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If the Big Three automakers can't come up with a radical plan that will satisfy Congress, they can kiss the $25 billion bailout goodbye
After going to Capitol Hill and begging for a $25 billion bailout, the three chief executives of General Motors (GM), Ford (F), and Chrysler have been sent away with a request for a "plan" by members of Congress. And if they want to get the taxpayers' money they so desperately need, they had better come up with something good.
The problem is, there's not a lot they can say that Congress, specifically Senate Republicans, wants to hear.
Many people, inside and outside the industry, believe the Big Three need to make wrenching cultural and strategic changes if they are to survive. One is former Treasury Secretary Paul H. O'Neill, who sat on the GM board from 1993 to 1995. "This is not going to work," O'Neill says, "unless there is 100% change [in Detroit]."
Which brings us to the question: How can government give Detroit a bridge loan while ensuring that the companies do more to be competitive? While the automakers offered nothing new in Washington, GM sources say President and Chief Operating Officer Frederick A. "Fritz" Henderson has talked almost daily with United Auto Workers President Ron Gettelfinger, discussing different things the two sides can do to cut costs. For its part, Ford says it can last into later next year, and Chrysler has been seeking a buyer.
UAW Calls for Concessions
In the meantime, government, labor, and the automakers need to come up with a plan that Congress will buy. Otherwise, bankruptcy is a possibility. If that happens, buyers would be turned away and revenue would plummet, Henderson said in an interview on Nov. 18.
But here's the tricky part. According to one Big Three lobbyist, Democratic congressional leaders don't want a plan that slashes jobs and cuts union benefits. Republicans think that's a great idea. With no clear direction from Washington yet, here's what a smart bailout package might look like. Let's start with the union. There's no question the UAW has made huge concessions over the past three years. The union cut more than 100,000 jobs and agreed to a new $14-an-hour wage for new workers (half the rate of veteran employees), as well as a health-care deal that will make GM much more competitive with Toyota (TM). Detroit will reap that savings mostly in 2010.
But there's a big problem. None of the companies can hire new workers because they have to retire the veterans first. Plus, sales are too low to justify new hiring so none of them have been able to realize the savings, says Henderson. For GM, he says the company can find its breakeven point even at sales rates as low as 11 million or 12 million vehicles a year, but it will take time and any new action must be negotiated.
To see these companies through to 2010—and send the message to Congress that management and the union are serious about helping to build the bridge—the UAW could agree to cut to Toyota-level pay and lower benefits at least until the loans are repaid. The good news is that UAW chief Gettelfinger indicated at a news conference on Nov. 20 that he'd be willing to do something. "The UAW is at the table," he said. "We welcome all stakeholders to make concessions."
White-Collar Perks Under Scrutiny
So the union is prepared to make cuts if Congress demands it. UAW workers in domestic plants make $29 an hour while Toyota workers make at most $25. That $4-an-hour difference adds up to about $500 million in potential annual savings for GM alone. No one is asking factory hands to work for Chinese wages, just what Toyota pays. Then there are those gold-plated health benefits. While average American factory hands pay 32% of their health-care expenses, UAW workers pay 5%, according to the Center for Automotive Research. Add in other benefit costs, and UAW workers cost an additional $15 an hour. That's another $2 billion in potential annual savings at GM.
Gettelfinger is right about all stakeholders needing to get involved. Can you imagine a troubled company giving its top 9,600 white-collar staff a free car every three months and paying for gas? Hello, GM. Employees pay $300 a month for the car and insurance but they get to expense gasoline. At $2,700 per employee per year, GM could save more than $11 million a year. The point here is not the costs involved but the message such largesse sends to the rank and file: We're too big and special to fail. If GM wants to sell Washington on a bridge loan, such symbolic perks like paid gasoline and company jets could be curtailed or cut.
As always, such transformations start at the top. When the government bailed out Chrysler in 1979, Chairman Lee Iacocca took a $1 salary (the company's current chief executive, Robert L. Nardelli, has offered to do the same). Nardelli, GM Chairman and CEO G. Richard Wagoner Jr., and Ford CEO Alan Mulally could work for $1 with big incentive-based payouts if the companies get back in the black.
Detroit executives say they've already given up plenty. GM's Henderson notes that 80% of his compensation is incentive-based. However, GM and its crosstown rivals don't disclose bonus structure, so there's no way to measure performance. The government could ask other top executives to take a 50% pay cut and give them stock in exchange. If the carmakers revive after the recession lifts (as they say they will) and the companies don't file for Chapter 11, Henderson and his colleagues will reap the rewards.
Bailout Funds Would Require Oversight
While we're on the subject of cost-cutting, it's important to remember U.S. carmakers have huge interest payments. In the Chrysler bailout, lenders got 50¢ on the dollar. With banks reeling, a scalping like that seems downright impolite. On the other hand, if GM and its brothers slip into bankruptcy, as many bailout opponents have suggested, then unsecured lenders could end up with a lot less than that. And consider how such relief would help the Big Three. GM pays roughly $3 billion in interest annually. Cut that in half, and it has another $1.5 billion to fix its problems. None of this is going to happen without the government grabbing some control, especially at GM. "There has to be change at the top," says former Commerce Secretary Mickey Kantor. There is plenty of buzz saying that GM's Wagoner has to go.
Even if management doesn't change—and it probably won't since no one in Congress has asked for anyone's head at the hearings—Detroit will have to agree to some oversight. Maryann N. Keller, an independent auto analyst who covered the companies for 20 years on Wall Street, suggests that Congress set up an advisory board of industry veterans, finance experts, and seasoned industrialists to approve requests for money from the loan program. They would make sure it's being earmarked for new products, research and development, restructuring costs, or marketing. They wouldn't decide which cars get the green light, but they would ensure the money is spent on fixing the Big Three. "You can't give these guys a blank check," says Keller. "If you don't have oversight, you'll have them coming back for more."
With the cover of government mandates, both management and the UAW could bring about the big changes they have been unable to push through in the past. And both management and the union appear willing to do what it takes to get some help. "We have to do our part to get our hands around costs," Henderson said. With government holding the purse strings, Detroit could further restructure without the black mark of bankruptcy, which Henderson argues is more likely to kill the patient than to cure it.