Posted by: David Welch on November 16, 2008
The drumbeat is getting louder for bigger change in the U.S. auto industry if the government steps in with a bailout plan this week. Former Labor Secretary Robert Reich told the Wall Street Journal that labor may have to make concessions. And on 60 Minutes last night, President-Elect Barack Obama had this to say when Steve Kroft asked him about a bailout of Detroit: “My hope is that over the course of the next week, between the White House and Congress, the discussions are shaped around providing assistance but making sure that that assistance is conditioned on labor, management, suppliers, lenders, all the stakeholders coming together with a plan — what does a sustainable U.S. auto industry look like?”
Okay, so he wasn’t as specific as my headline indicates. But it sounds to me like Obama and the Democrat-controlled Congress wants to see some changes before handing out taxpayer money. In other words, for Detroit (and for the moment, we mostly mean GM) to get on the nation’s dole means they’re getting the equivalent of government surplus cheese, not the fine Stilton they have been dining on. The way I read Obama’s answer, he wants concessions and/or participation from everyone involved. For most of them, that means concessions.
Detroit executives have enjoyed fat pay, bonuses and perks for years while company performance has been mediocre to horrid. The UAW has also gotten the best pay and benefits of any auto worker in the U.S., while the cars they make command lower prices and profits that those made in Toyota and Honda plants. Their cars usually command better pricing.
From labor, it could mean wage cuts or watered-down medical benefits. United Auto Workers members at Detroit’s plants pay just a fraction out of pocket for healthcare coverage that most others pay. Maybe they will have more pay tied to productivity or profit. In any case, they’ll have to give more. Management will have to take a pay cut, too. Executives could take a big hit in salary and accept stock warrants instead, finally motivating them to produce real profits to earn the seven-figure paycheck. Lenders will be encouraged to loosen up, but government guarantees may be the only way to get those big checkbooks out from the mothballs.
In a way, there is already a blueprint for this kind of deal. When Uncle Sam guarantees $1.5 billion in loans for Chrysler in 1979, Chairman Lee Iococca worked for $1 and other top managers took a pay cut. The UAW took a $1 an hour pay cut, which was equivalent to 15%. Suppliers and dealers all cut their margins. All of that applies, except the suppliers and dealers. Most of them are losing money these days. But you get the idea. Actually, former Chrysler CFO and GM board member Jerry York suggested this to GM a couple of years ago. It’s a fine blueprint for whatever compromise comes from Washington to help Detroit this week. Sorry Motown boys, but you’ll have to give to get something.