What Should Be Done?

On the table for discussion today is what to do with the ailing U.S. Auto Industry. Chrysler and GM are essentially broke and Ford is heading in that direction. Naturally, they've appealed to the government for help:

Democratic leaders in Congress this weekend called on the Treasury Department to consider assisting the ailing US car industry through the $700bn financial rescue plan enacted last month.

Following meetings with the big three carmakers – Ford, General Motors and Chrysler – on Thursday, Harry Reid, Senate majority leader, and Nancy Pelosi, House speaker, appear increasingly convinced of the need for large-scale government intervention to aid the industry.

But will throwing money at the problem help? Professor Bainbridge, focusing primarily on GM, lists the problems as he sees them:

1. An incredibly inefficient bureaucracy. GM has to continue cutting management. Shedding management will be a lot more more likely if GM is forced to go through bankruptcy reorganization rather than being bailed out.

2. An excessive number of brands, which results in substantial cost duplication. Alfred Slaon’s vision of a customer who graduated from entry to mid-level to luxury brands as he grew older hasn’t worked for a very long time. Instead, the brands compete to retain customers, which all too often leads to cannibalizing sales from one another instead of outside competitors. GM needs to shed brands. Pontiac and Buick, for example, exist solely to cannibalize sales from Chevrolet. Again, GM is much more likely to shed brands in a bankruptcy reorganization than in a bailout.

3. Although GM didn’t bet as heavily on trucks and SUVs as did Ford, it still has almost no profitable small and medium-sized car models. Toyota can make a profit on the Camry as long as the exchange rate is above 85 yen to the dollar. GM has no comparable product. Bailing GM out won’t solve that problem.

4. An antiquated distribution system cemented into place by state franchise laws that insulate dealers from any real changes. GM needs a radically new distribution system involving fewer dealers, just in time inventory practices, and considerably greater use of on-line sales. State franchise laws protecting dealers, BTW, are a big part of the reason GM can’t shed brands. Killing a brand simply gets too complicated when you’ve got hundreds of dealers protected by 50 different sets of laws. In a bankruptcy reorganization, it will be much easier to kill a brand despite dealer opposition.

5. Union contracts that impose astronomical health and pension costs, make innovation harder, reduce production flexibility, and fail to ensure quality. American workers can produce quality cars and do so at numerous foreign owned plants. Most of those plants, however, are not organized. A Democrat-sponsored bailout is certain to preserve the current union contract.

6. Massive pension and health costs for retired workers. (emphasis mine)

Numbers 5 and 6 pose the most immediate and difficult issue to deal with politically, but unless they are dealt with, I don't see GM surviving, certainly not in the way that we've known it. You can see why GM can't compete with the likes of Toyota here:

You can start with labor costs. Non-union Toyota pays competitive wages of $15-20 per hour, which is grow to $21-25 per hour over a few years. But with benefits, one industry researcher estimates Toyota’s total labor costs to be about $35/hour, versus $81/hour for GM, including its legacy retirement and healthcare costs. That means that if Toyota did no better than match GM’s Arlington levels of productivity, it would still have a $1000 per car cost advantage in labor alone.

But it will exceed GM’s level of productivity. GM’s 3000 workers in Arlington operate in a decades old plant that is landlocked by development, making many potential cost-saving changes to flow and efficiency impossible. For example, as the WSJ reports, “GM's body shop is housed in a separate building, which was built in 2000 to introduce new technology. The bodies are transported on an elaborate, enclosed conveyor to the final assembly area, where they are painted and stored before being bolted onto frames. GM managers say they would use a more modern layout that would help boost the plant's productivity even more, but GM can't afford to shut down operations and completely rebuild the plant.”

The other problems listed are certainly true, but without a plan to deal with the legacy costs of building cars competitively, GM is done. The question is, does anyone have the political will to do it? My take, for what it's worth, is similar to Professor Bainbridge's. Cut Chrysler loose and force GM and Ford to go through reorganization as a part of any bailout effort. Yes, a lot of people will be hurt, in some cases disastrously so. But without help, GM will be out of money by the end of the year.

Which would you prefer, having a portion of something or 100% of nothing?