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Hail and Beware, American Taxpayers: We’re about to begin the Mother of All Bailouts!

All the automotive industry wants is a paltry $25 billion to tide them over – for the time being.

Let’s cut to the chase: The auto industry’s problem is not financial. That’s the symptom. The problem is competition. Even the $25 billion is a band-aid.

Spokesmen for the industry are claiming that their dire straights are the result of the current economic malaise brought on by the financial melt-down. No, the problem started long before that. Here’s the bottom line – and it sticks out like a moose at a garden party: The Detroit Three companies are trying to beat their competition that has better products and a lower cost structure. Detroit’s average wage cost (including medical and pensions) lies at around $80 an hour, while Toyota, Honda, et al comes in at about $40 an hour. Those are facts, not opinion. NO industry can win against a competitor with a better product and a lower cost structure.

Let’s be brief again. Taxpayers may feel we have to allow federal intervention to “save the economy,” which undoubtedly will suffer if the American-based auto industry goes down the drain. And we MAY want to save the 100,000 or so automotive workers and their jobs, but we have NO obligation to save the private companies.

The solution is very simple: Allow the Detroit Three to go into Chapter 11 bankrupcy. Why? (We’ll leave out “because they deserve it.”) Because the industry must restructure for its own survival. That means two things: 1) Investors in the Detroit Three companies will lose much of their equity (most of it is gone now anyway), and 2) Labor costs must be adjusted to something close to their competitors. It’s the only way – unless you like the idea of non-stop federal cash bailouts.

Protests Will Abound

Oh, you can hear the cries of anguish already, from friendly politicians and the UAW members: “You can’t take away our benefits — we fought many years for them.” O.K., keep your benefits and go down with the ship; just don’t ask us to finance them.

Why not keep them? Basically, the benefits were gained during the years when Detroit controlled the market; if you wanted a car, that’s the only way you could get one. So when the union and the companies bargained, what they were really doing was deciding how much they could tax the rest of us for the price of the cars. We can’t blame the union for getting all they could (under those circumstances) or the companies that went along if they wanted to stay in business. Wage rates were raised higher than anybody else’s, medical coverage is better than anybody else’s, pensions are better, and when they had to lay off workers, they paid them up to 95% of their working wage. (It is said that they have more ex-workers now on pension than are working in the business.)

It was a grand trip – and there’s no use blaming anybody now — but it just won’t work anymore. The only hope for a healthy automotive industry is a complete restructuring.

When a business, or industry, enters Chapter 11 bankruptcy, all bets are off. For protection from creditors, they must prove to the court that they have corrected the problems that led to the bankruptcy. That’s when the market decides. Banks decide whether the re-structured company is worth lending money to, and customers decide whether to buy the product. Of course, you don’t have to be a genius to know that the union will be there in force (with its political friends) arguing to maintain all the perks. Again, you can’t blame them: that’s what unions are for and what politicians do. But if they want to build a new, competitive industry, basic changes must be made – to get that $80 an hour production cost down closer to $40 an hour.

Consider The Alternatives

Unreasonable? For some, sure. But consider that the new Honda plant down at Greensburg will start by offering jobs at good wages and benefits – for a few hundred workers, out of thousands that applied. Understandably, workers at the Detroit Three don’t like the idea of giving up their higher wage rates and perks. But how about the many more thousands of good people who have been let go and have no jobs at all? And does the rest of the tax-paying public have an obligation to support the higher lifestyles obtained when Detroit told us to pay up or no cars? Are we really doing anyone a favor in the long run – the workers, the companies, the industry, the economy, the nation – unless we stand firm now by saying: No more subsidies unless you restructure so you can compete with anyone in the world economy?

I’ll make one more wild proposal: Sure, give them their $25 billion as a stop-gap, but also give them a very definite message: That’s all! This is the end of the government subsidies.

None of us should be under any illusions that this change will play out under the scenario cited above, given the mind-set of so many people and the political pressures. All we can do is point truthfully to the facts that demand major restructuring. And we should maintain some sympathy for those directly involved in these difficult changes. But after all, it’s for their good. Call it Tough Love for the Automotive Industry.

Vic Jose :: Nov.16.2008 :: Uncategorized ::

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