Automotive News | April 13, 2009 - 12:01 am EST
It's foolish to think Detroit can be run from Washington
By Louis E. Lataif
No industry is more fundamental to the U.S. economy than automobiles; it accounts for more than 10 percent of American jobs.
The Detroit 3 certainly are not without fault, but they have been dealt lethal blow by a consumer credit crunch resulting from a housing market collapse they did not create.
If the current 9 million-plus vehicle annual selling rate continues, not all auto companies, American or foreign, can survive.
The federal government is willing to spend trillions to right the economy. The $787 billion stimulus bill, including in its 1,100 pages thousands of programs unrelated to the home mortgage crisis or the constrained capital markets, is rationalized as necessary to jump-start the economy.
That is like administering expensive blood transfusions rather than closing a significant wound.
Another way
Given that clear determination to preserve jobs and stimulate economic activity, irrespective of cost, it would have been entirely consistent and defensible for the federal government to serve as lender of last resort for the ailing auto companies.
Granting troubled auto companies an 18-month loan contingent on UAW, bondholder and management concessions would seem entirely consistent with and more defensible than many Wall Street bailouts.
The automakers would then be solvent and responsible for supporting their supply base and dealers as best they could without more government involvement.
Since the current sales pace is about 3 million units below the annual vehicle scrappage rate, the pent-up auto demand in 2010-13 is likely to be enormous. The auto companies would then be required to begin repaying the government loans with interest, making the taxpayers whole.
The alternative, where the federal government is doling out assistance piecemeal, separately bailing out suppliers, attempting to dictate what kinds of vehicles should be developed, determining who should run the companies and serve as directors - in effect operating Detroit from Washington - is folly.
The huge auto industry is too complicated to be saved by a small group of intelligent, well-intended bureaucrats with no industrial experience.
All the ambitious auto industry restructuring that has taken place over the past five years has been scuttled by the deepest credit crisis in 75 years.
The restructuring should be allowed to work.
Detroit has been scurrying to bring to market smaller, more fuel-efficient vehicles, many of which are but a year off. In any kind of normal market, the Detroit manufacturers were likely to be but a year or two away from restoring profitability.
Of course, the auto manufacturers also need to produce vehicles that people will buy in volumes and at prices that make business sense. That requirement seems lost on those now calling the shots.
Bankruptcy is too risky
Finally, in this economy, permitting an auto company bankruptcy, pre-packaged or not, is risky. It could deepen the recession as the already-weakened supply base chokes the entire industry. Or it could lead to expensive, government-backed and potentially anti-competitive purchase incentives and product warranties to offset buyers' apprehension about deal-ing with a bankrupt auto manufacturer.
Before Washington digs its auto ditch any deeper, it should revisit the notion of a proper short-term loan, one with restrictive covenants that commit the key players. Then let the chastened auto executive teams execute.
Louis E. Lataif is Allen Questrom Professor and Dean, Boston University School of Management and was previously a president of Ford of Europe.