Business forum: We have a stake in Detroit Three's woes

  • Article by: FRED ZIMMERMAN
  • Updated: December 7, 2008 - 9:58 PM

Bankruptcies and bailouts alone won't solve the problems facing U.S. auto companies -- or the nation.

It is with great sadness that I read about the plight of the U.S. auto industry, where I have spent much time. Though some coverage seems useful, the flippant recommendations, often made by people who have never walked a factory floor, surprise me because of their brazen simplicity.

"Bankruptcy is the best option for GM," a Wall Street Journal editorial written by a former Northwest Airlines executive said in November. Consider the source.

I take no position on the bailout of this important industry. The problems extend well beyond the auto industry itself.

Only a major restructuring of finance, insurance, services and government -- as well as industry -- would lessen the problems we have before us. We should keep in mind that our current disastrous economy did not begin because Ford and GM built subprime transmissions. Our problematic economy results from mismanagement, greed and wealth destruction originating in other sectors, as well as problems in the auto industry itself.

Bankruptcy would change things for large industrial firms. It is true that they may be able to renegotiate labor, health care and pension obligations. But emergence from bankruptcy requires positive operational cash flow -- and GM's operational cash flow was negative $7.8 billion this past quarter. Perhaps other fruitful trimming would be made easier. But how would bankruptcy work?

GM is $60 billion in the red

General Motors, as an example, has $60 billion more liabilities than assets. How would the gap be made up? Taxes, attorneys and secured creditors would be paid first, because of bankruptcy's payment priorities. Unsecured creditors would get paid next -- if anything were left. There would be endless haggling, but predictable results. The vast majority of GM's bankruptcy cost would be borne by taxpayers and unsecured creditors -- the suppliers of parts, supplies and services.

GM may be able to dump its pension obligations to the Pension Benefit Guarantee Corp., an arm of the government. The PBGC, which had a $23 billion fund deficit in 2005, is essentially an insurance company without premiums, with shortfalls made up by taxpayers. One estimate suggests that the taxpayer pension cost of a GM bankruptcy would be an additional $23 billion.

To emerge from Chapter 11, GM would require a fresh line of credit, called "debtor-in-possession" financing. In the past, financing of this type has often been provided by such pinnacles of financial acumen as GE Capital, J.P. Morgan Chase & Co. and Citigroup. Would they be able to provide it? Or would this, too, fall to the taxpayers?

GM's vast cadre of suppliers also would fare poorly. The carmaker currently owes $62 billion in accounts payable and accrued expenses. In today's fragile economy, these essential suppliers to our nation's industrial capability would face a devastating loss of future business, along with the high likelihood of not getting paid for work they already performed.

Because many of these suppliers also provide parts or services to aerospace, agricultural equipment, machinery and other important industries, the country's industrial strength would be severely imperiled.

To the credit of the people involved in the U. S. auto industry, they still make good vehicles. Mercury, Buick, Cadillac and Lincoln all continuously rank near the top of J.D. Powers dependability surveys. Ford surpassed Toyota this past year with the most vehicles in first place in the Initial Quality Survey. True, GM and Ford do make more trucks than cars, but sometimes we need trucks. Try moving a refrigerator in a Prius and see how that works out. And GM and Ford are profitable overseas. For sure, both of these companies have the expertise to compete internationally.

Bold action is required

What will happen? I don't know. But clearly, the matter of our industrial presence should not be dealt with simplistically, of flippantly. Serious inquiry and bold management is required -- not just on the part of the people in these industries, but by the rest of us as well.

To be sure, management of Detroit's Big Three has not always been exemplary. But sometimes it has been more enlightened than it is now. Lee Iacocca worked for $1 per year as Chrysler was recovering in the 1980s. Ford had excellent management with Phillip Caldwell and Donald Peterson (from Pipestone, Minn.) during this same period. GM had good management in the 1970s, not so much in the 1980s and sporadically since. Today, management needs to display more competence and more personal dedication than in the recent past.

Criticism of auto companies carries with it some irony. What activity is better run? Finance? Insurance? The airlines? Professional sports? Education? Government? As a practical matter, manufacturing, agriculture and mining have supplied nearly all of the U.S. productivity improvements in the past 30 years.

Legacy costs for pensions and health care create the major cost disadvantage for U.S. auto companies. But governments are far more imbedded with unfunded or underfunded pension and health care liabilities than any auto company. Minnesota teachers, as an example, are in retirement for an average of 27.4 years, nearly as long as some of them have worked. What should we say when the public-employee pension fund managers come clamoring to legislatures for more funds? Should we say, "Let them go bankrupt," as some have suggested with our industrial companies?

The problems of the auto industry belong to all of us and we are all likely to share in their resolution -- one way or another.

  • Fred Zimmerman is professor emeritus of engineering and management at the University of St. Thomas. He has served on the boards of directors of several companies and is the author of "The Turnaround Experience" (McGraw-Hill, 1991), which chronicled the revitalization of automotive and agricultural equipment companies. His e-mail is zimco@visi.com.

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