Bankruptcy or Bust

This past week, Congress delayed a vote until December on whether to give General Motors, Ford, and Chrysler a $25M bailout. However, as much as Speaker Pelosi says the automakers need to be "accountable" and that they need "to submit a viable business plan" to gain government financial assistance, she also says that bankruptcy would be "digging a hole far too deep." Translation: she intends to give the money and the delay is simply political posturing to get the votes.

The U.S. automakers are clearly in big trouble with each company posting losses in the third quarter. GM and Ford each reported losses between $2B and $3B. Yet, somehow Toyota made a profit. Why? Simply put, the Detroit 3 are operating with a business model from the past. Their Union contracts require them to pay their workers an average of $30 more per hour than competitors like Toyota; they have to support 15,710 dealerships across the country compared to 4,000 for their Japanese competitors; they pay enormously for outdated facilities they may never use again; and, they pay billions annually for more than 800,000 retirees' pensions and health care. A bailout will not change any of that.

The only way to assure what Speaker Pelosi calls a "long-term viability of the industry" is not through a Congress oversight committee that reviews the automakers' business plans, but through bankruptcy. That wouldn't mean the end of the world. Rather, it would mean a chance to reorganize the business structure to create a model that is competitive in the global marketplace including against the Japanese competitors. Even though the Union wants the current salary structure, pensions, and retiree health care benefits to remain the same, these companies cannot continue to be viable in that structure and the jobs will continue to go away, and eventually the Union with them. Bankruptcy allows the Union agreement to be ripped up and a new agreement forged as part of a sustainable business model that will then create competitive product offerings and more jobs, and the government can step in to guarantee the pensions and heath care of retirees.

Bankruptcy gives the U.S. automakers a chance to be viable again. Congress and President-elect Obama even have a chance to present a pre-packaged bankruptcy solution, about which there have been rumors. This type of program would provide government financing in the form of a loan if the automakers go into court with a new agreement with and concessions from workers and suppliers that would present a viable and sustainable business model. Such a program is the only way to free the automakers from the poor management decisions, crippling debt and untenable labor contracts and, in its wake, to create a new beginning and a productive, profitable, and sustainable U.S. auto industry that is competitive in the global marketplace and creates jobs for years to come.