Monday, November 17, 2008

Everybody wants to know what I think about the Big 3!

Well, because I spent 17 years in the auto industry, I am getting a great number of inquiries about "what should we do with the Big 3?"

What I share here are my own opinions. I do not suffer from naivete about how hard this will be. But I do wish for a sustainable resolution, and not just another short-term fix, which inevitably leads to more pain and hardship in the near future.

Here are my thoughts for beginning to truly address the Big 3 issues. I believe that there should be no "free lunch." I do not support a "no strings attached" plan for the Big 3. They need support and encouragement to make the changes they have discussed for decades.

If our government supports the domestic-owned industry with loans or grants, then in exchange, it must seek to create a viable business for employees, and a return for investors. The only way to guarantee employment is to create an ongoing and viable business model that can compete and win. To survive, and in the future prosper, the industry must reform.

Here are the types of radical changes needed in these dire times:

Topic One: Lower labor cost per unit, health care cost per unit, and pension cost per unit.


1. An immediate reduction of UAW payroll and benefits is required. I estimate a 20+% may be needed. In exchange, employment is guaranteed for one year at today's level, and the dollar value of the lost wages and benefits is placed in a government regulated health care and pension program. This same wage reduction would apply to all white collar employees, but their employment must continue to be rationalized further, with perhaps 25+% potential job losses. The white collar workers are more fungible than their blue collar counterparts. This is why employment is so critical. Re-allocating the UAW labor is not an easy thing to do.

2. I cannot do justice to the idea of creating a health and pension program for the auto industry in this blog. This process has been underway for some time. John Devine's genius work to secure a Trust for GM Pensions is one model. There is funding now, but it needs to be set up separately from the auto business. We must have a defined contribution program, and not a defined benefit program. Those days are over. Health care also needs to establish emergency support for major illness and accidents, and set a floor for support. But a new system must begin to insure some semblance of market forces. People need to make good decisions about whether to smoke, be overweight, etc. based upon the true costs to their lives. In the same way, the medical decisions they make must have some association to reality. Insurance can help for the unnatural, but elections must be market-based. I will have another entry to express the similarities between an entitlement mindset for credit (I want it now and will pay later) and the entitlement mindset for health care (I can do whatever I want and somebody else will pay).

Topic Two: Get Consumer Demand Up for Domestics

1. I can say without any embarrassment that GM, Ford and Chrysler automobiles are high quality automobiles. I am a brand marketing expert, and I know that the quality issues of the past still bias many consumers against the Big 3, and towards imports. There are also other reasons why some people like imports, but that is irrelevant to review here. Suffice it to say that if we can get people to "Try a Ford Lately?" then we will not disappoint them. Same is true for fantastic vehicles from GM and Chrysler. Up and down the line, they are really strong.

2. So what do we do? I believe that the U.S. government should provide consumers with a tax credit when they buy American cars. These are CREDITS. They would in effect be a check if no tax is due, and reduce taxes owed dollar for dollar. There should be a $1,500 minimum growing to a maximum of $5,000 (10% of net price paid).

Topic Three: Lower Fixed Costs, Research & Investment

1. Closure of excess capacity. I don't have access to the details, so I am making an informed estimate here, but General Motors has 5, Ford 2 and Chrysler 3 plants that have been frequently targeted for closure. They should be closed. It is ugly and painful, but necessary. As plants close, remaining plants must absorb as much union labor as possible. The goal will be for all plants to go to a 3 shift format. Investment from the government must go to increased plant flexibility to build 2 or more models in each factory, and move towards specific emissions and CAFE goals. There may be permanent layoffs of UAW workers after one year, but we can address that with other programs.

2. All capital expenditure for new model development should be deferred by two years to conserve cash. The only exception would be for alternative fuel power trains. Have all R&D focus on bio-fuel, electric, and fuel cell. I agree, if only to gain support for the plan, with Jennifer Granholm that we should further energy independence and national security with this rescue. I would not be opposed to having the U.S. military partner on development and deployment of new technologies.


Topic Three: Suppliers and Dealers must also contribute.

1. There may be some reductions for suppliers, but they have been squeezed a great deal in the past decade. Some of them may need to participate in the government-led wage/benefit concession for health and pension programs.

2. We learned at Chrysler in the early 2000s that dealers have options. Even still, this is very serious and I believe they will be willing to contribute if they can help save the Big 3. I believe they need to accept a lower margin on all aspects of their business (retail minus wholesale). In exchange, they could receive 180 days or more of interest free floor plan to hold full inventory in return. Again, this stimulates lending, which is good for the economy.

To summarize, the government support leads to creation of a single health and pension program. It guarantees employment and viability via management and labor wage and benefit reductions. It also incentivizes consumers with a stimulus program. There could also be a pro-lending element for financing autos, and supporting inventory and wholesale with dealers.

The alternative to government support is Chapter 11 (which is also a form of government supervision). In bankruptcy, the unions will lose. The question will be how much. They come before shareholders and after creditors. They will not easily be re-employed. They need to accept their role in all this, and take a cut for some certainty. They will say it is not there fault that Detroit cannot design cars people want. That is offensive in its absurdity. There is blame to go around. Time to put up and shut up.

There are no winners in my plan, save consumers, in the short-term. Shareholders will likely lose everything. All employees take a hit. Some factories will close. But the industry survives, and will eventually prosper. If done correctly, the pension and health care programs created can pave the way for solving our national health care and Social Security crises. In the long-term, the industry will move towards a cleaner and more prosperous future. And by long-term, I would target 2010.

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