Big day for the Big Three

BIG DAY FOR THE BIG THREE…. The Big Three automakers were on the Hill recently, with hat in hand, asking for a generous bailout package to save the American automotive industry. Lawmakers insisted that the companies craft a sensible business plan, demonstrating a vision for the future that’s significantly different from how the industry has been operating.

Well, today’s the day in which the Big Three will turn in their homework assignment to lawmakers. Most reports indicate that the automakers will emphasize dropping multiple car brands and models, thereby streamlining the business considerably. That, of course, will help save some costs, but won’t represent the fundamental restructuring that seems necessary.

So, what’s next? There’s no shortage of ideas. The LA Times’ Dan Neil recommends the feds simply purchase General Motors, run the company, and then sell it at a profit down the road. As we discussed at some length last week, here at the Monthly we have a provocative piece from Jeffrey Leonard, the CEO of Global Environment Fund, who argues that the way to save Detroit and revitalize the industry is to give car buyers, not car companies, a bailout.

Also today, The New Republic has an interesting piece from Case Western Reserve University economist Susan Helper and Wharton School management professor John Paul MacDuffie, both of whom have spent their professional lives studying the auto industry, with their own way forward. They endorse a federal bailout, outside of bankruptcy, with a series of targets for quality, efficiency, and productivity.

A better solution would be a process that preserves the most helpful elements of Chapter 11 bankruptcy while avoiding elements that might push the auto industry in the wrong direction. Under this scenario, the government would make available $25 billion in financing — similar to the “debtor-in-possession” financing that the private lending market would make available in a healthy economic environment. And, as in a normal bankruptcy, existing creditors would get heavily reduced payments (say, 30 or 40 cents on every dollar owed) along with equity. The creditors would take a hit, but they’d also have a chance to make back that money — and perhaps earn some more — if the companies rebound and stock prices rise.

But instead of letting a bankruptcy judge supervise this process, the government would appoint a special advisory committee to oversee the process… Under the scenario we envision, the committee would set goals and require the companies to report on progress quarterly, as a condition for obtaining additional funds. If a company missed its goals for, say, two quarters in a row, the committee would then provide only enough funds to prepare for liquidation or nationalization. (Leftover money could go to retraining workers and softening the blow of downsizing on communities.) […]

The goals for automakers to meet would start with the obvious “outcome” measures: To keep receiving funds, the companies would have to keep scoring well on familiar consumer tests, like the J.D. Power Initial Quality Scores that appear every June and the federal government’s crash safety experiments. But “input” measures would be just as important. The companies would need to demonstrate that they were finally collaborating with suppliers the way Japanese companies do–by documenting meetings, then hitting targets for the cost and quality of the parts they use. The automakers would have to sit down with the United Auto Workers, as well, in order to make sure all plants featured regular, institutionalized labor-management cooperation. […]

The government could set one final set of goals, not so much to address a lingering failure but to advance an important social goal: fighting climate change. Each company seeking funds could commit itself to exceed, by at least twenty percent, the recently passed Corporate Average Fuel Economy requirement of 35 miles per gallon by 2020. This requirement could be made contingent on the passage of a broader climate change bill that effectively kept gas prices high, to make sure consumers actually want such vehicles.

We’ll know more soon enough.

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