WSJ: Let Detroit Build Profitable Cars

I’m doing a little catching up this weekend and trying to read all the two dozen or so articles I bookmarked over the past couple of weeks.

One of the items I bookmarked was Holman W. Jenkins Jr. December 31st Op Ed piece in the Wall Street Journal “Let Detroit Build Profitable Cars”

In the continuing battle over Detroit, UAW chief Ron Gettelfinger doesn’t seem to get the picture. Let’s help him.

With shareholders virtually wiped out and debt holders taking a massive haircut, labor is the only stakeholder with anything left to lose. Even a friendly Obama administration will have to acknowledge this. But there is an alternative that would at least take some of the pressure off wages and benefits — and that’s freeing auto makers to build cars for a profit rather than to meet regulatory mandates.

Like all regulatory schemes, Congress’s hallowed Corporate Average Fuel Economy rules froze in place a conception of the auto industry as it appeared to the simple minds of Congress in the early 1970s, when three manufacturers dominated the U.S. market, making full lines of vehicles. Today, more than 25 companies sell vehicles here, and the corollary of such diversity, normally, is specialization.

The Big Three, left to their own devices, would surely specialize in those vehicles on which they make money — i.e., those with hefty price tags and markups relative to their man-hour content. Even at the peak of gas prices, half the vehicles sold in the U.S. were light trucks. In November, amid a collapsed home construction industry and with $4 gasoline fresh in mind, what were the two top sellers? Pickups by Ford and Chevy — and the Dodge Ram was No. 7.

While I agree with Jenkins in principle on repealing CAFE standards it’s only one piece of what needs to be done to bring the big three back to profitability… It’ll help but that won’t solve the problem.

On a related note: Chrysler seems to be winning new friends… I don’t who the marketing genius was that dreamed up the idea publishing a thank you ad but if the comments on their blog are any indication it didn’t go over well.

Treasury Throws Auto Industry a Life Line???

Damn! What is it with the Bush administration?

Senate Republicans rightly stopped the auto industry bail last night and today the Bush Administration decides to use TARP funds to throw a life line to GM and Chrysler.

From FoxBusiness:

Despite the abrupt death last night of bailout legislation in Congress, it seems the Big Three car makers will still get billions of dollars in rescue funds from Washington.

The Treasury Department said Friday it will provide an unspecified amount of money to the cash-strapped industry, Fox Business Senior Washington correspondent Peter Barnes has learned from a source close to the discussions. It was not immediately clear from which funding source Treasury would get the money.

Still, industry experts are deeply skeptical that emergency cash is the answer to the myriad ills plaguing the industry.

“They’ll get the money, but it’s a very dangerous proposition. It’s a very complicated mess,” said David Magee, author of How Toyota Became #1.

In the wake of the failure of a $14 billion bailout bill in the Senate Thursday night, the Treasury Department said Friday it was prepared to step in and prevent a collapse until Congress takes up the issue again. Read the rest…

It’s a sad reality but  Billions in taxpayer dollars aren’t going to save the Big 3… They need to drastically restructure, bankruptcy is the only way for them get that done in the time frame required.

Update: Larry Kudlow posting at the Corner says there’s no deal yet:

Media reports and Wall Street investors are now assuming the Treasury will put up $15 billion in TARP money to keep the Detroit carmakers out of bankruptcy. But my sources tell me that the TARP deal is not done — not by a long shot.

At a minimum, it’s going to take the Treasury several days to walk through the financial numbers and gather all the facts before it takes any action. The Treasury wants to see the cash-flow data and get to the truth about GM and Chrysler. (Ford doesn’t need the money.) And nothing will happen until these numbers are properly crunched. And the Treasury may well want to arrange for a built-in monitor — something that might even look like a car tsar — if any TARP money is dispersed.

Senate sources tell me that any TARP-money allocation might include the very same conditions proposed by Tennessee Sen. Bob Corker in legislation that broke down in a marathon session in the Senate list night.

So folks shouldn’t count their TARP eggs before they’re hatched. And nothing is expected to be announced today.

Assuming Kudlow is right this is good news.

Mitch McConnell: No

Senate Minority Leader Mitch McConnell has broken with the White House and come out against the auto industry bailout in a Senate floor speech:

“These are turbulent times for the U.S. economy. Over the past several months, Americans have seen giant companies fail, significant job losses, and, after unprecedented problems in the credit markets, the frightening prospect of total disarray within our nation’s Main Street economy.

“The crisis in the credit markets came at us quickly. We were told that urgent government action was needed in order to shore up the broader economy — and that failure to act would lead to a complete collapse of consumer credit, the very lifeblood of our nation’s economy.

“Under ordinary circumstances, I would have opposed such a measure. Government intervention in the marketplace cuts against all my ordinary impulses. But this was not an ordinary event. I, and many others, believed that extraordinary action was needed to protect millions of ordinary Americans from the colossal and far-reaching mistakes of a few. And action was taken.

“The systemic breakdown that some envisioned has not occurred, so there is reason to believe that the medicine has had some effect. But, on the whole, the overall economy continues to struggle. Some industries have been hit harder than others. And one of them is the auto industry.

“The problems in the auto industry have been long in the making. But last month the situation grew so dire that American automakers came to Washington with an urgent appeal for federal help. Over the past few weeks, lawmakers have taken the time to examine the problems at these companies and the solutions that they have proposed. And now the American taxpayers are being asked to put their money behind a plan that is aimed at helping these companies survive.

“Republicans received that plan late yesterday morning. We reviewed it closely to see if it meets the criteria that I have laid out repeatedly for taxpayer-protections and an effective strategy for securing the long-term viability of these companies. In the end, I concluded that it does not.

“In some ways, the proposal that was worked out by the White House and Congressional Democrats appears tough. It calls on struggling auto companies and autoworkers to make the sort of sacrifices they have not been accustomed to making in the past. It also includes time limits as a way of hastening necessary reforms. But in reality, this proposal isn’t nearly tough enough.

“A primary weakness relates to the so-called ‘Car Czar,’ who has nearly unlimited power to allocate taxpayer dollars but limited ability to force the kinds of tough concessions that long-term viability would require.

“Another problem lies outside the proposal itself. And here I’m referring to the type of government action that’s being contemplated. Somewhat lost in the recent debate over the auto industry is the fundamental difference between it and the financial rescue plan that Congress approved in October. While that plan was intended to rescue the entire economy, this one is intended to save a single industry. That plan was intended to help everyone — from small business owners to college students; and every lawmaker who voted for it acted on the belief that that is what it would do.

“A failure to appreciate this distinction has caused a number of other industries and even a number of municipalities across the country to prepare their own proposals for a government rescue as all Americans weather the tough economy. It has also created the impression in some minds that the federal government is picking favorites, and that favored businesses get help while others don’t.

“A lot of struggling Americans are asking where their bailout is. They wonder why one business would get support over another. When it comes to the auto industry, many Republicans in Congress have asked these same questions.
“There are many principled reasons to oppose this bill. But the simplest one is also the best: ‘a government big enough to give us everything we want is a government big enough to take everything we have.’ This is as true for individuals as it is for business. It’s the primary principle on which American industry, including the auto industry, was built. And even in turbulent moments like this — perhaps especially at moments like this — it’s a principle well worth defending.

“Some argue that the effects of an auto industry collapse would be too acute and far-reaching for an already-struggling economy to bear. This is impossible to know. And even if we grant that these companies would fail without taxpayer help, we would still have to ask ourselves whether the proposal before us achieves the goal that everyone claims to embrace — namely, the long-term viability of ailing car companies — and, in my view, it does not.

“I have already enumerated some of the weaknesses in the plan. But in the end, its greatest single flaw is that it promises taxpayer money today for reforms that may or may not come tomorrow. And we would not be serving the American taxpayer well if we spent their hard-earned money without knowing with certainty that their investment would result in stronger, leaner auto companies that would not need additional taxpayer help just a few months or weeks down the road.

“We simply cannot ask the American taxpayer to subsidize failure.

“All Americans, including myself, are worried about the future of our nation’s automakers. These companies have a venerable place in the story of modern America. They continue to provide hundreds of thousands of jobs across the country, including nearly 50,000 auto-related jobs in my own home state of Kentucky.

“But many Americans are also worried about the prospect of the government intervening on behalf of some industries and not intervening on behalf of others — especially when there is no guarantee it that the interventions will work. They wonder when the spending stops. If I were to vote in favor of this bill, I would not have a good answer for them.

“The best route for the long-term viability of ailing car companies may be a rocky one. Government help is not the only option. It’s not even the best option. Long-term viability is still possible. But it’s only possible if these companies are forced to make the tough choices necessary for their survival.

“Senator Corker has proposed an amendment that would go a long way toward improving this bill. In keeping with the principles I’ve outlined, the Corker Amendment does not just encourage reform, it requires it. And it does so with crucial specificity. First, participating companies would be required to reduce their outstanding debt by at least two-thirds through an equity swap with bondholders.

“The Corker Amendment also requires that labor costs at participating companies be brought on par with companies like Nissan, Toyota, and Honda — not tomorrow but immediately — because it is delusional to think that a company which spends $71 per labor hour could compete with a company in the same industry that spends $49.
“The Corker Amendment would improve the liquidity and cash-flow of automakers by requiring that a portion of the payments made to union accounts consist of company stock.

“And finally, the Corker Amendment would require participating companies to file for Chapter 11 reorganization if any of these conditions aren’t met by a fixed date.

“The Corker Amendment forces necessary reforms, holds companies accountable, and assures taxpayers that these companies won’t be back for more. If legislative action were necessary, the Corker proposal would make many much needed and dramatic improvements to the underlying bill.

“I, like all of my colleagues, want the U.S. auto industry not only to survive but to thrive. And by cutting costs, streamlining production, increasing fuel efficiency, and investing in new technologies and attractive, more competitive designs, American auto companies will once again make cars that people all over the world will want to buy. Then Americans will be able to say again with pride that our cars are the best.

“In addition protecting the taxpayer, this is a goal that Republicans have been fighting hard for in this debate. And in my view, it’s a goal that is well worth our efforts.”

H/T: Kathryn Jean Lopez

Update: Here’s the text of the Corker Amendment Sen. McConnell mentions.

H/T: Michelle Malkin

Will The Auto Industry Bailout Work?

I’ve been so focused on finishing up the projects I’m working before the holidays I’ve only been half attention to the new recently. I completely missed Holman W. Jenkins Jr. latest Wall Street Journal column:

The Bailout That Won’t

Would you buy a car from Congress?

By Holman W. Jenkins Jr., Wall Street Journal, December 10, 2008

Leave it to Bob Lutz, GM’s voluble vice chairman, to puncture the unreality of the auto bailout he himself has been championing. In an email to Ward’s Auto World, he notes an obvious flaw in Congress’s rescue plan now taking shape: The fuel-efficient “green” cars GM, Ford and Chrysler profess to be thrilled to be developing at Congress’s behest will be unsellable unless gas prices are much higher than today’s.

“Very few people will want to change what has been their ‘nationality-given’ right to drive big and bigger if the price of gas is $1.50 or $2.00 or even $2.50,” Mr. Lutz explained. “Those prices will put the CAFE-mandated manufacturers at war with their customers — and no one will win in that battle.”

Translation: To become “viable,” as Congress chooses crazily to understand the term, the Big Three are setting out to squander billions on products that will have to be dumped on consumers at a loss.

None of this was mentioned at four days of congressional bailout hearings, because Detroit knows better than to suggest Congress has a role in the industry’s problem. Yet its own recently updated Corporate Average Fuel Economy regime, or CAFE, makes a mockery of the idea that government money will render the companies profitable, even as the same bailout bill demands that the Big Three drop their legal challenge to a California mileage mandate even more unsustainable than the federal government’s.

Forget Chrysler, which has needed a bailout from Washington or Stuttgart in three of the last four recessions. The tragedy of GM and Ford is that, inside each, are perfectly viable businesses, albeit that have been slowly murdered over 30 years by CAFE. Both have decent global operations. At home, both have successful, profitable businesses selling pickups, SUVs and other larger vehicles to willing consumers, despite having to pay high UAW wages. Read the rest…

The problems at the Big 3 have been a long time in the making. Unfortunately, the bailout plan being pushed by the White House, Congress and the Big 3 ignores reality… As long as gas prices are reasonably low people are going to buy big cars.

The last time I went car shopping the price of gas or fuel economy were way down on the list of things I was thinking about… The number one thing was can this car get me, 3 friends and 4 golf bags the to course in relative comfort, number two was price. Bottom line I’m not going to buy a car that doesn’t meet my needs.

The $25 Billion Question

Holman W. Jenkins Jr. has an excellent Op Ed piece in today’s Wall Street Journal. Mr. Jenkins ask the one question that no one Congress dares ask… Why is it Ford and GM can build viable auto businesses all over the world but not in North America?

A Car Wreck Made in Washington

Can Democrats afford to let Detroit succeed?

By Holman W. Jenkins Jr., Wall Street Journal, November 26, 2008

The wrong folks were in the witness chairs in last week’s congressional hearings on auto doom. A fantastic moment was Massachusetts Rep. Stephen Lynch assailing Rick Wagoner about whether GM was asking China for a bailout too. The implication seemed to be that GM can’t afford its inflated UAW pay packages because it’s squandering money to build cars in China.

Mr. Wagoner mildly answered that GM’s China operations are profitable. They actually help to underwrite the massive losses in the U.S.

Mr. Lynch showed no sign he was actually listening, having illustrated his disapproval of foreigners. He didn’t ask the obvious question: If GM can make cars profitably in China, why doesn’t GM import them to the U.S.?

For that matter, any of the brainpans on the Hill might have asked why Ford and GM managed to build viable auto businesses all over the world but not in North America.

You don’t need the Hubble telescope to tell the answer: The UAW is present only in the U.S., not all over the world. Read the rest…

It’s high time we faced the reality: Washington is the problem. Ronald Reagan summed it up pretty well when he said “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it.  If it keeps moving, regulate it.  And if it stops moving, subsidize it.”

Mitt Romney: Let Detroit Go Bankrupt

Former Massachusetts Governor Mitt Romney has a must read Op Ed on troubles facing Chrysler, Ford and GM in today’s New York Times.

Let Detroit Go Bankrupt

By Mitt Romney, New York Times Op-Ed, Wednesday, November 18, 2008

Boston

IF General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.

I love cars, American cars. I was born in Detroit, the son of an auto chief executive. In 1954, my dad, George Romney, was tapped to run American Motors when its president suddenly died. The company itself was on life support — banks were threatening to deal it a death blow. The stock collapsed. I watched Dad work to turn the company around — and years later at business school, they were still talking about it. From the lessons of that turnaround, and from my own experiences, I have several prescriptions for Detroit’s automakers.

First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota’s Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable. Read the rest…

Gov. Romney is right, simply witting Detroit a check will only delay the inevitable. If the Big 3 are going to survive long term they need restructure drastically.

Allahpundit has commentary and video @ Hot Air.

Counterpoint: General Motors Chairman and CEO Rick Wagoner explains “Why GM Deserves Support” in today’s Wall Street Journal.

CNSNews.com: Union Workers at Big Three Automakers Average $73 an Hour

The headline may be a little misleading but the article is worth reading:

Union Workers at Big Three Automakers Average $73 an Hour

By Pete Winn, Senior Writer/Editor, CNSNews.com, Tuesday, November 18, 2008

Economists in Michigan, the long-time home of the auto industry, say they don’t support the proposed multi-billion dollar bailout of Big Three automakers Chrysler, GM and Ford.

One reason why, they say, is the ultra-high labor costs for union workers employed by the Big Three. It costs over $73 per hour on average to employ a union auto worker, according to University of Michigan at Flint economist Mark J. Perry.

“Is it right to tax the average worker making $28.50 to bailout workers whose labor cost is over $73 an hour?” Perry asked.

He explained that in 2006, widely available industry and Labor Department statistics placed the average labor cost for UAW-represented workers at the former DaimlerChrysler at $75.86 per hour. For Ford it was $70.51, he said, and for General Motors it was $73.26.

“That includes the hourly pay, plus the benefits they’re receiving and all the other costs to General Motors, Ford and Chrysler, including legacy costs – retirement costs, pensions, and so on – so it’s looking at the total labor costs per hour worked for workers,” Perry said.

For U.S. workers at Toyota, however, the per hour labor cost is around $47.60, around $43 for Honda and around $42 for Nissan, Perry added, for an average of around $44.

“So we’re looking at somewhere around a $29 per hour pay gap between the Big Three and the foreign transplants that are producing cars in the United States,” Perry, chairman of the economics department, told CNSNews.com.

The average union worker at Chrysler, meanwhile, received 150 percent more in compensation than U.S. workers generally.

“Using Bureau of Labor Statistics numbers, the average compensation for manufacturing workers is around $31.50, and the average hourly compensation, including benefits, for the average worker in the U.S. economy is around $28.50,” Perry told CNSNews.com.

Bottom line: unless Chrysler, Ford and GM get a handle on their costs any government bailout is just going to delay the inevitable.

Wall Street Journal: Just Say No to Detroit

There’s an interesting essay by New York University finance professor David Yermack in today’s Wall Street Journal.

Just Say No to Detroit

Given the abysmal performance by Detroit’s Big Three, it would be better to send each employee a check than to waste it on a bailout, says David Yermack.

Before Michael Moore became famous for documentaries like “Fahrenheit 9/11″ and “Sicko,” his first big success came in 1989 with “Roger and Me.” In that film, Mr. Moore followed General Motors chairman and chief executive Roger Smith with a camera crew, asking him why the company was closing plants and producing low-quality vehicles. Mr. Smith looked flustered and inartfully avoided Mr. Moore’s camera crew while it lingered outside his country club or GM’s executive offices.

“Roger and Me” was entertaining, but it missed the real story about Roger Smith, who turned out to be a forward-thinking genius. Mr. Smith made big investments in information technology and satellite communications, acquiring Electronic Data Systems in 1984 for $2.5 billion and Hughes Aircraft in 1985 for $5.2 billion. Mr. Smith’s successors divested those businesses at huge profits — EDS was taken public in 1996 for more than $27 billion, and Hughes, renamed DirecTV, went public in 2003 for more than $23 billion. (The man who sold EDS to Roger Smith at a bargain price was H. Ross Perot, who then convinced many people that the experience qualified him to be president.)

Mr. Smith understood all too well that GM shouldn’t continue investing in its failing automobile business. That was 25 years ago. Today, our government is being asked to put tens of billions of dollars in GM, Ford and Chrysler, but we would be much better off if Washington allowed these companies to go bankrupt and disappear. Read the rest…

From a purely academic point of view professor Yermack’s conclusions are interesting. From a political point of view they’re a non-starter. No politician democrat or republican liberal or conservative is going to allow 3 bellwethers of American industry to fail… Even if that means throwing good after bad.