The Sad Reality facing General Motors


The Sad Reality facing General Motors

The Congressional plan to bail out the Detroit auto industry died a swift death last night, but the White House may yet swoop in with a unilateral bailout of its own. Reports surfaced this morning to suggest that the Treasury Department, on the authority of the President (and presumably the U.S. Fed) would tap the $700 billion fund to bail out Wall Street in order to get enough cash to Detroit to keep the companies afloat until next year.

That, of course, would finally destroy any notion that the U.S. Government is actually operating with a coherent plan. I know, I know…nobody really believed that anymore anyway. But the Trouble Asset Recovery Plan (TARP) was first supposed to buy up bad mortgage assets, then got converted into a giant bank account to buy bank stocks, and now, apparently, it might also branch out into the car business. This, dear friends, is what’s known as making it up as you go along.

Unlike my friend Andrew Coyne, I’m a little more sympathetic to the idea that governments can lend a helping hand to industry in times of trouble. That said, these bailout plans are disasters in the making. The best explanation of why can be found here (a column from a month ago in the Wall Street Journal by Michael Levine.)

Here’s the gist: As much as management, the unions, the dealers and local governments pay lipservice to the need for GM to change, once you strip away their platitudes, it’s clear that deep down everybody wants to maintain the status quo, or at least as close to the status quo as possible. The UAW’s refusal to accept pay cuts last night was a dead giveaway. They say they understand the need for radical measures, and then they balk at the first sign of anything radical. It’s the old story – “when you said ‘radical changes’ were coming, I thought YOU were going to change, and I’d stay the same!”

Bankruptcy or no bankruptcy, this is what has to happen at GM (and Chrysler, and yes, eventually, to a lesser extent even at Ford):
-Plants must close. GM used to have half the market, now they have 20% of the market. They have too much capacity, and too many workers. Thousands of those workers are being paid to sit and do nothing all day in a “jobs bank” waiting for the mythical recall to the production line, that is never coming.
-The big three employ 250,000 people, and another 100,000 at parts suppliers rely on the big three for their jobs. The necessary restructuring would certainly mean job losses running well over 100,000 in the U.S., Canada and Mexico.
-For those who do not get fired, salaries and benefits, and yes maybe even retirement benefits are going to have to come down. GM simply doesn’t have the money or the size to support their current cost structure.
-GM has too many brands – eight in all. It should be maybe half that many.
-That means dealerships have to close. GM has 7,000 dealers in the U.S. Toyota has 1,500. Honda has 1,000. GM could shut half its dealerships and still have three for every Toyota store.
-That means thousands more car salesmen, mechanics, secretaries, accountants and support staff will lose their jobs.

For all that to happen, GM must enter into incredibly arduous, slow, complicated and expensive negotiations. Meanwhile, their business continues to deteriorate. Bankruptcy throws all those contracts the window and forces everybody to accept a cold, harsh reality. They can begin re-building a sustainable GM from the ground up.
A bailout does not “save” GM or Chrysler or anyone else. It puts the taxpayer on the hook for paying the bills while it sorts out the mess, and prolongs the fantasy that the Big Three can remain pretty much as they are.

What government should do is allow GM and Chrysler to enter Chapter 11, and THEN step up with financing to assist the restructuring and cusion the blow to the hundreds of thousands who will be affected.