Posted by: David Kiley on November 21, 2008
Earlier this week, former Massachusetts Governor and Republican Presidential hopeful Mitt Romney chimed in, via a New York Times op-ed column, with his argument for letting Detroit’s automakers go bankrupt as a means to fixing their problems and reorganizing.
Unfortunately, several members of his party, and even some members of the media, have given his argument added weight because Romney’s father, George Romney, had taken over American Motors in the 1950s with some success.
Following this logic, though, would mean that Hank Williams Jr. is as talented as his father.
Romney’s column was not completely lacking sense. I would still say that 94% of it was pure clap-trap, but I wouldn’t want to give clap-trap a bad name. The best way to break it down for you is to take it step-by step, and insert my rebuttals after each point the Governor tried to make. My notes are in italics.
Romney: If General Motors, Ford and Chrysler get the bailout that their chief executives asked for this week, 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.
[Romney joins a legion of pundits and kibitzers who are oblivious to two facts: The companies have been dramatically resizing and restructuring. First: Ford, for example, had cut its hourly workforce from 83,000 to 44,000 in five years, and its white collar workforce from 33,000 to 12,000. The numbers at GM and Chrysler are comparable. Second: Retiree burdens? The companies entered into covenants with workers on pensions and retiree healthcare. The big burden is paying healthcare benefits of retirees and their dependents still too young for Medicare—about 400,000. If the U.S. had a healthcare policy like Germany and Japan, just to name two rival auto-making countries, this wouldn’t be an issue. Just what would you do for those families and their healthcare costs Governor Romney? Chuck them onto the heap of the uninsured? How about a more constructive suggestion like compelling the retirees, through arbitration, to pay more for their healthcare benefits as a way of pitching in to the problem. Given the choice between losing all benefits and paying more for them, most families will opt for the latter.]
I love cars, American cars. I was born in Detroit, the son of an auto chief executive.
[Mitt Romney shamelessly launched his unsuccessful Presidential run in Dearborn, MI in 2007 despite the fact that he hadn’t lived there in decades. Why? Because it was considered a swing state. He said at the time that he would fight for auto industry jobs in Michigan. Why didn’t he launch his campaign in his home-state of Masssachusetts? Because the chance of a Republican winning Mass. in a Presidential race is nil.]
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.
[What took place in 1954 with AMC is hardly applicable today when Detroit is competing against foreign automakers with vastly different cost structures—the cost structures they have in their home countries.]
First, their huge disadvantage in costs relative to foreign brands must be eliminated.
[Come 2010, GM says its cost of sales will be 25%, very near that of Toyota. That’s one example. Yes, they have been spending billions to off-load their healthcare obligations in the meantime. But there is a moral question here, isn’t there Governor? If the U.S. government provides the credit necessary for GM to go bankrupt, are you telling me that our tax-payer dollars are going to be specifically used to chuck hundreds of thousands, if not a few million workers and their families, onto the rolls of the un-insured while the government simultaneously does nothing for those families? I would offer that it has taken Ford, for example, five years to make such huge cuts in its workforce, and ditto GM, because it has tried to resize itself morally, through employee buyouts and the like and not flat-out dismissals.]
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.
[The automakers were well on their way to accomplishing this before the credit meltdown, which most would agree was a function of government over-selling home ownership, and Wall Street’s willingness to securitize any piece of crap mortgage underwriting that came down the street. Let’s see…your experience has been as a Governor (the government) and as a hedge-fund investor. Where was the clarion call from Mitt Romney warning of this toxic cocktail that has driven the U.S. economy into the ditch, taking the auto industry with it? Yes, Detroit had long played a game of maximizing cash-flow over profits in order to pay for a gradual resizing and its enormous retiree and healthcare legacy costs. That left the companies too vulnerable for the current meltdown. But as you are fond of reminding us that we are in a global economy, how can the Big Three or whatever companies would arise from bankruptcy be expected to compete against companies in Europe, Japan and China that do get government bailout support?]
That extra burden is estimated to be more than $2,000 per car.
[This is a number that pre-dates the last UAW contract, and, as I said, Detroit had parity in its sights come 2010 but for the credit meltdown that has made the situation so dire].
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.
[Have you driven a 2009 Taurus that wasn't a stripped down rental? Somehow, I doubt it. I have driven both cars, and for “feel,” I would compare the two cars very favorably. The Avalon is no great shakes.]
And 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.
Second, management as is must go.
[So, you are grouping GM CEO Rick Wagoner, Ford CEO Alan Mulally and Chrysler CEO Bob Nardelli in one lump the same way that GOP Alabama Senator Richard Shelby does? Mulally came from Boeing two years ago. Nardelli came from his stint at Home Depot less than two years ago. If you want to go after Wagoner, a GM lifer, go ahead. But at two-thirds of your target, the outsiders have arrived! I’m not carrying anyone’s water here, just criticizing your superficial analysis.]
New faces should be recruited from unrelated industries — from companies widely respected for excellence in marketing, innovation, creativity and labor relations.
[Ford and GM have done this at the top. In the 1990s, there was an attempt to recruit managers from packaged goods, IT, etc. We who lived through it recall it as mostly a disaster. Also, please tell me the names of the executives from, say, Silicon Valley, who are going to uproot to move to Michigan to work for car companies you want to push into bankruptcy in this economy?]
The new management must work with labor leaders to see that the enmity between labor and management comes to an end. This division is a holdover from the early years of the last century, when unions brought workers job security and better wages and benefits. But as Walter Reuther, the former head of the United Automobile Workers, said to my father, “Getting more and more pay for less and less work is a dead-end street.”
[Governor, if you bothered to read the last UAW agreement, you would see that today’s union is a far cry from the days of Walter Reuther. But I would bet what’s left of the value of my house that you didn’t read it. Your perspective on the labor seems to be fixed in the 1950s.]
You don’t have to look far for industries with unions that went down that road. Companies in the 21st century cannot perpetuate the destructive labor relations of the 20th. This will mean a new direction for the U.A.W., profit sharing or stock grants to all employees and a change in Big Three management culture.
The need for collaboration will mean accepting sanity in salaries and perks.
[Again, Governor, your numbers and perspective are out of date. Rather than a Chapter 11 Bankruptcy, how about some high-minded political leaders make a direct appeal to workers and retirees to perhaps accelerate some of the changes the union has already agreed to in exchange for not driving the companies into bankruptcy. But when you do this, I hope you have a government solution to provide healthcare for retirees not yet eligible for Medicare.]
At American Motors, my dad cut his pay and that of his executive team, he bought stock in the company, and he went out to factories to talk to workers directly. Get rid of the planes, the executive dining rooms — all the symbols that breed resentment among the hundreds of thousands who will also be sacrificing to keep the companies afloat.
[Finally, a paragraph that makes sense. But this is hardly a new idea. In fact, most of those perqs other than the planes are gone. But I’m with you on making the CEOs work for a $1 a year for the next two years, or deferring their compensation to a point where they get paid after they hit some government supervised goals. And, hell yes, make them fly commercial like the rest of us.]
Investments must be made for the future. No more focus on quarterly earnings or the kind of short-term stock appreciation that means quick riches for executives with options. Manage with an eye on cash flow, balance sheets and long-term appreciation. Invest in truly competitive products and innovative technologies — especially fuel-saving designs — that may not arrive for years. Starving research and development is like eating the seed corn.
[Hedge funds, the world you come from, are known for not focusing on quarterly profits and for building long term strategies?]
[I know there is a perception that Detroit hasn't been investing in new technology. But the only area I can find where Detroit seriously lagged the Japanese as in the area of hybrid car design. No, GM nor Ford produced a Prius. Though, Ford did produce an Escape hybrid years ago that is still selling. But they are fuel-economy competitive or better than the Japanese on virtually every car where they go head to head. Look it up Gov. on www.fueleconomy.gov. The knock on Detroit is that they sold many more SUVs than small cars. However, absent an energy policy that would have kept gas prices high enough to give consumers a natural incentive to drive small cars all those years, Detroit sold the vehicles America wanted in the free market you are so fond of. Were all those Americans who craved Explorers and Trailblazers as family cars taken to Gitmo and tortured to buy them? No…they wanted them because gas was $1.50 a gallon. Toyota and Nissan followed GM, Ford and Chrysler into pickup trucks and SUVs. Sure, Toyota makes a Prius and Corolla. But they also make a Tundra, Sequoia, 4Runner, Tacoma, Highlander and Landcruiser. But you know what? Their’s aren’t as good and they suck up more gas than Detroit’s trucks and SUVs. GM could beat Toyota to the punch with plug-in electrics. And it has as many patents on electric car technology as Toyota. Ford’s Fusion Hybrid beats the Toyota Camry hybrid by five or six miles per gallon. I’m not saying there haven’t been mistakes made by Detroit, but I’m holding you accountable to make sure you at least cite mistakes truthfully. I’m weary of the perception that Toyota sells a million Priuses a year and that it’s SUVs and pickups get 50 miles per gallon. For the record, I wish Detroit hadn't invested so deeply in SUVs, too. But Washington's lack of policy on energy and oil prices set the stage for that strategy. Japanese automakers were better prepared because their home market, Japan, is a market that encourages small car development because of high gas prices and shortage of real estate.]
Just as important to the future of American carmakers is the sales force. When sales are down, you don’t want to lose the only people who can get them to grow. So don’t fire the best dealers, and don’t crush them with new financial or performance demands they can’t meet.
[The only problem with Detroit’s dealers is that there are too many of them. The companies have been working with the dealers to encourage mergers. That process has been taking place. Filing Chapter 11, as you suggest, would actually do the most harm to dealers because it would probably allow the automakers to pare their dealer body more quickly with far worse repercussions for these independent businesses.]
It is not wrong to ask for government help, but the automakers should come up with a win-win proposition. I believe the federal government should invest substantially more in basic research — on new energy sources, fuel-economy technology, materials science and the like — that will ultimately benefit the automotive industry, along with many others.
[Fine, but who oversees this? The Clinton Administration spent a billion or more on a program that made no sense. If the government wants to invest in technology, let them put money directly at what we know works—lithium batteries. Government investment can make it easier to scale up the technology faster, and provide tax credits to encourage the first waves of customers to buy them. That goes for cellulosic ethanol as well. We know corn ethanol is a boondoggle.]
I believe Washington should raise energy research spending to $20 billion a year, from the $4 billion that is spent today. The research could be done at universities, at research labs and even through public-private collaboration. The federal government should also rectify the imbedded tax penalties that favor foreign carmakers.
But don’t ask Washington to give shareholders and bondholders a free pass — they bet on management and they lost.
[Your second worthwhile point. Stay with what you know Gov. Shareholders have to take the pipe—what’s left of it. And bond-holders will have to write down their losses. This has to be part of the bailout proposition.
The American auto industry is vital to our national interest as an employer and as a hub for manufacturing. A managed bankruptcy may be the only path to the fundamental restructuring the industry needs.
[You have clearly been talking to too many Chap. 11 lawyers who would be the only winners in this scenario. I recall at a debate last year, when asked whether you would attack a known nuclear facility in Iran, you said you would assemble your lawyers to decide. Why do you listen to so many lawyers?]
It would permit the companies to shed excess labor, pension and real estate costs.
[Real estate costs? Since when is that part of the company’s problem? Excess labor and pension costs? You realize that the government will wind up eating a lot of this, right? The cost to the government of rolling bankruptcies in the auto sector would be well over $100 billion at minimum. For far less money, why not keep people working and help the automakers with loans get to the restructured place they were on their way to before the credit crunch?]
The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.
[So, you want the tax-payer to guarantee a fan-belt, but not healthcare for families who, for example, may have a dependent with with cancer or diabetes? No wonder you lost to McCain.]
In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.
[I can’t believe The New York Times printed this.
Mitt Romney, the former governor of Massachusetts, was a candidate for this year’s Republican presidential nomination.
[How'd that work out for ya?]