.

Bankruptcy will allow Detroit to go back to square one and negotiate reasonable labor contracts. Sure the union workers would be screwed, but they’ve been living pretty well for years, even getting paid for not working.

THE FRONT OFFICE:
Big three’s management must go. These guys drove their industry into this problem agreeing to fat union contracts while designing cars that Americans don’t want.
Robert Lutz, is the Vice Chairman of GM now in charge of the make-or-break Chevy Volt electric car. Yet he admits he doesn’t believe in global warming and recently described the car’s potential buyers as “no make-up” lady environmentalists with hairy legs.

This guy needs to be taken out of the executive gene pool. Ignorance and arrogance like Lutz’s have no place in Detroit’s future.

Grounding your fleet of corporate jets and agreeing to work for a dollar a year are sacrifices of too little and far too late.

THE PRODUCT:
Why has Detroit continued to build gas-guzzling behemoths while the Japanese have innovated with hybrids to great success? Gas may be cheap today, but the days of $4 and $5 a gallon will return.

Watching “60 Minutes” the other night, I heard the Saudis unapologetically explain that because their future is in selling oil, they’ll do all they can to stop an electric car from being built.

Detroit’s big-three are clearly OPEC’s best customers, so why not let Saudi Arabia, Kuwait and Qatar bail them out?

But please, do not waste another US taxpayer or Treasury dollar on a bailout of Detroit. They’ve squandered their own money. Don’t let them misspend ours.
Detroit and the big-three’s unions are victims only of their own greed and incompetence. A bailout is like handing booze and the car keys to an alcoholic because he promises to drive to an AA meeting. Bankruptcy would give them a clean slate, like going to rehab.

THE FUTURE:
One silver lining: Senator Chris Dodd’s observation that Detroit used to build more than cars and trucks. GM also used to build passenger trains and buses.

So in a post-bankruptcy auto industry, let’s use their engineering expertise to think of transportation as more than one person in two tons of steel guzzling gasoline.

As of today the US doesn’t have a single large domestic rail passenger car builder: Kawasaki, Bombardier, Alstom and the others are all foreigners with token domestic plants. This lack of competition drives prices up: the new M8 cars on Metro-North cost $2.5 million each.

Imagine a post-bankruptcy Detroit putting its engineering skill, production facilities and labor to work on mass transit and maybe, just maybe, there’s a silver lining in this mess.

1 comment:

jnavon said...

Jim I conceptually and morally agree with all your points. Unfortunately there are a couple of flies in the ointment:

1) The real cost differential is $49 per hour for the Japs in the US vs $55 per hour for Detroit - which isn't a 30% differential. The additional $18 per hour represents pension and post retirement bennies for workers that are already retired. That is a fixed cost that the big three erroneously lump into the variable cost of producing a car. As such it goes up as they produce fewer cars. I.e. It is not quite as easy to gain savings by renegotiating the current employees' contracts. And reneging on retirees will be political suicide. The Government ought to consider just taking the existing retirees off the companies' backs. After all if Obama is going to provide universal health care, let him take that population on first.

2) While bankruptcy would provide a legal mechanism to deal with all these issues, there has never been a car company that successfully reorganized under chapter 11. Once the company declares a reorg, sales go to zero as people lose confidence in the warranty and dealer network for future service needs.

Bottom line, as much as I like the solution conceptually, it is not so easy in practice. Unfortunately letting them all go at this stage in the economic cycle, will be a huge blow to global confidence and will deepen the recession. Thus we find ourselves between a rock and a hard place.

Jacob