The US auto industry has been dead man walking for a generation, it's ultimate demise stalled by a series of stays of execution (the Chrysler bailout), happy accidents (the SUV boom), and labor givebacks. The current credit crunch has done little more than hasten the final insolvency of GM, Chrysler and Ford. With collapsing of credit drying up sales, the companies' cash burn has become unsustainable (GM burned almost $7 billion in cash in the third quarter leaving it with too little cash to survive another quarter) and private money has disappeared (investor Kirk Kerkorian walked away from a new round of investment in Ford and is liquidating his remaining position selling shares at a reported loss of $700 million).
Sure there's plenty of blame to go around for the woeful situation including generations of unimaginative management focused more on eking out incremental revenue (for example by expanding the now cratering auto finance business) than on designing, manufacturing and marketing the best, most innovative, most competitively priced, most consumer friendly cars. (The increasingly hysterical claims about the fallout of a potential GM bankruptcy--2.5 million jobs lost, for example--have done little to enhance the reputation of GM CEO Rick Wagoner.)
But as much as anything, there are trends beyond management's control have doomed US car manufacturers--the high cost of fuel, the low cost of labor elsewhere, the legacy costs of pension and health benefits for two generations of employees. As long as these externalities remain realities--and that's for the foreseeable future--America's big three automakers will remain insolvent. In other words, there is no saving the industry as we know it. These companies need to become smaller. They need to make fewer cars. They need to employ fewer people. They need to focus on many fewer name plates. They need innovative new manufacturing processes to allow for made-to-order assembly. And most of all they need to operate in the future with much lower benefits costs. In other words, these companies don't need the kind of prolonged life support that Congressional Democrats are proposing, they need complete reorganization.
In the US we have a process for completely reorganizing companies. That process is called Chapter 11 bankruptcy--in which creditors take control of a failing company and rebuild it under the auspices of a federal judge. Forestalling a Chapter 11 reorganization by propping up the current industry structure and its three insolvent companies would be a tragic disaster and an enormous missed opportunity for the nation. And if it occurs it will represent the worst kind of business as usual in Washington--where preserving a marriage of political convenience (in this case between the Democratic party and the UAW) trumps the nation's best interest.
Saving Chrysler, Ford, and GM is not the same thing as saving the banks. If the banking system fails the entire economy grinds to a halt and a recession becomes a depression. If the the auto companies are forced to operate under bankruptcy protection, sure jobs are lost, but the system survives more or less intact.
That doesn't mean the government would have no role to play in the bankruptcies of the big three. Each would of course be operating under federal court supervision. Most likely the US government would be a major provider of debtor in possession financing to the companies. Active involvement of the federal government in the bankruptcies of the big three would ensure that the US maintains the capacity to design and manufacture automobiles (a compelling state's interest), limit the collateral damage of job and benefits losses, and promote the crucial national security goal of curing the nation's addiction to oil.
Most importantly, the government must seize this moment to completely remodel the way the nation provides retirement and health care benefits to its citizens--call it America 2.0. Since the early 1950s the auto industry has represented the gold standard in employer-based health care and retirement benefits and for 25 years at the middle of the American century--when American industry and the US dollar ruled the world; when it was a labor not a service economy in which labor quality, not technology, was at the source of industrial productivity; when the median age of the nation was much younger and its citizens' lifespans much shorter. It was a system that worked fantastically well under those conditions providing car companies with huge profits and providing even non-college educated blue collar workers compensation enough to buy homes, raise healthy families, and retire with stability. But since the 1970s global economic conditions have shifted tectonically while our national system for providing for citizens has changed only incrementally.
Our system of employer based benefits no longer works for anybody. It's created a retirement crisis and a two tiered health care system where the rich get phenomenal health care while the majority of the nation is stuck with second class care and where job growth is restrained by the swelling cost of benefits. A government bailout of the big three that preserves the current system, or worse one that federalizes benefits for car company employees without changing the structure for all American citizens and companies would be a tragic lost opportunity.
The looming failure of the US auto industry is the first test for the President-elect. So far Mr. Obama has shown precious little leadership on the matter. I understand the politics. If the government acts in the lame duck session, Obama can insulate himself from the political fallout that a true transformation would entail. But the season of politics is ended and the season of leadership begun.