How To Save the Big 3 Automakers

The clock is ticking.  The big three U.S. auto makers of GM, Ford, and Chrysler are bleeding cash.  Some estimate they won’t make it through February.  Deutsche Bank analyst Rod Lache lowered his price target on GM stock to $0.

“Even if GM succeeds in averting a bankruptcy, we believe that the company's future path is likely to be bankruptcy-like."  Also facing "major risks" are parts suppliers Lear Corp. (LEA), American Axle Manufacturing (AXL) and Magna International (MGA).” (source: MarketWatch) 

The risk of losing one out of every 10 jobs and and the threat of breaking the backbone of American manufacturing is staring the Obama transition team in the face.  Creating a long lasting fix for the automotive industry has become priority numero uno.  The government is leery about throwing more money at a broken system.  A cash infusion to this group is like giving a drug addict more drugs.  Politicians are searching for real solutions.  

There’s only one way to do this if Obama wants it done right.  He needs to give restructuring authority to one individual, similar to the power that former Goldman Sachs CEO Hank Paulson has had with the financials.  This position must be filled by an individual who would be well respected by the other CEOs, someone who knows the auto industry but won't be bogged down by its mediocre past, and someone who understands the art of the turnaround.  

As a pre-condition to receiving survival funding, the automakers and the unions must be forced to concede their restructuring rights to this new automotive czar.  He can then act in the best interest for the industry rather than tripping over the individual self interests of turf protection that have caused this out-dated model.  All three companies are dealing with the same issues and the restructuring of the system needs to be streamlined. 

Statistics show that consumers won’t buy cars sold by a company in bankruptcy so let’s solve that by coordinating the bankruptcies to happen on the same day.  If the public knows that the three companies are in unison, and that the restructuring process will be relatively quick, I guarantee you sales won’t be any worse than they’ve been over the last few months. While under the protection of chapter 11, the czar will restructure debt and labor commitments while revamping the business structure to create incentives for innovation. 

Let’s face it.  The U.S. automotive industry has been run by a bunch of keystone cops.  GM’s model has been broken for 40 years.  Conceding the luxury market to Germany put us on a path of pinched margins that we have never recovered from.  The dominance of BMW, Mercedes Benz, Porsche, and Volkswagen (VLKAY.PK); not to mention Honda (HMC) and Toyota (TM),  put our companies on shaky ground.  The oil bubble brought the final crushing blow.  $5/gallon at the pump caused a generational scare for consumers who never want to get burned by gas guzzling SUV or truck ownership again.  

Americans are expecting an Obama presidency of change.  With the industry at an alternative fuel crossroads this is an ideal opportunity to usher in a new era.  Enter Mitt Romney.  Mr. Romney has made a career out of orchestrating successful turnarounds.  He did it at Bain Capital, he did it for the Olympics, and he did it in Massachusetts.  His father turned around American Motors in the 1950’s.  The automotive industry runs in his blood.  Could Obama ever pull the trigger on such a dramatic move of bi-partisanship?  Absolutely.  I predict the legacy of the Obama presidency will be his ability to bring people together.   Give Mitt 100 days to restructure the big three and transform them into the alternative energy innovators to lead the world.  Mitt was born for this role.  He'd become the Steve Jobs of cars.   In a recent interview Mr. Romney remarked:

Q. Given your Michigan roots and what your father accomplished turning around the American Motors Corporation in the 1950s, what do you think is the future of the auto industry?

A. Right now, the auto industry is on life support, and its prospects look extremely dim. But they don't need to be. The industry could be turned around. There is no inherent reason why America can't build and sell cars to Americans at least as well as the transplants are doing. Any effort to help the auto industry has to be made as part of a comprehensive strategy. Before the government issues loans to the auto industry, as has been authorized by Congress, it should insist on seeing credible and independent strategies that will return the companies to long-term sustainability. Government should not finance ongoing losses and declining market shares (source: CNN Money).

We are in need of a return to quality and innovation.  Consumers are always willing to buy both.  Out with the keystone cops and in with some new blood.   An Obama/Romney ticket sounds pretty good for Detroit.  Investors should proceed with extreme caution through this process as it has become common for most government intervention to dilute or even dissolve current shareholders.  If a structural change happens, this will be a great sector to own at a later date.  Stay tuned...

Disclosure: None

Comments

[FGH:]

Your article would have more gravitas if it included at least a mention of the role that "Big Labor" has played in the slow bleeding death of the US auto industry. Those bloated legacy pension obligations and sky-high average salaries, more than triple the national average, would have been a good start. Are there any workers on the planet as overpaid and coddled? I like your Mitt Romney idea, but it seems unlikely that those arrogant union bosses would even sit down at the same table with him.

2008 Nov 11 03:58 PM

[joey579:]

I am starting to like this socialism and the democratic philosophy of handouts and that Johnny can't play dodge ball just incase he gets sent to the sidelines. What ever happened to competition and survival of the fitess.

I think I will throw away all the morals that my mother and father taught me and default on my credit cards and mortgage so the goverment can pay my way.

2008 Nov 11 04:20 PM

[Douglas Kor...:]

Labor had nothing to do with GM's problems. It's easy to blame the engine room crew when the ship goes aground. Ignoring the drunken lookout and passed-out captain. It's the top brass that cause the problem, of course.

GM destroyed the EV1: there should be NO BAILOUT unless GM uses the Taxpayer money to resume production of the EV1.

Lutz, who claims it can't be done, needs to be fired; Wagoner, who created the problem, needs to be prosecuted; and the Board of Directors needs to be brought up on charges.

If the auto industry is a matter of national security, and takes Taxpayer money to fix, then the white-collar criminals who destroyed that industry should pay the penalty due to those who endanger our national security.

West of the Pecos, we call those folks "traitors".

It's not as if they didn't have warnings: Ross Perot tried to fix GM decades ago, and Kirk Kerkorian just recently bid $31/share for a chance to fix GM -- but Wagoner and the Board refused to listen to common sense.

GM jailed cash customers, instead of selling them the EV1: GM top brass now should be jailed and prosecuted for destroying the lives of the workers and for endangering the national security.

2008 Nov 11 04:38 PM

[Douglas Kor...:]

Labor had nothing to do with GM's problems. It's easy to blame the engine room crew when the ship goes aground. Ignoring the drunken lookout and passed-out captain. It's the top brass that cause the problem, of course.

GM destroyed the EV1: there should be NO BAILOUT unless GM uses the Taxpayer money to resume production of the EV1.

Lutz, who claims it can't be done, needs to be fired; Wagoner, who created the problem, needs to be prosecuted; and the Board of Directors needs to be brought up on charges.

If the auto industry is a matter of national security, and takes Taxpayer money to fix, then the white-collar criminals who destroyed that industry should pay the penalty due to those who endanger our national security.

West of the Pecos, we call those folks "traitors".

It's not as if they didn't have warnings: Ross Perot tried to fix GM decades ago, and Kirk Kerkorian just recently bid $31/share for a chance to fix GM -- but Wagoner and the Board refused to listen to common sense.

GM jailed cash customers, instead of selling them the EV1: GM top brass now should be jailed and prosecuted for destroying the lives of the workers and for endangering the national security.

2008 Nov 11 04:38 PM

[MellowGuy:]

There are many factors that have and are destroying manufacturing in North America. A value-added tax to replace part of the current corporate taxes would reduce the subsidy to foreign manufacturers. A reasonable health care system would reduce health care costs for current and retired employees. If the value-added tax were to be extended to oil, manufacturers would have a more predictable market for vehicles with lower fuel consumption.

The switch to defined contribution pensions, such as 401ks will help since the companies won't be gambling away all of their obligations to employees.

Companies that are in financial trouble shouldn't be paying dividends.

2008 Nov 11 04:43 PM

[Gumby:]

Jason
you look like a dumb blond Republican, alright.. Anyway, dont you realize that Japan had been buying back dollars for years to prop up dollars ... If not for that, our dollars will probably get you only 50 yens or less to spend during your Japan trip next time .... Ah, also, if you are still thinkin about buying a new Civic, you better be prepared to put up $40,000 in weak dollars. It is clearly not GM or Ford fault that we had weak dollars. Nor do I forgive UAW pigs or keystone managers.. I really feel very sorry for the miserable lifes that japanese citizens had to endure in order to survive under the insane dollar buying government of Japan... What a dollar addict, indeed!

2008 Nov 11 05:04 PM

[Gumby:]

No, jason, you are a dumb blond parrot too anxious to please the Republican bigwigs puffing cigars@@

2008 Nov 11 05:05 PM

[Micha Elyi:]

Obama appoint Romney to be Car Czar? You've got to be kidding, Mr. Schwarz. First, Obama isn't the sort of politician you wish he were (a mistake that millions of voters recently made so you're not alone there). Second, the agony and pain that will be required to wring out the fat from the bloated Detroit 2-1/4 carmakers and condition them to be lean, trim makers of quality, value-for-money, technologically up-to-date manufacturers will be intense. Whoever your imagined Car Czar is will need plenty of firm, unwavering support from the President and Democrats in Congress. Voting "present" won't cut it. When a weak willed Obama blinks in a stare-down with unionists who see their plush jobs about to be flushed down the drain forever, they'll crush Obama so fast that a trillion dollar bailout won't buy Obama and his Democrats in Congress back into the good graces of union workers anywhere.

Most likely, we'll see Obama follow the pattern that he set in the financial crisis -- stand around tut-tutting, then bash anyone who risks their own political capital (like McCain did) to get Washington moving on a clean up package to deal with the mess. Buh-bye Detroit.

2008 Nov 11 06:03 PM

[Steven Hansen:]

czar of auto industry??? there is no one i would trust. and what exacty is the symbol for american motors - the automaker with the worst product mix in history.

not enough money was put into r&d for decades - they are short of correct product and you cannot pull this out of your a$$.

the american board of director system is a failure because the directors only see the company through the chief operating officers eyes. they only represent the biggest stockholder.

the ceo is rewarded for short term profits. the auto industry requires vision 5 to 10 years in the future. why would a ceo look too far ahead. hey, this is the system the "investors" want - they got it.

we cannot allow an ill-timed death of the auto sector. the social displacement would be significant - and the taxpayers will pay if GM fails or it is rescued. i vote to use money to help GM go to an orderly death. there are pieces of GM worth money, and worth saving. if the crap we are hearing about the volt is true, this piece should be worth something to somebody. but my senses tell me that the volt is a bust - just like the vega. another Sophie's choice.

2008 Nov 12 02:28 AM

[Paul Killinger:]

So labor had nothing to do with GM's problems? That implies that paying the equivalent of $60 an hour to pound on hubcaps was a good idea. As it turns out, of course, it wasn't.

2008 Nov 12 09:33 AM

[GREG SANTO:]

JASON,
GREAT ARTICLE BUT THINK OF THIS FOR A SECOND. WHAT DOES FORD GM AND CHRYSLER HAVE TO DO TO GET HEALTHY AGAIN? SELL CARS.
HOW CAN THE GOVERNMENT HELP SAVE THE AUTO INDUSTRY? HELP THE INDUSTRY SELL CARS.
GIVE CAR BUYERS WHO CHOOSE TO BUY AMERCIAN AN ADDITIONAL 1500 REBATE ON TOP OF THE DEALERS BEST DEAL. THIS REBATE SHOULD BE IMMEDIATELY REDEEMABLE AT THE DEALERSHIP AND NOT A TAX DEDUCTION AND IT IS ONLY FOR THOSE WHO BUY FORD CHRYSLER OR GENERAL MOTORS. THE US AUTO INDUSTRY WOULD GET HEALTHY REAL FAST. LET'S FACE IT, WE CAN'T PUT A TARRIFF ON HONDA OR TOYOTA TO EVEN THE PLAYING FIELD BUT THE GOVERNMENT CAN DO THIS AND IT WOULDN'T HAVE TO BE FOREVER. 2 YEARS OF THIS WOULD CHANGE BUYING HABITS FOR A LONG TIME AND THAT'S WHAT WE NEED.
GREG SANTO
SANTO LINCOLN MERCURY VOLVO
[e-mail]

2008 Nov 12 12:36 PM

[ed2:]

The bonus system got out of hand for the auto leaders. They should be given shares to hold as a penson and only sold slowly after retirement. No golden parachutes.
One sharp guy the other day said give Toyota $50B to take GM off the gov't hands. And give Honda $20B take care of the Ford mess.


On Nov 12 02:28 AM The hand wrote:

> czar of auto industry??? there is no one i would trust. and what
> exacty is the symbol for american motors - the automaker with the
> worst product mix in history.
>
> not enough money was put into r&d for decades - they are short
> of correct product and you cannot pull this out of your a$$.
>
> the american board of director system is a failure because the directors
> only see the company through the chief operating officers eyes. they
> only represent the biggest stockholder.
>
> the ceo is rewarded for short term profits. the auto industry requires
> vision 5 to 10 years in the future. why would a ceo look too far
> ahead. hey, this is the system the "investors" want - they got it.
>
>
> we cannot allow an ill-timed death of the auto sector. the social
> displacement would be significant - and the taxpayers will pay if
> GM fails or it is rescued. i vote to use money to help GM go to an
> orderly death. there are pieces of GM worth money, and worth saving.
> if the crap we are hearing about the volt is true, this piece should
> be worth something to somebody. but my senses tell me that the volt
> is a bust - just like the vega. another Sophie's choice.
>

2008 Nov 12 02:35 PM

[ed2:]

One cause of the poor cars offered is the Dealers and companies writing state laws to encourage the well off to turn over their cars often. The buyer has a short term outlook if it is a 2 or 3 year lease. The deduction of the trade in for sales taxes also helps the short term view. In Europe they hold their cars longer so they demand a good car not a disposable one.


On Nov 12 12:36 PM GREG SANTO wrote:

> JASON,
> GREAT ARTICLE BUT THINK OF THIS FOR A SECOND. WHAT DOES FORD GM AND
> CHRYSLER HAVE TO DO TO GET HEALTHY AGAIN? SELL CARS.
> HOW CAN THE GOVERNMENT HELP SAVE THE AUTO INDUSTRY? HELP THE INDUSTRY
> SELL CARS.
> GIVE CAR BUYERS WHO CHOOSE TO BUY AMERCIAN AN ADDITIONAL 1500 REBATE
> ON TOP OF THE DEALERS BEST DEAL. THIS REBATE SHOULD BE IMMEDIATELY
> REDEEMABLE AT THE DEALERSHIP AND NOT A TAX DEDUCTION AND IT IS ONLY
> FOR THOSE WHO BUY FORD CHRYSLER OR GENERAL MOTORS. THE US AUTO INDUSTRY
> WOULD GET HEALTHY REAL FAST. LET'S FACE IT, WE CAN'T PUT A TARRIFF
> ON HONDA OR TOYOTA TO EVEN THE PLAYING FIELD BUT THE GOVERNMENT CAN
> DO THIS AND IT WOULDN'T HAVE TO BE FOREVER. 2 YEARS OF THIS WOULD
> CHANGE BUYING HABITS FOR A LONG TIME AND THAT'S WHAT WE NEED. <br/>GREG
> SANTO
> SANTO LINCOLN MERCURY VOLVO
> [e-mail]

2008 Nov 12 02:56 PM

[33Nick:]

"...needs to give restructuring authority to one individual, similar to the power that former Goldman Sachs CEO Hank Paulson has had with the financials."

It's fascinating how any government would give discounted loans to any companies without enforceable strings attached. It would make sense to kindly remove the management team who, unfortunately and please, let's do away with the emotions and out of context patriotism, since no one has put the companies back to high financial levels. And again, no finger pointing because the downfall of the big 3 has been an on-going issue since the 70s' invasion of foreign cars.

Lend money, remove the lack of performance, deal with the unions (they too, have a share in it) and force them to make a variety fuel efficient cars, not as it didn't happen in the 80s. Simple, no?

2008 Nov 13 11:13 AM

[mangolfer:]

Good article. When the Northwest Airlines was near collapse, a 25% paycut was forced on most all the unions, pilots, mechanics, etc. This needs to happen for cars. Management needs to feel the pain too.

2008 Nov 14 07:04 AM

[Engineer tu...:]

It is a horrible shame (and should be a crime) what happened to the once seemingly invincible American Auto Industry. Growing up in the sixties and seventies, I remember when virtually all the cars on the street were American. When a person went car shopping, it was probably to buy a Chevy, a Ford, or a Dodge. Only the occassional oddball would buy a foreign vehicle such as a VW Beetle or an MG or a Triumph. This changed dramatically during the seventies. Not only did Japanese cars begin to flood our market, but the American companies let their quality plummet. They still produced oversized tanks using outdated technology. Their attempts to build smaller cars proved disasterous. The cars were poorly designed, lacked innovation and were so bad, they drove many long time american car buyers over to import brands. My family used to be a Chevy family. My father, grandfather and even my greatgrandfather always drove Chevys. In 1978, my dad bought a Chevy that was a piece of garbage. On the way home from the dealership, half the dashboard fell off. The screws to hold it in place were not installed. Over the next few years, there was nothing but one problem after another. The car spent almost as much time in the repair shop as he spent driving it. It also has a nasty habit of stalling in traffic. At 46,000 miles, he got rid of it. He then bought a Ford because he still wanted to buy american. The car was nearly as bad. From day one, the transmission would slam hard when downshifting from third to second gear. Over a dozen trips to the dealership never solved the problem. The car also had a tendency to overheat if driven more than an hour. It barely reached 70,000 miles Eventially, he traded the Ford in on a new Toyota. The Toyota gave him over 15 years and 150,000 of virtually trouble-free miles before it was destroyed by an unlicensed illegal immigrant driving an uninsured, unregistered vehicle who crashed into it while it was parked. Also, my brother-in-law who came from a Dodge family, tired of the poor quality of the vehicles he had, bought a Toyota. In fact, he has now owned four Toyotas and most likely will never buy an american brand vehicle again. Even with me, my first car was a Ford (a horrible piece of junk that I sold for less than half what I paid a year after I bought it) though I now drive a Nissan (my second) after owning a Toyota and a Mazda.

In 1980, I graduated high school and went to an enginnering college where I studied Mechanical Engineering. My goal was to work for one of the big 3 and design high-quality innovative vehicles that americans actually want to buy. After getting my degree, I even moved to Michigan for a while in hopes of securing a position. Unfortunately, all three were slahing engineering positions (though still employing overpaid executives who knew nothing about the automobile business). I went back to school to get a second Bachelors, a Masters and a PhD. I now work as a college Physics instructor. The faculty lot where I park my car usually has about 50 vehicles parked there. Only about 5 of them are american vehicles. About 30 are Japanese (Hondas, Toyotas, Mazdas and Nissans) and the rest are a mix of Korean, Germans and Swedish. Earlier today, I went food shopping. The supermarket is located in a shopping center. I was curious, so I counted the cars there. There were 117 vehicles. Of these, only 15 were american (and 11 of those were vans, minivans or SUVs). There were 78 Japanese vehicles, 12 Korean vehicles, 6 German vehicles, 4 Swedish vehicles. one English vehicle and one Italian vehicle. This reminded me of something an American Senator said when asked why he only owns foreign vehicles. His answer was, "I am also an American consumer and as a consumer I should have the right to buy the products that give me the best value for my money. I do not feel I get that with american cars." Many will agree with his statement.

Despite their problems and horrendous mistakes, I agree that the government must help to save the U.S. auto industry. I vehemently oppose simply handing them billions without demands and oversight. The money needs to come with many strings attached. First, the quality of the vehicles must be improved. More engineers (American born and trained) must be hired as well as more inspectors. No car should be allowed to leave the factory unless it is 100% defect-free. Also, overseas factories are to be closed down and bring the work back to the U.S. In fact, at least 95% of the parts should be made in U.S. plants employing American workers. All U.S. factories need to be updated and modernized. All top executives are to immediately resign and forfeit all and any bonuses. Their pensions will also be drastically reduced. The people running the companies must have a background in the automotive industry and should have an engineering background. (In the U.S., less than 30% of the executives of technology companies have a technical background. In Germany and Japan, it is around 80%.) The companies must invest heavily on new and innovative products and have well-defined and detailed 5-year, 10-year and 20-year plans. Make the workers part-owners of the company. Their income will be based on how well the company does. This will provide an incentive to build better products. Lastly, a car czar needs to make sure that the money is spent wisely and the companies are kept on track. This person will report directly to the President and Congress.

If the American car industry collapses, it may cause another great depression where it may take decades to recover.

2008 Nov 15 04:53 PM

[User 318210:]

What is the dollar value of the big 3's inventory.Why would they not be requiered to auction off the existing inventory.After that is done then we can decide how much they need to survive.I believe they are setting on large sums of assets well asking for money.They should have to try to raise money before wanting more.

2008 Dec 12 10:29 AM