Bailout; Motor City Edition

(Apologies for the length of this post)

I have read a number of articles about the proposed bailout of the American auto industry (which, like 99% of everyone else, I'll refer to as "Detroit").

First off, let's get the obvious on the floor:

• Detroit made a lot of crap. They still make a lot of crap. Detroit has been behind the major Japanese car makers in quality for nearly two generations. If you buy a Honda, you can easily go 100,000 miles or more on just routine maintenance. If you buy a Chevy, you need to buy a Triple-A membership, as you will need them. It was not for nothing that there was a time not long ago that "Ford" stood for "Fix or repair daily."
• Detroit buried its head in the sand on fuel economy. Whenever suggestions were made to raise the CAFE standards, Detroit fought them tooth and nail.
• Detroit has historically cared more about styling than engineering. If you wanted a car with leading edge technology, you bought a Japanese or German car.
  
• The Chairman of GM referred to climate change as "a total crock of shit."
• Detroit has fought every safety improvement that ever came into existence, other than the self-starter. When they were mandated anyway, the very first thing Detroit did, each time, was run advertising touting how safe their cars were.
  
• The pay structure for both the workers and the brass is out of whack.
• When the opportunity existed 15 years ago to enact a national healthcare system (and to get rid of having to provide it to their workers and retirees), Detroit fought it.
• Neither Detroit's management nor its unions have fully grasped that the rules have changed in the auto industry. They blather on about "buy American," which is a code phrase for "please buy our shitty cars anyway, because we know the Japs and the Krauts make better cars."
  
• Whatever is wrong with Detroit is not the fault of American workers. Americans have been building small Honda cars in Ohio for 20 years and those cars are as good as their Japanese-made equivalents.

Second, there seems to be a complete unwillingness to confront reality. Despite the fact that gas prices have dropped by nearly 50% since last summer, is there anyone who does not understand that the main reason for that has been the ongoing global collapse of the economy? When the economy turns around, however long it takes, the same factors that drove the price of diesel over $5 a gallon and gasoline to well over $4 a gallon are still in place, other than one (we won't have Bush and Cheney starting more wars in the Middle East).

Third, there is a powerful fairness argument to be made. I am certain that there are readers of this blog who have been involved in small businesses which failed, none of which went to their state capitols or to D.C. to demand a bailout.

All of the above would argue for letting them go under. Maybe in a bankruptcy scenario, the failing companies could be restructured.

Now let's look at some reasons why Detroit should not be allowed to fail:

First, the companies might not survive a bankruptcy process. It is one thing to run United Airlines through Chapter 11, as most customers of an airline do not have a long-term relationship with them. You get on an airplane to fly somewhere and, as long as the airline is still flying a week or so later when you come back, you're happy. If you buy a car or a truck, you are entering into a long-term relationship with the manufacturer, for you'll need spare parts and warranty service. If Chrysler is in bankruptcy, would you buy a car from them, knowing that they may discontinue the model of the car you want or they might close completely? That is not an unrealistic scenario; Linens `N Things entered Chapter 11 hoping to restructure and survive, but now they are closing completely.

Second, the ripple effects would be felt far outside of Detroit. Many of the towns where auto and truck plants are located would partially empty out as the residents left for greener pastures. The towns would be stuck with large abandoned factories. The downtowns of those towns would collapse as the merchants went out of business. Dealerships around the nation would close. The suppliers of parts to Detroit would also cut back their workforces or fail outright and the effects of that would be felt in their towns and in the companies that supply parts to them.

Third, prices of other new cars would likely go up, as there would be fewer choices.

Fourth, the foundation of any strong economy has been the production of things. As far as I know, a "service economy" has never existed. A service economy is a glorified check-kiting scheme. As we make less and less of what we need, we open ourselves to being squeezed.

Fifth, there is a national security component to being able to make all of the stuff you need for the military. It is not just for the local creation of jobs that FN and Beretta had to build plants in the US in order to sell to the armed forces. The manufacturing base of this nation provides the reserve ability to supply the military with what it needs in the event that a there is another major conventional war.

Ideology is a poor guide in times like these. You cannot eat ideology. It will not put food on your table or keep a roof over your head. You know full well that stealing is wrong, but if the choice is to either steal or go hungry and/or freeze, you'll steal.

The choice is not whether to let Detroit fail. The choice is whether we can live with the consequences of such a failure. I do not think we can, but if we are to bail out Detroit, there must be very strong conditions. Otherwise, a bailout would just be pounding money down a large rathole.

My suggestions:

1) No bailout without detailed business plans that includes items such as plans for new designs for cars and trucks. We cannot give Detroit money to continue doing what it has failed to do. Detroit changes or it dies. General Motors bled market share because it could not figure out how to profitably build good small and medium sized cars. Honda and Toyota took nothing from GM that GM did not give away.

2) No bailout without the government taking a significant stock position.

3) No pay bonuses for the top brass until profitability returns. Running a failing company is not grounds for a bonus. Bonuses should be structured based on long-term performance, not on quarterly earnings. The focus on the short term has been one of the most destructive trends in our economy.

4) Pay and benefit packages must be renegotiated from top to bottom. Everybody takes a pay cut with bonuses based, to some degree, on the performance of the business unit. The choice is either reduced pay or no pay. That is going to be harsh for a lot of people who may not be able to easily absorb the reduction in income and it may require restructuring of mortgages for a lot of the employees.

Some folks will leave. That's fine, especially the top executives. They are free to go find another job based on their experience at running a large company into the ground.

5) Some of the changes are to be national, including emission and mileage standards, so that one company cannot opt-out and be the premier producer of dinosaurs.

Everything in the way that Detroit does business has to be on the table, nothing is sacrosanct. The current economic downturn has merely cut a few more supports; Detroit has been headed down the path to the scrapheap for a long time. Some divisions in the companies may have to go (Ford's Mercury division, for example).

Detroit has to change or it dies. We can help Detroit change or deal with the fallout because it could not or refused to change.