Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

06 December 2008

Saving the Big Three II: Accountability

[For a new index to my posts on the auto industry, click here.]

A previous post laid out why a bailout of our auto industry is likely to fail without a radical reduction in legacy costs, preferably by means of rational national health-care and pension programs. That, it appears, is not going to happen, at least not anytime soon. Instead, Congress appears ready to do whatever it can now to avoid the “sky is falling” syndrome that the Big Three’s CEOs have self-servingly predicted.

It’s not hard to understand why Congress, in the worst “recession” in three generations (dare I say “depression”?), wants to avoid losing millions more jobs in the already hardest-hit states. But if Congress is going to put taxpayers into the business of making cars, it should at least be as smart as a new graduate with a bachelor’s degree in business.

No one—not even our hypothetical newly-minted graduate—would invest in a business in our auto industry’s present shaky condition without taking a few minimum precautions. Stripped to their essence, they are: (1) a short leash, (2) new management, (3) new vision, and (4) accountability.

1. A short leash. The Big Three now say they want $34 billion, but they don’t need it all right away. To avoid wasting money, and to provide time for planning and reflection, Congress should give them only what they need for two months—until the new Congress convenes and the new administration takes office. Since Ford says it doesn’t need any cash right now, that probably boils down to about $ 4 billion each for GM and Chrysler. Congress should tell all three they won’t get more until they satisfy all of the following criteria.

2. New Management. It’s nice that all three CEOs agreed to reduce their enormous salaries to $1 per year, because that’s what they are worth. Not only are these the folks who drove their businesses into the ground. They also were dumb enough to fly to Washington from Detroit separately in private jets, and to demand bailouts for a failing industry, from a skeptical Congress, without business plans for recovery. They must have confused themselves with Wall Street banks, which make nothing but money and don’t encounter technological or market risk. If so, they were (as President-Elect Obama in his inimitable understatement might say) mistaken.

These are folks who have zero strategic vision for the future of their industry. Their idea of vision is to make big expensive cars while gas is cheap, and now to wait until gas gets cheaper so they can do it again. They didn’t get it then and don’t get it now.

In a colloquy with Gwen Ifill on the Lehrer News Hour, Alan Mullaly of Ford three times insisted that Ford would save itself by continuing to make small, medium and large cars. Apparently, with gas prices falling, he wants to continue to produce gas-guzzling dinosaurs like the Ford Expedition, which no one needs unless he runs a construction company or has six sons who play football. His “plan” for recovery is downsized business as usual, i.e., the same strategy that got the Big Three in this mess.

He and the other two should go. If there are no consequences for failure, at least it should not be repeated.

Congress need not micromanage their replacements. All it need do is require that the Big Three’s directors pick replacements committed to a radically new vision for the industry. It wouldn’t hurt if Congress required approval by a blue ribbon panel of independent industry analysts, economists, and labor experts. Several lower layers of management should go also, but new people at the top, if properly selected and motivated, probably will see to that.

3. New Vision. If the industry is to recover, it must do at least three things. First, it must make its domestic cars more like its foreign cars in size, fuel efficiency and quality. As my own personal experience attests, the cars that at least one of the Big Three (Ford) markets abroad aren’t bad. The cars that all three make here should be just as good.

Congress might require that each maker import a substantial percentage of its sales from its own foreign factories until it has had a chance to retool its domestic plants. Why any U.S. firm should produce quality products abroad and overpriced junk here at home is puzzling, to say the least. But Congress need not solve that mystery; it need only require that the trend be reversed.

Second, the industry must commit to radically better fuel economy. Dubya wants to give the industry previously allotted efficiency money with no strings attached, but that’s a recipe for extinction. Gas prices will not stay low if the economy recovers, and recovery is the whole point of the exercise. Congress should demand radical improvements in efficiency as a condition of continuing relief. The bar should be set higher, not lower, than current law requires.

Third, Congress should demand innovation. Before receiving the next installment of relief money, each firm should have concrete plans for: (1) plug-in hybrids, (2) cars that get more than 40 miles per gallon, (3) vehicles that run on compressed natural gas, and (4) alternative power sources such as fuel cells. Plans for all but (4) should be for production by a specified date, not mere prototypes or “concept cars.” Congress might also consider requiring flex-fuel cars that can burn 85% or higher ethanol blends, but only after repealing its ridiculous tariff on cane-derived foreign ethanol. (For the reasons, see posts 1 and 2).

As for GM, Congress should require it to produce the Chevy Volt in quantity by late summer of 2010, i.e, at the normal time for new-model introductions. Of all the products now in the pipeline, that is the one most likely to save the industry and promote energy independence. It is also the only product in half a century (other than gas-guzzling dinosaurs) with which our industry has been ready to beat Toyota to market. The Volt can be made to succeed with a little imagination.

4. Accountability. Finally, Congress should make one thing clear at the outset: no more money without accountability. That doesn’t mean congressional micromanagement. Far less does it mean having lawyers and lobbyists nitpick a detailed set of numerical milestones. Congress should set general milestones, like those in the vision above, and assess their satisfaction at public hearings, with the aid of a blue-ribbon panel of experts. If the experts’ thumbs go down, no new money. No excuses.

* * *

Although many smart people are skeptical, Congress is probably right to invest a little money in an attempt to save our domestic industry. Under current conditions, ten billion or so qualifies as a little money.

But Congress needn’t be stupid about it. It need not, and should not, invest billions just to delay the dinosaurs’ extinction by a few months. Congress should make an effort, with the aid of experts, to impose conditions that will significantly increase the Big Three’s chances of survival, notwithstanding residual legacy costs. Keeping current management in place does not meet that criterion.

Even with the best of plans, the industry will continue to hemorrhage jobs and money for some time. But perhaps Congress can reduce the job losses and encourage a leaner, better industry to emerge. It’s worth a try, but not without strict conditions stringently enforced. Holding most of the bailout money until late January will give Congress and the new administration time to formulate intelligent conditions.

Besides humanitarian concerns, there is a national-security rationale for a rescue plan. If some day we have to manufacture tanks to defend our country, we don’t want to have to ask Toyota to do so.

So the Big Three may be worth saving, but not with current management or their current “downsized business as usual” plans. We need bold new management with a bold new vision for the industry. Anything less is just kicking the bankruptcy can down the road.


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