Big Three automakers deserve bankruptcy, not bailouts

BY DAVID

Have you driven a Ford lately? If recent sales numbers are correct, the answer is likely, “no.” With each of the “Big Three” Detroit-based automakers (General Motors, Ford Motor, and Chrysler LLC) returning to Capitol Hill this week in search of an estimated $25 billion in bridge-loans, the debate rages on regarding the best course of action for saving Detroit, or not saving Detroit.

Yet, the federal government has no business serving as the lender of last resort to these misguided companies, with their outmoded business models, unwanted products, and union shackles. Only reorganization through bankruptcy, and not a direct injection of federal funds, can begin to rectify this situation.

Most analysts are too quick to concede that the Big Three have sufficiently advanced in terms of product. According to Alex Taylor, senior editor at Fortune Magazine, “[c]reating vehicles that people want to buy is the most fundamental mission of any auto company.” Sadly, the Big Three are now seemingly more like giant pension plans that happen to produce cars than innovative manufacturers.

The proof is in the sales, and the Big Three are behind. Autos built by non-Big Three companies now comprise 54 percent of all vehicles purchased domestically. This consumer preference seems based on actual product quality and performance. In its “10 Best Cars” list, Car and Driver magazine included only two Big Three products for the 2009 model year. The Big Three offerings which made the cut were both from GM, but were also niche offerings (the Cadillac CTS and the Chevrolet Corvette) that lack the ability to return the automaker to profitability. Moreover, Big Three manufacturers still lack proficiency in small-car segment which first gave imports a foothold in the American market.

And it’s not just Car and Driver: since 2003, Big Three vehicles have accounted for only two Motor Trend Car of the Year award winners.

While Big Three quality has slowly improved, understanding customer desires has not. In 2001, the same year that Toyota launched the hybrid-powered Prius outside of Asia, GM launched the Pontiac Aztek crossover SUV, which sold less than one-third of the predicted 75,000 units during the first model year and soon became GM’s worst product miss of the last 10 years.

And for every Cadillac CTS, the Big Three seems to produce two or three uninspired vehicles with hard interior plastics, excess body molding, inadequate breaking distances, and outdated engines (examples like the GM 3800 series, a cast iron, push-rod V-6, which was initially developed in the 1960s, come to mind). Even vehicles which were formerly class leaders are now fading behind the competition. Consider Chrysler’s 2009 Town & Country minivan, formerly the crown jewel of the segment.

Car and Driver’s editors sum it up well: “[o]verall, the Town & Country is a versatile, practical vehicle that isn’t a terrible choice, but there are simply better minivans to be found.”

Professor Peter Morici of the University of Maryland encapsulated this problem during last month’s hearings on the auto bailout before the Senate Committee on Banking, Housing, and Urban Affairs: “There is no such thing as competitive enough in the automobile industry. Either you hit the mark that Honda hits . . . or you are not competitive. The margins are too thin. There’s too much excess capacity. Either the costs are the same or they’re not. There’s no such thing as almost as competitive.”

Lawmakers and industry veterans alike cite the need for the Big Three to shift their fleets to more fuel-efficient and alternative-fuel vehicles. GM cites it forthcoming Chevrolet Volt plug-in electric hybrid as its new key to success. Chrysler is betting the farm on hybrid minivans, while Ford is marketing hybrid versions of its existing models. While these efforts should be applauded, two problems spoil the “hybrids to the rescue” thesis: hybrids are not profit-drivers and, most importantly, the Big Three have been here before.

While Toyota has sold over 1 million Prius units over the last 10 years, the Houston Chronicle recently reported that Toyota is “widely believed by analysts to be losing money on each one sold.” The cost of developing and producing the Volt’s 375 pound, Lithium Ion battery pack will likely keep that vehicle from profitability for at least the first one or two model years as well.

What’s more significant is that GM has been down the electric car road twice before. GM introduced the EV1 in 1996 and spent more than $1 billion on its development, “including significant sums on marketing and incentives to develop a mass market for it.” Later EV1 units received 75 to 150 miles per each eight-hour charge. Just over 1,100 units were produced over a four year production run. The vehicles were only sold under special lease agreements, and GM has since removed all EV1s from America’s roadways.

GM officials claim that “low demand for the EV1” caused a premature end to the project. “Parts suppliers quit making replacement parts, making future repair and safety of the vehicles difficult to nearly impossible,” according to GM communications representative Dave Barthmuss.

In 2005, GM taunted the public once more with the Sequel, a hydrogen fuel cell-powered concept car. But once again, GM abandoned the concept and switched back to a plug-in prototype months later: the Volt. Taxpayers cannot afford to loan GM enough capital to re-invent the hybrid for a third time. The current union framework and legacy requirements on the Big Three must be restructured if these companies are to have any chance at a turnaround. In February, GM and the UAW reached a troubling buyout agreement, where GM would offer a “cash buyout for any employee who voluntarily quits [in the amount of] . . . a $140,000 buyout incentive.” Coupled with skyrocketing healthcare and pension costs, the use of buyouts will stifle any turnaround and delay the benefits gained from reducing capacity.

Moreover, foreign-based auto companies have proven that they can profitably assemble quality vehicles in the United States without the shackles of union demands and legacy costs. The Wall Street Journal reported that hourly labor costs at Big Three plants, when benefits are included, total $73.21 as compared with $44.20 at non-Big Three domestic plants.

This model has been most successful in states with lower cost-of-living levels and strong “right-to-work” laws (which forbid forced union membership). Alabama is a prime example: the state is home to three auto assembly plants and corresponding support facilities: one owned by Hyundai, another by Honda, and a Mercedes-Benz plant owned by Daimler AG. Toyota also has an engine factory in Alabama. While the state lured these automakers with incentives and tax benefits, Alabama has proven that domestic assembly is not the Big Three’s problem. All the while, instead of renegotiating union contracts at home, Big Three firms have shifted jobs abroad. Many new Big Three models are assembled elsewhere, like Mexico (Ford F-Series and Fusion, Mercury Milan, Lincoln MKZ, Chevrolet Aveo and HHR), Canada (Chevrolet Impala, Dodge Grand Caravan, Chrysler 300), and even Australia (Pontiac G8).

While the Big Three blame the economic recession for their recent problems, it is their failed business models and overreaching sales targets that are truly to blame. Airlines have faced a tough economy, high fuel prices, and cutthroat competition as well. In 2002, when United Airlines was plagued by legacy costs and the economic slowdown following the September 11th attacks, it failed to secure government loans entered bankruptcy. It shed 100 planes from its fleet, renegotiated salaries with labor unions, and cancelled feeder contracts with regional carriers. United also canceled its pension plan and shifted 120,000 pensions of employees and former employees to the Federal Pension Benefit Guaranty Corporation, resulting in a tab of $5 billio
n for taxpayers and reduced benefits for pension holders. Even so, the costs to taxpayers of the United shift were far less than any bailout, and a shift of the Big Three pensions to the PBGC would be a one-time charge to taxpayers and likely cost less overall than the proposed bailout.

Bankruptcy would also allow the Big Three to make the real changes they need: cut dealer networks by at least half, sell or shutter brands, cut plant capacity, and void union contracts and renegotiate wages and benefits to mimic foreign transplants. One or more may not emerge from Chapter 11, but those which do will be lean and competitive in the 21st century marketplace.

David Fotouhi is a member of the Harvard Law School Federalist Society.

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