Tuesday, November 18, 2008

Should Detroit Declare Bankruptcy?

I own a GM car.  It is a 21st Century beast however, built in Sweden on a platform that is shared by Chevrolet, Saturn, Opel and others.  It is a good car, I have no complaints, well designed, fairly well built (though a far cry from the quality that Japanese car manufacturer's produce) and wonderfully fuel efficient yet with plenty of zip thanks to a smallish four cylinder engine that is turbocharged.  In short, it should be a pretty darn good car for toady's marketplace.  But sales of my car in the US have been abysmal.  And herein lies the problem with GM in my view.  Too many brands, too many dealers, too many cars - all leading to not enough focus on a core set of cars and research supporting new innovation.  

It is tempting to blame the relics of the strong labor movement for GMs downfall, as I have seen done many times in the last few days in the press, but closer scrutiny reveals that this is more a function of the past labor contracts and not the current labor contracts that are pretty much in-line with those of foreign manufacturers that are doing business in the US (though the effect of these contracts is still lagged). So don't blame labor for this mess.  GM's web site lists 13 brands!?!  Apparently they have over 7000 dealers to Toyotas 1000, this is just too many irons in the fire, no wonder they have not been able to remain dynamic and competitive.

Many observers are saying that Detroit's problems are of its own making and the cure is Chapter 11 bankruptcy.  This would allow them to renegotiate union contracts, get out of pension obligations (at great expense to the US taxpayer presumably), and renegotiate with creditors.   I was of this opinion at first blush.  The problem with this solution is that the traditional device of this type of bankruptcy is the ability (under chapter 11 protection) to secure commercial credit, and this type of credit is not now available - meaning that chapter 11 would quickly turn into chapter 7 and the liquidation would begin.  Perhaps this is all for the best, but in a time when the economy is in a deep, deep nosedive and shedding jobs like crazy the hit that this would deliver may just be a knock-out blow.    I am fairly well persuaded by this line of thought.

But maybe there is a middle way.  Perhaps a government bailout of GM, for example, could be a part of a chapter 11 filing, in the form of a credit guarantee.  Or perhaps some of the provisions of chapter 11 could be imposed on a bailout (insisting on a renegotiation of labor contracts and pensions, for example).  Why must it be a $25 billion hand out or a potentially disastrous chapter 11?  Let's provide them the opportunity to shed dealers, discontinue brands (which is hard with outstanding dealer contracts) and refocus on a core set of products.  

I believe preventing the collapse of Detroit is vital to our efforts to dampen the blow of the economic crisis right now, but lets do it in a way that leaves Detroit dynamic and competitive when it is all over.

1 comment:

Gregory said...

I like your middle-ground approach to this issue. Why are we looking for either-or solutions when a partial solution is actually better than both extremes (as is usually the case anyway).