GM and Chrysler filed their turnaround plans this week asking for an additional $30 billion in bailouts. Almost no one believes these plans will work or that this additional $30 billion on top of the $17 billion received to date will be sufficient. Ford, wisely, so far, stayed out of this charade, but faces the same endgame as these two procrastinators.
The American auto industry—like major league baseball—has been a symbol of American pride and a pastime lingering on beyond our boyhood dreams. I once had a 1970 Chevy Malibu convertible which my 75 yr old grandfather aptly described at the time as a “babe magnet”. We had an emotional attachment to our wheels. Then things began to change. We still rooted for our favorite brand, even as we abandoned them for better quality, more stylish, fuel efficient, more dependable foreign cars. Detroit responded by giving us more of the same. The imports just got better and then expanded production in America—not in Detroit—but in Alabama or Mississippi or elsewhere. Today, we have a robust American automotive industry, but the Big Three are now Toyota, Honda and BMW.
Is it time for tough love for Detroit?
We all know the answer is yes. Perhaps, a year ago the argument that GM was too big to fail was “scary” or that a bankrupt Big Three player could not sell cars because customers would fear to take a risk rang true. That game is over. The Bush Administration handed out the bailout money because it did not want GM or Chrysler to go down on their watch NOT because they believe they could save themselves even with financial help.
Now, bondholders and the UAW, Cerberus and other stakeholders are playing chicken with each other—hoping and praying—that Obama will expand Bush’s sentimental gift of a financial lifeline to these icons to stave off bankruptcy. My advice: Just say no.
What will happen then? Chrysler will almost certainly fail and be sold off for “parts” with the Jeep brand fetching a fair price from a foreign player interested in taking an iconic position in the North American market. GM will go Chapter 11 and Ford will quickly follow and together they must “fix it right” to give the patients a chance for a healthy financial future. This is not time for a botox treatment—this is open heart surgery. Only in bankruptcy court can the legacy costs be stripped away. There will be fewer brands, plants, dealers and workers. Shareholders will be wiped out—the price they will pay for allowing management to evade reality so long. Bondholders will have an opportunity to trade debt for equity and stop being enablers of a failed strategy. Management housecleaning will be complete.
Is there a role for the government here? Sure, as an honest facilitator of this transformation in bankruptcy court by sweeping away impediments to change, preempting state dealer laws, transition for worker pensions and other constructive implementation efforts of the reorganization plan the parties negotiate in the restructuring proceeding before the judge.
If we’re lucky, someday my grandson will proudly drive up to show me his new GM car and I will nostalgically wink at him and say—this is a “babe magnet”.