US Big Three Bailout and Conditionality

During last week or so, the media in US is agog with two hot news items- First one relates to the possibility of Senator Hillary Rodham Clinton, the wife of the former president and the rival of Obama in primary getting in the Obama’s government as Secretary of state, and the second is about the desirability of bailout for automakers. Naturally, the politics is not my great interest; the debate of the bailout for Big Three certainly does.

On my morning walk that is the normal office going time for Americans, I find cars speeding towards the destinations. For Americans, the proximity of the workplace is not the top priority for selecting their house of residence with one of the cheapest oil prices, good roads, and latest cars financed so easily with plastics. Surprisingly, I see the cars of Toyota and Honda far more in number followed by other Japanese, South Korean, and European cars. I hardly find cars of American Big Three. Why is it so? Is it because of quality or price?

With my experience of Hindustan Motors that had close connection with GM, I am of opinion that American Big Three had gone creating its presence in the entire potential markets world over. But they never tried to be at the top in those markets and yielded soon to competitors. As with other sectors such as machine tools and electronics America never tried hard to remain at the top. It is just by sheer worldwide presence that GM and Ford still remains near the top. In India, GM started with HM, and Ford with M&M, but soon decided to become fully-owned companies. Neither GM nor Ford was serious to become the leader in the market and so today Suzuki and Hyundai are the main car manufacturers followed by Tata Motors. Nano may push Tata Motors ahead of the other two, but with a bad beginning at Singur, many have started doubting it. Interestingly, VW is number one in China, and Fiat in Brazil. GM and Ford may have a better position in Russia. It appears the management of the American automakers doesn’t have the fire required to reach the top and remain there. Should it not be considered as a failure of the management that is taught in all world famed schools of Harvard, Stanford, Wharton, or Princeton that are the benchmarks for other developing countries including India?

General Motors, Ford and Chrysler have been making losses and going to run out of cash to continue soon. The course left is either bailout by the federal government or going for bankruptcy before year’s end. The Big Three have asked for bridge loans of $25 billion. The alternative route to file bankruptcy may mean catastrophic economic hardships in all 50 states with automakers having 239,000 U.S. employees, 775,000 retirees and spouses and 2 million people covered by company-sponsored health care. Collapse of Detroit Three could be cataclysmic and touch more than 4 million other jobs including suppliers, dealers, car haulers and rental companies. A shut down of Detroit will mean an around 10% of the national unemployment rate .

Both the Democrats and Republicans appreciate the problem and stake involved, and so are ready to assist, but it must impose certain tough conditions.

Automakers must restructure and become viable.It must improve up on its perception about its quality, and services among the customers. It must come out with some breakthrough innovations in hybrid, fuel efficiency, or alternative fuel technologies. The government would put limits on executive compensation including a provision barring bonuses from executives whose salaries are higher than $250,000 (couldn’t even retire with lucrative “golden-parachute” compensation) and a prohibition on the payment of dividends. Automakers would also have to submit plans on how they intend to remain competitive.

The Democrats’ plan in the Senate would give automakers access to $25 billion in loans from the $700 billion Wall Street bailout program for the financial companies.

The White House and many Republicans favor amending the law approved in September to extend automakers $25 billion in technology loans to retool factories and make more fuel efficient cars.

The whole of US is divided on only the way to help, and not on the need to help.

Some doubt if the bailout will fail to reform American auto makers. Jack Welch, the legendary former CEO of GE in Business Week suggests bankruptcy reorganization. According to critics like Jim Schrager at the University of Chicago, Booth School of Business, the wrong people are in charge. Bush, whose limousine is made by GM, opposes a bailout. President-elect Barack Obama is in favour of an aid package, but not a blank check.

I fail to understand why the American administration is so generous to the financial sector but not to auto? It came out with an unprecedented bailout of $700 billion for it. It set few restrictions. As reported, some large banks were even pressured by the administration to accept money they did not need or particularly want. Is it because of the heavy budget of the companies in sector for lobbyists that influence the administration?

I do also hardly understand why there is no mention of the correction required in UAW demands that has made labor and legacy costs for American automakers highly uncompetitive. Under new contracts, hourly pay and benefits for new hires were cut to about $26, while for the old employees it amounts to about $78. GM’s health-care costs tack on $1,500 per vehicle. Toyota and Honda spend a mere $400 per vehicle at their U.S. production plants. In Japan, it’s as low as $150 per vehicle.

Why the legislators are so afraid in talking about the union that is equally responsible for the poor shape of automakers today? Why are the old workers not agreeing to have cut on wages over going to bankruptcy? Why can’t the federal government subsidize the health care cost or get negotiated to the level of other sector? Interestingly, under a labor agreement last year, the companies are required to provide $15 billion to a health care fund for retirees in January 2010 and another $15 billion in 2012. And the UAW is separately asking for $ 25 billion bailout for it.

Naturally, US auto industry is badly in need of total platform change. The country must come out with some long term strategies in many areas of operations to make manufacturing relevant for it. Will it go for a similar bail out for Boeing tomorrow or for Cisco in tech sector, if situation arises?

GM is trying to educate the people about some wrong perceptions about the US automakers. I wish Americans find time to visit the site.

I wish the US automakers use its resources such as managerial talents in BRIC countries to improve upon the domestic car business.
PS
Latest on Big Three bailout, November 18,2008
CEOs Plead

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