As General Motors and Chrysler careen toward insolvency, we the taxpayers are being asked to step in and toss them a lifeline. The problem is that the American public instincitvely understands that the American auto industry is rife with outdated business practices that need to undergo major structural reform, and the public is right. I think most of us, however, also think its important to have an American-based auto industry, even if that impulse is purely based on nationalist sentiment. In the end, the American public would like to see two strong American car companies emerge that can compete with Toyota, Honda, Mercedes and BMW on the global stage. We should figure out a way for General Motors and Ford to emerge on the other side of this recession, properly structured to compete in the auto industry of the future.
General Motors’ core problem is that it is caught in a web of relationships that were put in place back when it was the dominant producer of cars in the United States. (Chrysler, on the other hand, is just a plain old weak company.) GM created several brands to provide customers with diversity of choice (back before there was real diversity from foreign producers), and therefore now is hobbled with too many dealerships, excess production capacity, and an inefficient process for new model development. It also was caught in the great false assumption of the post WWII period: that production capacity and employment was permanent, so that management and their employees are enemies engaged in a struggle to divide the spoils, rather than a partnership to compete against the likes of Toyota and Honda.
Through that prism, the way these companies have been run starts to make sense. They can’t cut capacity, because they have a contractural need to maintain their network of dealers, their huge employee bases and their huge number of retirees. Yes, the management that agreed to those contracts was short-sighted, but they were also dealing with what appeared to be reality at the time. As fiduciaries, management has run the business to avoid bankrupcty as long as possible. Either way, bankruptcy was inevitable, and has been since the 1970s. That time has now come.
Andrew Ross Sorkin of the New York Times lays out how Chapter 11 can work while saving General Motors and "merging in" Chrysler. GM would be reduced to four brands: Cadillac, Chevy, Buick (big in China) and Jeep. In my view, Ford should also ditch Mercury and be left with Ford, Lincoln and Volvo. Production capacity, the dealer networks and the employee base would be sized to make sense for the size of the industry today. The government would facilitate this process by providing a DIP loan for a pre-packaged Chapter 11 restructuring. As an American, I would be happy to see two, strong, restructured American car companies emerge on the other side of this crisis, rather than maintaining the three "zombie" companies that exist today.