More Federal Money Won't Help the Big 3 Automakers

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Includes: F, GM
by: Vernon Hill

Can you imagine anything sorrier than the spectacle of CEOs of three of the great names in American industry, Chrysler, Ford (NYSE:F), and General Motors (NYSE:GM), trooping to Washington to ask for $25 billion in taxpayer money?

Pathetic. First of all, even if the bailout made economic sense (which it absolutely does not), $25 billion won't come close to fixing the automakers' problems. Rick Wagoner himself admits GM's share of the money would only carry the company through the first quarter, at most. So what exactly is the point?

Besides, what ails the auto industry isn't a lack of capital; what ails it is a cost structure so bloated that U.S. automakers are chronically uncompetitive. The Big 3 pay $2,900 per vehicle more to build a car, on average, than Japanese automakers do, according to Fortune. You won't be surprised to learn the major source of that cost gap, either: labor. Of the Big 3's $2,900 cost disadvantage, $1,600 pays for gold-plated health care for workers and retirees, while restrictive work rules add another $600 or so. And have you heard of the "jobs bank"? It pays laid-off autoworkers 95% of their regular pay, plus benefits, to sit around and do nothing.

And the Big 3's CEOs expect taxpayers to subsidize that?

Critics argue that U.S.-made cars are hopelessly uncompetitive. That's wrong. U.S. auto designers are among the best in the world. (Many Japanese automakers rely on them.) And U.S. auto workers can be among the most productive in the world. Non-union U.S. plants operated by non-U.S. manufacturers such as Mercedes-Benz and Toyota turn out vehicles of extremely high quality.

The Big 3's problems would fix themselves, therefore, if only the companies could get out from under their crushing labor obligations. In the meantime, virtually no amount of bailout money would do much good.

Investing in these companies without a complete change of their business model, their managements, and labor contracts is totally hopeless. Only one alternative makes sense: reorganization in bankruptcy, including comprehensive labor cost relief. The only way the government can truly help the industry is by assisting in such a reorganization, and ensuring the companies emerge from it with a clean slate.

But a cash bailout in the meantime? Congress might as well light a $25 billion bonfire in front of the Capitol.