A road map for Detroit
Don't scrap the US auto industry. Overhaul it. Here's how.
San Francisco — When your car is burning oil, you have a few choices. Buy quart after quart and watch your money go up in smoke. Scrap it and try to manage without. Or overhaul the engine and keep it for the long run.
As it stands, the $25 billion US auto industry bailout championed by congressional leaders amounts to another quart of oil. The only jobs it may save – temporarily – are those of executives, without forcing real accountability for management and unions. Hope, maybe. Change? Not a chance.
But Republican resistance to intervention – the scrap-heap strategy – amounts to principle (or dogma) divorced from reality. With 2.5 million American jobs at risk, from dealers to admakers, we'd abandon the industry at our peril.
Consider a third way: Provide $25 billion in federally guaranteed loans only after company management seeks Chapter 11 protection, to finally and fundamentally restructure their operations, and prepare to compete.
In other words, offer the carrot only after the stick.
The economic stakes
The US has lost more than 1 million jobs this year, for a total of 10 million unemployed – and that counts only those still looking. Hundreds of thousands of auto-related jobs in Michigan, Ohio, and Indiana have already vaporized.
Detroit: the pheasant city?
Hurricanes don't hit Detroit, but the Motor City looks as if it's been devastated by a slow-motion Katrina.
Block after block of crumbling and burned-out homes and businesses has literally become an urban hunting preserve, with head-high weeds offering what the Detroit Free Press calls "ideal roosting, nesting and feeding covers" for wild pheasant. Hunters just need to watch out for open manholes and packs of aggressive feral dogs. Pheasant hunting season reopens in downtown Detroit (no kidding) on Dec. 1.
You could romanticize this surreal return to nature if it weren't for the immense human costs of Detroit's decline – the disastrous consequence of business and social failure.
Companies, it turns out, are inseparable from their communities. Neither prospers without the other. Detroit's schools don't produce the skills relevant to competitive manufacturing – and its businesses and unions have been locked in a fatal wrestling match of mutually assured mediocrity.
Now, we've come to the point where the companies want the larger community's help.
Don't just bail – rebuild
If the industry were to start over today, it would have enviable assets: 100 years of know-how. Real progress in automation and productivity. A nation passionate about cars, and steeped in innovation.
The reforms Detroit needs may sound radical, but they're not unreasonable. And they're essential if we want to avoid making a $25 billion bridge loan to nowhere:
•Offer the best "retooling assistance" available: Chapter 11 protection from creditors. That will provide both the time and the incentive for real restructuring and stable job creation.
•Fill GM's board with enough seasoned aerospace, electrical engineering, and technology hands that they make up a majority – and have them determine how much of current management stays on.
•Give management the right tools to renegotiate existing debt and get out from under excessive dealer contracts and expensive leases for unused facilities.
•Amp up the plug-in hybrid Chevy Volt. The company's future depends on its ability to master technology that doesn't defy the laws of nature. Which means…
•Shut down Chevy's hydrogen-car fantasy. Beyond the untold billions needed for retail hydrogen infrastructure, hydrogen is the most codependent atom on earth (it hates to be alone). The electricity needed to pry it from water far exceeds its energy as a fuel.
•Scale down the consumer truck and SUV businesses, and consolidate product lines. (Quick: What's the difference between Pontiac and Buick?) Shut down excess plant capacity, now estimated at four million cars a year.
•Don't allow mergers. A long history of failed ones (remember Daimler-Chrysler?) shows that more scale is the last thing they need.
•Fully fund unemployment insurance and healthcare for all affected workers – but make those benefits contingent on enrollment and success in retraining programs, so that they get the skills relevant to better-paying, more secure jobs.
•Then, provide the $25 billion in loan guarantees, with the government first in line to be paid back – in exchange for company stock with voting rights and board seats, to be held by a public-interest troika: a new "auto czar," plus the secretaries of Labor and Commerce.
Customers will initially be leery of purchasing anything as significant as a car under the stigma of bankruptcy. But revitalizing board and executive leadership – and funding and guaranteeing warranty service through recognized national service chains – will send the right signal while they reorganize.
How to get Republicans on board
Congress may vote as soon as Wednesday on legislation. House Speaker Nancy Pelosi (D) of California and Senate majority leader Harry Reid (D) of Nevada could generate more support across the aisle by ensuring restructuring and accountability along with any loan guarantees.
Republicans, who would consider a Chapter 11 filing more adequately bracing and focusing, might sign on in greater numbers – perhaps enough to get it done this week.
Signs of renewal
It turns out that what we make – profitable products, persistent and happy customers, personal income – all depends on what we know. Which means that education and retraining of the local workforce is the most pivotal partnership the public sector has to make with business.
Drive just two hours west of Detroit, and you'll find the effervescently named Kalamazoo, which now appears, remarkably, to lead the nation in per-capita job creation. A long series of business expansions and arrivals here have been prompted by the town's vision for "The Education Community." Robert Miller of Western Michigan University announced at a panel discussion this month: "This community is not going to participate in the recession." I wouldn't bet against him.
Area employees are expected to volunteer four hours a month in learning-related service projects. A scholarship program called "The Promise" has become a business catalyst for improving schools and local colleges, bettering quality of life in low-income neighborhoods, building employer and investor confidence, and creating jobs.
"Don't sell it as a scholarship program," Ron Kitchens, CEO of the economic development agency there, told The Kalamazoo Gazette. "It's about building infrastructure for the future. If new job creation is at the top of the pyramid…, the base is education." That is as true for unemployed auto workers today as it will be for their kids.
Reject false choices
During the summer of $4 gas, consumers sent the automakers a clear message: We don't want what you're selling. In response, Chrysler offered a $2.99 gas guarantee. While the price of oil has dropped, most observers expect that it will climb again.
For Congress, the choice being debated is a false one: Subsidize failure through a bailout of existing management, under unmanageable contracts and constraints. Or let the automakers crater, and let all involved with them suffer.
Voters are incensed by the Wall Street bailout because it has done everything but enforce accountability to the public.
There is a way, if there's the will, to demand and reward reorganization and management accountability while we commit public money to save the US auto industry – and give our workers the training and education they need to succeed.
• Mark Lange is a former private equity executive and presidential speechwriter.