A Radical Solution for U.S. Automakers

The US auto industry has lost the war. Not just the battle, but the war. At least, the war for supremacy in fossil-fuel vehicles. We’re not close to being remotely competitive in the arena of fossil fuel-powered vehicles, and we never will be. Legacy pensions, benefits, an uncompetitive pay scale and sheer lack of vibrant new product ideas will ultimately crush the US auto industry. Foreign cars in this country are built in with a far more cost-effective cost structure. Detroit Big Steel is sunk. Pure and simple.

Automakers want a bail out because they’re burning cash at phenomenal rates, but they have no meaningful plans for how, exactly, they’re going to turn things around. What good is a bailout if there is absolutely no opportunity for a turnaround? Detroit will never compete with foreign owned manufacturers. They simply do it better, faster, and cheaper. There is no way Detroit can shed its ugly legacy of high costs, slow market response and white-collar fat. Let’s admit that.

On the other side of the coin, there is strong, albeit idealistic, talk about creating an energy-independent America and weaning ourselves from fossil fuels. Rather than debate about the future of the Big Three, let’s look at this situation from a radical perspective. Well, as radical as capitalism, with a kick in the pants from the government. Which, in case any of us have forgotten, is representative of the people, by the people and for the people. So here’s a “peoplespeak” solution.

Henry Ford didn’t invent the horseless carriage, but he did figure out how to mass produce it and capitalize on the abundance of cheap fossil fuel. It propelled the US auto industry for seven decades, but we have hit the end of the line. Government cash infusions for US automakers will only prolong the pain. There is no K-car or minivan miracle in our future. We will throw billions out the window if we simply prop up automakers doing the same old same old.

Many of the pundits of the early 1900s scoffed at the concept of replacing the cheap, reliable, hay-fed four-legged vehicle with a weird device with a starter crank and a paucity of places where this odd vehicle (which couldn’t even keep pace with a decent horse), could find fuel. We all know how that battle ended up.

After all these decades, perhaps it’s time for radical thinking, consistent with the radical concepts of Henry Ford in his battle for the internal combustion engine or Thomas Edison in his belief that electricity might actually be a cost effective replacement for gas lamps. I’m a historian, and if you spend enough time on the Internet, you’ll see just how much resistance there was to electricity. The rhetoric of the day might make you wonder why we aren’t working by the light of gas or kerosene.

Making a change from Detroit steel to Detroit clean green would be a move of desperation and opportunity, but so have many great successes to bolster our “unrealistic” hopes. John F. Kennedy charted a course to the moon before we’d barely breached the stratosphere, and six years later, men were walking on the moon. It can be done. And perhaps it takes a government initiative – reflected by the will and spirit of the people, rather than what we’ve come to think of as a government plan – to make this happen. If the people wish it, then the government, a vehicle of the people, should be compelled to make it happen. Unlike many countries, where government is a vehicle of the elite, the US government is not an “it,” but an “us.”

Before I launch my plan, let me counter one argument you must all have: Henry Ford and Thomas Edison, two of America’s great innovators and inventors, built their businesses without government intervention. Ideally, this is the way it should happen. However, you must agree that they operated without the restrictions of union and employment obligations, expectations of management compensation, and all the other factors that are weighing down the US automakers.

The concept of small manufacturers building energy efficient autos using alternative fuels sure sounds good, but it hasn’t worked in 20 years and it will never work. Too many vested interests, and a lack of sufficient compelling financial reward has proven that simple capitalistic entrepreneurship will not succeed. This dire situation requires a radical approach.

So here’s the plan: implement a plan that virtually nationalizes the US auto industry. If everyone is talking about bailing out US automakers because they’re a “can’t fail,” we’re already talking about virtual nationalization. We’re looking at an outdated, uncompetitive industry with high costs and an unbelievably slow to market response time. So if the US were to provide billions to the auto industry to prop it up, what new value proposition would we actually have? The same old companies, doing the same old thing, and when all is said and done, they would still not be able to muster a cost-effective, high quality alternative to their competitors.

If the political rhetoric is correct, and the country is ready for new transportation and energy alternatives, why not use a government bailout to jump start the Big Three into becoming the world leader in new-energy vehicles? How is this so different from Henry Ford figuring out how to make the break from hay-powered nags to the era of cheap fossil fuel?

Maybe whatever energy source we select will never be as cheap as the early days of fossil fuel. But do we still believe the US is the world leader in developing new, creative, cost-effective alternatives for the future? If we don’t believe that, we should give up right now. But then, who would the Chinese and Indians have to emulate? If we believe we are still world leaders in innovation and creativity, then let’s step up to the plate and make the jump from the four-legged hay-burner to the horseless carriage. This fundamental change in business would be risky, but it would also jump start a level of creativity and energy not seen since we made the commitment to put a man on the moon.

We can do this. Our country, spurred by a can-do attitude and an infusion of money, went from bi-wing canvas-clad airplanes with propellers to rockets on the moon in 25 years. Think about that: 25 years. If our belief in American leadership and ingenuity is accurate, let’s encourage these $46 per hour line workers who are proud of their creativity and expertise to show what they’re made of. Let’s not fire the white collar designers and engineers because there’s no future in designing fossil fuel vehicles. Let’s challenge them to rapidly develop a new generation of vehicles, with new power sources and new capabilities, at attractive price points. Let’s pressure gas stations to switch from offering bales of hay for the horses to instant battery chargers or bio-fuel dispensers or whatever. We’re heading toward a big government cash bailout anyway, so let’s make it count.

We’ll deal with the consequences later. We’ll figure out how to return these companies to independence, free from government control, and to being attractive free market investments. But right now, throwing good money after bad makes absolutely no sense. We will just prop up the same old operations, and sooner or later, they will collapse and the taxpayers will be out so much money America may never recover.

So, let’s be radical. It’s not a perfect plan, but can you think of any better way to meld populist agenda with economic reality?

Disclosure: none

Comments

[MiddleOfRoader:]

Good article conceptually, but no details on a solution are offered other than suggesting that resources be directed to vehicles which are greener than current internal combustion engines.

Let's say the cost of 8 million new vehicles a year are subsidized by the public to the tune of $10,000 each to make them greener than the current models. If my math is right, that is $80 billion a year. An initial investment in refueling infrastructure might be needed as well.

I'm not sure how much of an increase in efficiency can be achieved for that cost.

If the Big 3 do not possess the technology ready to make a decent jump in efficiency right now (maybe they have it but there is no market at the current cost), perhaps it could be licensed from competitors. Otherwise, a bunch of money would be needed for life support until the technology is ready.

Gas prices are getting so low, such an investment might be difficult to justify using conventional cost/benefit analysis.

2008 Nov 12 04:51 AM

[IXLR8:]

I kept waiting for the punch line, and it never came.

Truly a "Kumbaya" article.

Maybe, the author could write another one about how to end child abuse or how to end world hunger. No details, just good feelings....

2008 Nov 12 07:12 AM

[JDH:]

No Bail-Out with out total agreement to completely dismantle the Unions and limit executive salary to reasonable levels. No Million $ salary or stock options w/o substantial returns to the shareholders (the owners of the companies).

2008 Nov 12 07:31 AM

[Insiderman:]

I stopped reading at "nationalize the auto industry." Nationalizing the auto industry virtually ensures we will have plants based on the political powerbase, car colors that match Nancy Pelosi's expensive clothing and unions ad nauseum (since they contribute heavily to politicians).

The truly troubling part about the auto industry proposed bailout would be $25 billion of our money to pay for retired worker health care. Let them eat medicare.

2008 Nov 12 09:05 AM

[Paul Killinger:]

The only problem is we'll land a man on Mars BEFORE EV's become a viable, economic form of transportation. Investing taxpayer resources in this folly would not only bankrupt Detroit, but our nation's entire economy.

Fortunately, the solution is right in front of us. We can fuel our nation's cars and trucks with LNG and CNG right NOW. This is a no-brainer, which, of course, makes it unlikely that Detroit and the Feds will ever figure it out.

2008 Nov 12 09:29 AM

[Repper:]

Nationalizing the industry is a radical idea, but the idea about a bailout being designed to bridge the US automakers into developing alternative fuel vehicles is the reality. They are already heading in that direction. No, the infrastructure is not there yet for dropping the traditional combustion engine completely, but things are going in that direction.
The problem has been the American consumers' collective misconception that these are poorly run companies with shoddy products. They have made a huge turnaround in the last decade+ in quality, productivity, and management, but the American consumers and so many people writing article love to keep punishing them for past sins.
Before blindly bashing, please give a real look at the products that are being produced today and educate yourself with the facts. Try visiting gmfactsandfiction.com/.../ . Yes, it is compiled by GM, but all the facts included are from third-party sources to which links are provided. Dispel your misinformed misconceptions about GM and the other domestic auto makers.

Maybe you're right in saying that American companies won't be able to compete in the traditional market, but that's not because they can't produce quality, stylish, economic vehicles; it'll be because consumers will continue to ignore the facts about those products and continue the trend toward buying more foriegn vehicles.
Yes, legacy costs, and past labor agreements have hurt the financial situation of the Big 3, but recent renegotiations were a big strp in the right direction toward bringing operating costs down for the future.

2008 Nov 12 09:44 AM

[gwood:]

Ridiculous. The mechanism is already there in the free market to reward handsomely any entity that could accomplish the task the author speaks of. The payoff for the breakthrough is mind-boggling huge, much bigger than even our money-printing government can afford.

The breakthrough may already be within sight, in the form of the Chevy Volt, and other similar plug-in hybrids. Perhaps this vehicle alone justifies a loan to get them over the hump.

GM once held 50% of the market. Since, our open markets have seen a veritable onslaught of competing foreign brands-Toyota, Nissan, Honda, Mazda, Suzuki, Mitsubishi, Isuzu, Hyundai, Diahatsu, Daewoo, Kia, Vokswagen, Mercedes, BMW, Volvo, Audi, need I go on? Perhaps the miracle is that GM has actually HELD ON to 23%, and is actually leading all of the above in Russia and China, gaining fast in India and South America.

American auto manufacturers are sick, perhaps terminally, but high gas prices and the credit crunch, both now seemingly headed in the right direction, made a huge contribution to where they happen to be. Should we nationalize real estate and banking?

2008 Nov 12 01:35 PM

[BuyItForaDo...:]

You want my solution -- Give every tax paying adult over the age of 25, a guaranteed loan [provided by the US government] to purchase one, bright and shiny, brand new American Made Automobile [which would include any car manufactured in the US]. They could set a low [yet reasonable] interest rate - match the payment to pay schedules - how about just allowing me to use my Tax Rebate Check instead of making monthly payments - if I still owe, send them some money. I wonder if that would work - and that would benefit the majority rather than the minority -- and if it played out well -- GM, Ford and Chyrsler would still get to sell some units

2008 Nov 12 05:06 PM

[Alex Filonov:]

Alt energy is not going to work in transportation. There is none available right now which can compete with oil derivatives on price and convenience. Even at $100 oil. For a little bit of analysis look here:
muddlinginvestor.blogs...

Any project like proposed would be another case of government waste. Governments of the world already spent hundreds of billions of dollars on alt energy and it's mostly waste. You are just proposing to waste several trillions more.

2008 Nov 12 05:47 PM

[Michael D.:]

If you want to impact the industry and give it a chance to re-boot, legislate universal healthcare. Use the bail-out money for this. Personal income taxes and consumption taxes rise (to pay for healthcare) but corporate income taxes stay the same (to promote investment in the new USA).

2008 Nov 12 06:44 PM

[Tad Gage:]

Perhaps we could all do with a few choruses of Kumbaya. Better than the wet blanket dirges I'm sick to death of hearing. What good does this "realistic" thinking do for these companies or our economy? I absolutely agree with Repper's comment that Detroit has turned out many quality, good looking products. Which is exactly my point. Whatever value remains in the plant, property and equipment, the intelligence and design capabilities, the people and skilled workforce, etc. can and should be focused on creating something new and world class. Over the years, I've consulted with so many companies at such crossroads, and the best way to throw bad money after good is to continue funding and pursuing a flawed business model that offers no hope of being competitive. In any case, the outcome is uncertain. But as I noted, for your consideration, applying established capabilities to a new business model (and who wouldn't want to produce an attractively styled, well-built vehicle that doesn't use fossil fuel) certainly offers more opportunity than the alternative. The Big Three don't need to entirely cease producing fossil fuel vehicles. But rather than firing talented, energetic people and closing down facilities (which will happen as it always does in cost-cutting mode), why not consolidate dinosaur vehicle production in certain key facilities and dedicate the facilities and people that would otherwise be shut and fired to producing desirable alternative vehicles? This would be the best use of working capital. If the long-term ROIC can't be justified in any way, then any government bailout would be a terrible idea because there would be no quantifable return on investment. Better to let the whole thing collapse and let the PBGC cover the legacy commitments (yet another bailout). A viable strategy and a realistic business plan is necessary. Whether current Big Three management is up to the task, or it requires better and more creative minds to develop this, I haven't a clue. Capital turns, asset utilization and so forth will be very ugly in the beginning. But since they're already ugly now, what harm is there in developing a model that might offer attractive long-term returns and a plan that's better than simply propping up a losing proposition?


On Nov 12 09:44 AM Repper wrote:

> Nationalizing the industry is a radical idea, but the idea about
> a bailout being designed to bridge the US automakers into developing
> alternative fuel vehicles is the reality. They are already heading
> in that direction. No, the infrastructure is not there yet for dropping
> the traditional combustion engine completely, but things are going
> in that direction.
> The problem has been the American consumers' collective misconception
> that these are poorly run companies with shoddy products. They have
> made a huge turnaround in the last decade+ in quality, productivity,
> and management, but the American consumers and so many people writing
> article love to keep punishing them for past sins.
> Before blindly bashing, please give a real look at the products that
> are being produced today and educate yourself with the facts. Try
> visiting gmfactsandfiction.com/.../ . Yes, it is compiled
> by GM, but all the facts included are from third-party sources to
> which links are provided. Dispel your misinformed misconceptions
> about GM and the other domestic auto makers.
>
> Maybe you're right in saying that American companies won't be able
> to compete in the traditional market, but that's not because they
> can't produce quality, stylish, economic vehicles; it'll be because
> consumers will continue to ignore the facts about those products
> and continue the trend toward buying more foriegn vehicles.
> Yes, legacy costs, and past labor agreements have hurt the financial
> situation of the Big 3, but recent renegotiations were a big strp
> in the right direction toward bringing operating costs down for the
> future.

2008 Nov 12 06:49 PM

[Tad Gage:]

On Nov 12 07:12 AM IXLR8 wrote:

> I kept waiting for the punch line, and it never came.
>
> Truly a "Kumbaya" article.
>
> Maybe, the author could write another one about how to end child
> abuse or how to end world hunger. No details, just good feelings....

Good point, but it would require a 500 page business plan to lay out the entire game plan. And that would also require access to they key executives at the Big Three. If you could arrange that, I would be willing to tackle it for a relatively modest consulting fee. What specifics would you be looking for? World hunger and child abuse are challenging issues. However, a business plan for auto makers based on ROIC is much easier. If a company can offer a cost-effective alternative fuel vehicle that you can take on a 1,000 mile road trip, or fuel up at your local gas station, it will sell bigtime. It has to be convenient and cost-effective. Americans would get behind that, I am quite sure. We are all capitalists. A fraction of the population would support higher cost alternative energy transportation, but if people were offered a cost-comparable alternative, I believe they would jump on it.

2008 Nov 12 07:14 PM

[cpd:]

Nationalization would certainly be a radical solution. However, if you're going to go radical, why not go the whole way? At this point, why is there a need for 3 separate U.S. Car manufacturers? I can see how this made sense 30, 40, or 50 years ago, when having 3 U.S. manufacturers was most likely good for competition. However, now with the influx of foreign manufacturers is three U.S. manufacturers really necessay in the interest of competition? If not, what is the reason for 3 manufacturers? I happen to think that the U.S. auto manufacturers are the best in the world at producing trucks (for both personal and commercial use) and other commercial vehicles. Why do we need separate companies making Dodge trucks, Ford Trucks, Chevy trucks, etc?

Why not do something like this: Take all three companies, and smash them together. Create three separate companies:The first company would be responisble for all global truck manufacturing; the second company would be responsible for all international operations (where U.S. manufacturers actually have some traction); the third company would be a R&D company investing in next generation technology. Why does Ford, GM and Chrysler all need to seperately invest in next-gen technology (and the infrastructure that goes along with it)? Put 'em together and let the best employees of the three companies rise to the top of a combined R&D operation - you would probably be surprised how quickly things develop.

This set-up would still keep jobs (because it is not about cars it is about jobs), keep unions generally happy, and free up each newly created company to focus on making one thing better instead of each one trying to be all things to all people.

Note that there is nothing here about domestic cars. Forget it. You've lost the battle to the foreign companies. Move on.

2008 Nov 12 09:10 PM

[User 263844:]

In theory this article makes sense. In reality it would be a calamity.

2008 Nov 12 10:04 PM

[PA007:]

Provide a bailout on stiff terms. Wipe out the common stock holders, give a haircut to preferreds/bonds and impose 30-50% cuts across the board on wages, benefits etc. Compensate workers / management / bondholders with warrants for the steep haircut they take.
Then get rid of CAFE and car vs truck fuel economy standards. Simply tax gas at a uniform rate and let the companies and consumers decide what to build, sell and buy. The incentives will at least ensure honest effort and innovation.

2008 Nov 13 12:47 AM

[IM31:]

Everyone in the media seems to suggest that giving the Big 3 loans is a form of bailout. Yes I understand the terms of such loan would be much better than what they could receive in the open market, but here is one question no one is asking. How is giving the Big 3 a loan for billions any different than what the big banks received? The banks have ran up a total of nearly 300 billion worth of loan's in the last month. These loans were to stablize the liquidity of the financial system, yet this money has been used to buy other banks, bonus excutives, and other purposes that were not disclosed at the onset of TARPs creation. To be honest, the financial system has been the worst run sector of the economy for the last decade period. The lack of regulation and responisbility of the financial system is what has caused this epic meltdown, not the auto sector. I think GM and Ford will both survive this crisis, but nationization is not the direction to go. That would be far less efficient! If the government wants to make america competive it need to reduce the amount it cost to employ it's people (healthcare)!!! It is just a matter of time before unions spread to Toyota and Honda factories in north america, unions are not formed in good times!
If I were GM or Ford's CEO I would go to the UAW and say that everyone is going to take a 25% paycut, I would work for the same wage as the average employee. And if we were able to survive this period, we will share the rewards! The union will respond if they know there is job preservation and equal sacrific. The fact Rick Wagoner has made nearly 17 million in the last eight years is amazing given the lack of leadership he has shown to date. Nationalization is not the anwser, just look at what been nationalized in the past and its record. I beleive the government even lost money in the bunny ranch business. Enough said!

2008 Nov 13 02:26 AM

[Bdwplus4:]

I agree with all those who say this article doen't provide any real solutions to the Big 3 problems nor does nationalizing the auto industry.

Here are a couple of "radical" ideas to help the Big 3

1) As mentioned many times, the legacy costs and union benefits are killing the industry. For anything to work, the UAW is going to have to make MAJOR concessions - not the window dressing stuff that has been mentioned over the last few weeks. I suggest that pensions go away and replace them with a 401K system with some matching money from the companies (like most of the rest of us have). Of course, the companies would have to continue to pay the pensions of those already retired and those who will soon retire but for those who are 15 plus years from retirement and all new employees the pensions should be eliminated.
2) Wages - the wages should be reduced significantly but add a profit sharing program so the more profitable the company is, the more money the workers make. Taken to a greater extreme, turn the companies into competely employee owned companies so the workers enjoy high pay in the good times but have to make hard decisions in the bad times. I think this would also reign in on the rediculous demands from the UAW as workers would understand what the companies could and could not afford with respect to benefits and job security

Just some thoughts.

2008 Dec 19 03:41 PM