Bankruptcy, Bailout or Salvage?

Is the American auto industry “too big to fail’? Or is it “too big to rescue”?

The proposed beneficiaries of the next bailout include Chrysler – recently dumped by the Germans after having been temporarily helped by a loan from the US taxpayers – and General Motors.

Wait a minute? What about Ford? Yes, Ford is in the mix, but is not on life support and has economic taproots all over the world. [One of my favorite high school classmates served as Ford’s CFO for many years … in Mexico.]

Ford and the other two US manufacturers were to have been awarded government loans by the Bush administration out of a 25 B package, but this was ostensibly to help the “big three” to comply with environmental regulations. In response to the proposal by congressional democrats to allocate the same amount from the 700 billion dollar bailout package – an idea opposed by the fed – the Bush administration offered to reconfigure the environmental package. Those sidebar discussions are “pending”.

I doubt that the current congress will be able to do anything but shout. The real target of the “help me now!” campaign is the new president and new congress. And it is GM and Chrysler are desperately hoping for the big money – in lieu of declaring bankruptcy.

General Motors is a basket case. In Northeast blue collar circles – on both sides of the northern border, GMC is referred to as “Generous Motors”. The term is used ironically, of course. Several corporate reformers have attempted to take over GMC, out the ruling management, and remake the company.

13 February 2006

“Last week the board of directors of General Motors voted to give a seat to Jerry York, a senior advisor to billionaire investor Kirk Kerkorian and a former chief financial officer known for his drastic cost-cutting measures at Chrysler Corporation and International Business Machines.”

Ross Perot had tried to repair GMC in the 90’a as have others. Kerkorian eventually gave up. All outsiders have failed.

Here’s the problem: There is something called “corporate culture” and — like the career diplomats in the State Department — the new owners come and go, but the old culture prevails. Corporate culture is not changed from within, and not even by a new, inspirational leader, unless and until that leader – more realistically, leadership team – identifies, terminates and replaces the bulk of the old guard. This is why bankruptcy works so well: new beginnings with no strings and no legacy costs.

What are those legacy costs? The translation: under-funded pension obligations. This is why the new kid on the block in the airline industry tends to do so well – brand new airplanes and no pensioners to support is a great boost to any new enterprise. But to the actual workers, legacy costs are sacred retirement promises that they have worked years to redeem.

Taken as a political question, the bailout of GMC and Chrysler is profoundly complicated by simple human concerns – this in a cold hearted business world where too much compassion is seen as an obstacle to rational business decisions – like necessary layoffs and plant closings.

Here is the heart of the “no” argument: What if, as is likely, business failure is inevitable? How many billions of dollars is a two or three year postponement worth?

Salvage Not Rescue

The alternative to a “loan” with a few – mostly symbolic – strings attached is complicated, and possibly beyond the competence of the congress and federal bureaucrats. The auto companies who accept aid should be split into parts, some of which would be stand alone enterprises, supported by seed money and the rest auctioned for scrap. In the mix, all American carmakers need anti-trust exemptions so that parts, technologies and dealerships can be shared – if they choose to do so.

This requires a team of insider-outsiders to manage the restructuring and breaking up of one or two manufacturing empires [I doubt Ford would agree to join.] Here are some of the considerations:

Recall that some product lines are more durable than their owners. Chrysler acquired American Motors that had acquired the Jeep line from Kaiser-Jeep, and so on. Under Lee Iacocca’s brief but restorative leadership, Chrysler flourished in the 1980’s – largely on the strength of the minivan. In 1998, post-Iacocca, Daimler-Benz bought a weakened Chrysler company, but was forced to dump it last year. Yet the Jeep line has survived.

Saturn was GMC’s stand alone “new culture” carmaker, created as an answer to Japanese successes in 1990. By 2001, the brand was flagging because GMC had neglected it. As of this writing, GMC has put new resources into the line, while attempting to reabsorb the whole piece into the GMC culture. Saturn dealerships have closed and sales are weak.

The famous GMC Cadillac line, also lagging in 2000, was reinvigorated with introduction of the CTS type in 2004, aimed at German high end competition. The results were promising, if not spectacular.

The bottom line here is that the market is ruthlessly effective at picking winners, but politicians and bureaucrats are hopelessly ineffective. [I’m no better than either!]

Every car manufacturer’s inventory and resources presents a mixed bag of products and technologies, some better –higher quality, more profitable or both – than others.

The interesting questions are these:

Suppose GMC or Chrysler’s entire inventory, vehicles, technologies, factories, dealer networks, the whole package, went on the block in a bankruptcy auction. Some parts would be much more valuable than others. Which ones? Some parts would have only junk value. Which ones?

Here’s an exercise: Pair product line and description:

[]- Hummer.

[]- Corvette.

[]- Chevrolet Malibu.

[]- Chevrolet Volt

With –

—Military contracts.

—Industry icon.

—Sales success.

—A promising innovation.

This is where I decline any the detailed product suggestions, because, after all, I’m less competent than the experts and – unlike our elected leaders – I really do know my limits.

Our problem here is that the patient requires both life support AND surgery.

Bankruptcy is surgery by a blind OR team with blunt instruments. And the market is an expert pathologist looking for salvageable body parts.

I think the democrats are probably right here about the necessity of some significant government aid. I am persuaded that we at least need to spend enough money to provide life support and an incentive for a constructive reorganization.

The problem will be getting the second piece right. Past performance is not encouraging.

So I have just a few recommendations:

[a] If is to be bankruptcy, the government needs to move immediately to extract and rescue the military contract components from the wreckage, even if that means temporary nationalization and a managed sale to competent American interests. And the government needs to be proactively in the game to help facilitate rapid re-growth from the ashes, and the preservation of support services for the large fleet of American made card and trucks.

[b] Assuming a bailout takes place:

Suspend the anti-trust laws to enable creative restructuring of the entire industry. For example, the survivors may need to reach inter-company sharing arrangements for supply resources, service and dealership networks. Technologies might be shared. Other innovations might run afoul of anti-trust. There is plenty of competition already from Asia and Europe. It’s silly to let anti-trust considerations cramp restructuring planning. I say – Anti rust, not anti trust.

Mitigate the pension and benefit legacy costs for any new enterprise (for example if a division is launched as a stand alone new company, it should at least have the head start that a post bankruptcy company would have).

Apply the Colin Powell doctrine to the situation. If you go in, do it with enough resources and with a plan to win, and have your exit strategy ready before you commit.

The patient is dying from a chronic disease due to a misspent middle age. The physicians inside the beltway have no medical training. There is no living will. The grieving family says: DO SOMETHING.

It is well to remember the applicable part of the ancient Hippocratic Oath: Physician – do no harm.


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