Let Detroit Go Bankrupt

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Let Detroit Go Bankrupt

From the NY Times Op-Ed page, November 19, 2008

Let Detroit Go Bankrupt


IF General Motors, Ford and Chrysler get the bailout that their chief
executives asked for yesterday, you can kiss the American automotive
industry goodbye. It won't go overnight, but its demise will be
virtually guaranteed.

Without that bailout, Detroit will need to drastically restructure
itself. With it, the automakers will stay the course — the suicidal
course of declining market shares, insurmountable labor and retiree
burdens, technology atrophy, product inferiority and never-ending job
losses. Detroit needs a turnaround, not a check.

I love cars, American cars. I was born in Detroit, the son of an auto
chief executive. In 1954, my dad, George Romney, was tapped to run
American Motors when its president suddenly died. The company itself
was on life support — banks were threatening to deal it a death blow.
The stock collapsed. I watched Dad work to turn the company around —
and years later at business school, they were still talking about it.
From the lessons of that turnaround, and from my own experiences, I
have several prescriptions for Detroit's automakers.

First, their huge disadvantage in costs relative to foreign brands
must be eliminated. That means new labor agreements to align pay and
benefits to match those of workers at competitors like BMW, Honda,
Nissan and Toyota. Furthermore, retiree benefits must be reduced so
that the total burden per auto for domestic makers is not higher than
that of foreign producers.

That extra burden is estimated to be more than $2,000 per car. Think
what that means: Ford, for example, needs to cut $2,000 worth of
features and quality out of its Taurus to compete with Toyota's
Avalon. Of course the Avalon feels like a better product — it has
$2,000 more put into it. Considering this disadvantage, Detroit has
done a remarkable job of designing and engineering its cars. But if
this cost penalty persists, any bailout will only delay the

Second, management as is must go. New faces should be recruited from
unrelated industries — from companies widely respected for excellence
in marketing, innovation, creativity and labor relations.

The new management must work with labor leaders to see that the
enmity between labor and management comes to an end. This division is
a holdover from the early years of the last century, when unions
brought workers job security and better wages and benefits. But as
Walter Reuther, the former head of the United Automobile Workers,
said to my father, "Getting more and more pay for less and less work
is a dead-end street."

You don't have to look far for industries with unions that went down
that road. Companies in the 21st century cannot perpetuate the
destructive labor relations of the 20th. This will mean a new
direction for the U.A.W., profit sharing or stock grants to all
employees and a change in Big Three management culture.

The need for collaboration will mean accepting sanity in salaries and
perks. At American Motors, my dad cut his pay and that of his
executive team, he bought stock in the company, and he went out to
factories to talk to workers directly. Get rid of the planes, the
executive dining rooms — all the symbols that breed resentment among
the hundreds of thousands who will also be sacrificing to keep the
companies afloat.

Investments must be made for the future. No more focus on quarterly
earnings or the kind of short-term stock appreciation that means
quick riches for executives with options. Manage with an eye on cash
flow, balance sheets and long-term appreciation. Invest in truly
competitive products and innovative technologies — especially fuel-
saving designs — that may not arrive for years. Starving research and
development is like eating the seed corn.

Just as important to the future of American carmakers is the sales
force. When sales are down, you don't want to lose the only people
who can get them to grow. So don't fire the best dealers, and don't
crush them with new financial or performance demands they can't meet.

It is not wrong to ask for government help, but the automakers should
come up with a win-win proposition. I believe the federal government
should invest substantially more in basic research — on new energy
sources, fuel-economy technology, materials science and the like —
that will ultimately benefit the automotive industry, along with many
others. I believe Washington should raise energy research spending to
$20 billion a year, from the $4 billion that is spent today. The
research could be done at universities, at research labs and even
through public-private collaboration. The federal government should
also rectify the imbedded tax penalties that favor foreign carmakers.

But don't ask Washington to give shareholders and bondholders a free
pass — they bet on management and they lost.

The American auto industry is vital to our national interest as an
employer and as a hub for manufacturing. A managed bankruptcy may be
the only path to the fundamental restructuring the industry needs. It
would permit the companies to shed excess labor, pension and real
estate costs. The federal government should provide guarantees for
post-bankruptcy financing and assure car buyers that their warranties
are not at risk.

In a managed bankruptcy, the federal government would propel newly
competitive and viable automakers, rather than seal their fate with a
bailout check.

Mitt Romney, the former governor of Massachusetts, was a candidate
for this year's Republican presidential nomination.

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