The Hindu Business Line : US auto makers prefer Congress to the Court

The US ‘Big Three’ car makers — GM, Ford, and Chrysler — have been making a strong pitch for a rescue plan, appearing before Congress committees and releasing full page ads in newspapers to influence public opinion.

They were given $25 billion (Rs 1,25,000 crore) not too long ago, tied to developing technology for more fuel-efficient vehicles. Now, they want the same amount to pay their normal bills, a kind of bridge loan till things get better.

Attack the root cause

GM is leading the crew requesting help and almost every industry analyst is arguing against it. They say the problems of the industry run deeper than just short-term cash flow. GM has all kinds of legacy costs that it has not been able to wriggle-free from. The unions have agreed to take over some of the health and pension liabilities of retirees, but other costs remain. Such as, agreements with the Union wherein workers draw almost full wages in a scheme called ‘jobs bank’. The company pays about 8,000 workers for sitting idle, just in case their services are needed. They draw about $70 (Rs 3,500) an hour (the average GM assembly line wage cost including benefits) compared to about $50 (Rs 2,500) an hour that the non-union foreign manufacturers pay their workers. GM has over 6,500 dealers (about 5 times as many as Toyota) that it cannot restructure or reduce because various state-level laws prevent it from doing so without paying the dealerships significant retrenchment charges.

The major argument against a Government-funded rescue plan raises the issue of rewarding poor management by allowing the incumbents to stay in place without forcing any change in their policies. The fact that these three manufacturers have lost market share since 1970, from 90 per cent to about 46 per cent now, should tell us that the public is seeking alternative cars. A bridge loan from Congress is not going to send new buyers their way. The companies are trying to address the symptoms without dealing with the root causes.

Bankruptcy law

So, the reasoning goes GM should be allowed to file under the Bankruptcy Code. (Although the problems at Ford and Chrysler are not so severe, they are also in line behind GM waiting for a hand-out and the same logic applies to them also.)

The US bankruptcy law allows a company to restructure under the protection of the court, without change in management, provided their plan is approved by a creditors committee. This will force the company to renegotiate many of their commitments, and allow it to emerge leaner and more able to compete, while obtaining fresh loans that assume superior debt status. It would also give the management the courage to rid itself of several brands that are losing money, but have been retained because, well, they have always been there.

The argument that the companies have been making against the bankruptcy option is that consumers will be reluctant to buy a product not knowing if the company will survive to adhere to its warranties. But auto is not the first case of an industry that produces a product requiring after-sales service that has been in bankruptcy. Under Chapter 11 of the US Bankruptcy Code, one of the most liberal of such facility in the world, the debtor does not even need to show liabilities to be greater than assets. In the past, airlines have used such bankruptcy filings to break stringent union contracts.

Only a rescue of 3 cos

With the financial sector in the US having convinced the Government that it is too big and too important to be allowed to suffer, the auto industry is making the same point. The ‘multiplier effect’ makes it command a lot of attention. It is argued that for every job in the auto industry, about seven are employed elsewhere, at parts suppliers, dealerships, and so on. The US auto manufacturers collectively employ about 240,000 people.

It should be clear to all that the rescue is not of the US auto industry, but of three US manufacturers. To understand that, look at what the foreign manufacturers have done locally.

There are 12 of them, who make vehicles at various plants in the south, far from the Detroit heartland of the domestic industry. They employ about half the number the domestic industry does, have newer and more efficient factories, higher productivity, pay lower wages, enjoy growing market share, and are not asking for help.

The auto industry somehow grabs the psyche of the nation. It is not just in the US, but governments in Europe have also been listening to their auto industries. Germany and France are pledging to aid their auto manufacturers and the UK is also working on a rescue scheme.

The devil is in the details. Some would call it credit guarantees, others will provide soft loans for technology improvements, or provide loans for car owners to trade in old cars and buy new fuel-efficient ones, and so on. These are the industrial equivalents of making farmers dig canals during times of drought.

The US Congress was unimpressed with the initial presentations of the companies and asked them to return with more concrete proposals. I wonder whether this was just Congress buying itself more time to come up with a justification to help the industry. The Democratic majority in Congress is not going to turn them away, especially with a President-elect who has expressed support for the industry and concern for its problems.

There is also the glamour of the industry that is considered the core of American manufacturing. There are not many of those left. It is also a romantic product about which songs are written.

Americans have about one vehicle for every person of driving age (India has about one for every 100 persons). It is a product that touches every family deeply, for it provides transportation, and the make and model are said to speak the personality of the individual. Know me, not by the friends I keep, but by the car I drive!

Mounting pressure

If the rich folks in the white collar financial services industry could be approved a $700 billion bailout, why not the poor, blue collar workers of the auto industry? So, you can be sure GM and the other US auto makers will be given help very soon. None of the elected representatives want the blame of not having lifted a finger to help the companies.

There is also the pressure of the lobbyists and other influential interlocutors for the industry. For example, take Cerberus, the private equity firm that bought 80 per cent of Chrysler from Daimler Benz and is likely to lose a lot of money if Chrysler goes under. Surely, members of the board of Cerberus, such as John Snow, former US Treasury Secretary, who is the Chairman, and Dan Quayle, former Vice-President under Bush, the Elder, who is a Director, are working the phones calling their old friends in Government.

The executives of the Big Three are presenting their revised plans to Congress even as I write this. They will promise to restructure, cut costs, and cap executive pay. In return, Congress will advance large sums of money, and put in clauses that the companies will have to restructure, cut costs, and cap executive pay. In short, we will see the Congress behaving like the judge and the creditors committee of the bankruptcy court rolled into one.

Oh, and just to be different, Congress will wag its finger at the companies, and hint that Congress would keep the option to convert the debt into equity (to please the fiscal conservatives into believing that the government can make money on the deal if the companies revive). They should add one more clause.

That all members of Congress say a prayer every morning hoping these companies revive, while they get ready for the next industry that is going to come knocking on their doors.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. blfeedback@thehindu.co.in)

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