Reason.com

It's 65 Million B.C. for the Detroit Three

Why use taxpayer money to postpone the inevitable?

The former Big Three are back in D.C. to scare up $25 billion more on top of the $25 billion they've already received from Uncle Sam. If they don't get the money, they warn, cities will die; national security will be jeopardized; millions will lose their jobs; tens of millions will watch their 401-Ks vanish—and their CEOs will lose their corporate jets and have to travel first class. 

But these companies will need divine—not government—intervention to survive. And unless Rep. Nancy Pelosi (D-Calif.) and her fellow congressional bleeding hearts can arrange that, they shouldn't risk another dime of already-strapped taxpayers' money to keep these corporate dinosaurs alive.

General Motors alone burned about $5 billion a month for the last quarter and is expected to completely exhaust its kitty by the end of this year. (The other two will follow suit shortly after.) At that rate of cash burn, the bailout money translates into five more months of life.

A comeback in that time would be hard to pull off even if these were the best run companies on the planet, rather than ones debilitated by decades of labor intransigence and management incompetence, two characteristics that show few signs of abating.

Indeed, United Auto Workers (UAW) Chief Ron Gettelfinger, who has been accompanying the auto CEOs on their taxpayer shakedown missions to D.C., had until this morning ruled out any new concessions to the Detroit Three. "We have made dramatic, dramatic changes and the UAW was applauded for that," he insisted. "The focus has to be on the economy as a whole as opposed to a UAW contract." And what precisely are these "dramatic changes" that Gettelfinger touts? The UAW agreed to a labor contract last year that partially capped retiree health care and other legacy costs of the auto makers that will reduce their wage gap with Toyota from about $25 per hour to $10...in 2011! Until then every car rolling out of Detroit will cost $1,500 more than those built elsewhere in the USA by foreign competitors.

Gettelfinger is also unwilling to overhaul the rigid workplace rules that have long crimped labor productivity. For instance, these rules prevent workers from doing multiple jobs, which means that they can't be quickly redeployed in response to shifting market conditions. Nor will Gettelfinger allow the immediate shuttering of the notorious job banks program that pays laid off workers nearly their full salary for years on end.

Maybe Gettelfinger is just posturing. Happily, he has convened a UAW meeting tomorrow to "mull" some concessions. But if the threat of imminent death won't persuade him to pull out all the stops to restore the auto companies to profitability, why would he do so after receiving a $25 billion life-line from Uncle Sam? In effect, this means that the bailout will force non-auto workers—who should be saving in the event they get a pink slip themselves—to subsidize unemployed auto workers so that they can continue to draw fat checks for a few more months.

To ensure that the bailout money is not frittered away on overpaid unions, President-elect Barack Obama is reportedly considering a "prepackaged bankruptcy" for the auto makers. This is a fast-track process that will make the bailout money conditional on cost restructuring plans that auto makers and labor unions will have to hammer out before going into Chapter 11.

But even though this scheme might force labor to act more rationally, it won't address the other root cause of the Detroit Three's decline: managerial ineptitude.

Even before the latest financial crisis, GM's annual loss for 2007 touched nearly $40 billion, the largest ever for an automotive company (although some of this was driven by one-time costs associated with buying out its workers.) Ford and Chrysler have similarly posted billions of dollars in losses.

Admittedly, the Detroit Three have improved their product lineup in recent years. Gone are the days when people joked that GM ought to hand out a free umbrella with every Cadillac it sold to guard against a leaky roof that it couldn't find a way to plug. Its new Chevy Malibu is reputed to be every bit as good as its closest competitor, the Honda Accord. Similarly, the Ford Fusion hybrid offers superior gas mileage to the Toyota Camry hybrid at no extra cost.

But to persuade hard-pressed consumers to abandon their Hondas and Toyotas right now and splurge on new products, the Detroit Three will have to offer something radically—not just marginally—better. They will have to invent irresistibly sexy cars and sell them at super attractive prices—and still turn a profit.

This will require a degree of new thinking and innovation that their command-and-control corporate cultures haven't supported in a long time. Silicon Valley has demonstrated that competing effectively in a dynamic world requires egalitarian workplaces where smart people can think freely, unencumbered by the traditional trappings of status and power. But the Detroit Three have yet to learn that lesson. The plush corner office—still very much a prized thing—goes not to those with the most creative ideas to generate new efficiencies or products, but to the best ass-kissers. Indeed, in one of these companies, managers (drawing six figures) accompanying a boss on out-of-office engagements have standing instructions to be prepared with information about the nearest bathrooms to allow him or her to answer nature's call without losing a single moment. Is it any surprise then that their CEOs had no sense about how taking a begging trip on corporate jets would look to the thinking public?

Even though all car makers are suffering due to the economic downturn, only the Detroit Three are facing a mortal threat. America's other auto industry—composed of Asian transplants—will survive just fine.

But bailing out entities that long ago lost contact with market reality won't encourage them to reinvent themselves—exposing them to the full force of the gales of creative destruction will.

For the Detroit Three, it is 65 million BC—the year that the meteor landed and replaced the dinosaurs with smarter and more agile creatures. There is no point in using taxpayer money to postpone the inevitable.

Shikha Dalmia is Senior Analyst





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