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Op-Ed Contributor
Let Detroit Go Bankrupt
By MITT ROMNEY
Published: November 18, 2008
IF General Motors, Ford and Chrysler get the bailout that their chief
executives asked for yesterday, you can kiss the American automotive
industry goodbye. It won’t go overnight, but its demise will be virtually
guaranteed.
Without that bailout, Detroit will need to drastically restructure itself.
With it, the automakers will stay the course — the suicidal course of
declining market shares, insurmountable labor and retiree burdens,
technology atrophy, product inferiority and never-ending job losses.
Detroit needs a turnaround, not a check.
I love cars, American cars. I was born in Detroit, the son of an auto chief
executive. In 1954, my dad, George Romney, was tapped to run American
Motors when its president suddenly died. The company itself was on life
support — banks were threatening to deal it a death blow. The stock
collapsed. I watched Dad work to turn the company around — and years later
at business school, they were still talking about it. From the lessons of
that turnaround, and from my own experiences, I have several prescriptions
for Detroit’s automakers.
First, their huge disadvantage in costs relative to foreign brands must be
eliminated. That means new labor agreements to align pay and benefits to
match those of workers at competitors like BMW, Honda, Nissan and Toyota.
Furthermore, retiree benefits must be reduced so that the total burden per
auto for domestic makers is not higher than that of foreign producers.
That extra burden is estimated to be more than $2,000 per car. Think what
that means: Ford, for example, needs to cut $2,000 worth of features and
quality out of its Taurus to compete with Toyota’s Avalon. Of course the
Avalon feels like a better product — it has $2,000 more put into it.
Considering this disadvantage, Detroit has done a remarkable job of
designing and engineering its cars. But if this cost penalty persists, any
bailout will only delay the inevitable.
Second, management as is must go. New faces should be recruited from
unrelated industries — from companies widely respected for excellence in
marketing, innovation, creativity and labor relations.
The new management must work with labor leaders to see that the enmity
between labor and management comes to an end. This division is a holdover
from the early years of the last century, when unions brought workers job
security and better wages and benefits. But as Walter Reuther, the former
head of the United Automobile Workers, said to my father, “Getting more and
more pay for less and less work is a dead-end street.”
You don’t have to look far for industries with unions that went down that
road. Companies in the 21st century cannot perpetuate the destructive labor
relations of the 20th. This will mean a new direction for the U.A.W.,
profit sharing or stock grants to all employees and a change in Big Three
management culture.
The need for collaboration will mean accepting sanity in salaries and
perks. At American Motors, my dad cut his pay and that of his executive
team, he bought stock in the company, and he went out to factories to talk
to workers directly. Get rid of the planes, the executive dining rooms —
all the symbols that breed resentment among the hundreds of thousands who
will also be sacrificing to keep the companies afloat.
Investments must be made for the future. No more focus on quarterly
earnings or the kind of short-term stock appreciation that means quick
riches for executives with options. Manage with an eye on cash flow,
balance sheets and long-term appreciation. Invest in truly competitive
products and innovative technologies — especially fuel-saving designs —
that may not arrive for years. Starving research and development is like
eating the seed corn.
Just as important to the future of American carmakers is the sales force.
When sales are down, you don’t want to lose the only people who can get
them to grow. So don’t fire the best dealers, and don’t crush them with new
financial or performance demands they can’t meet.
It is not wrong to ask for government help, but the automakers should come
up with a win-win proposition. I believe the federal government should
invest substantially more in basic research — on new energy sources,
fuel-economy technology, materials science and the like — that will
ultimately benefit the automotive industry, along with many others. I
believe Washington should raise energy research spending to $20 billion a
year, from the $4 billion that is spent today. The research could be done
at universities, at research labs and even through public-private
collaboration. The federal government should also rectify the imbedded tax
penalties that favor foreign carmakers.
But don’t ask Washington to give shareholders and bondholders a free pass —
they bet on management and they lost.
The American auto industry is vital to our national interest as an employer
and as a hub for manufacturing. A managed bankruptcy may be the only path
to the fundamental restructuring the industry needs. It would permit the
companies to shed excess labor, pension and real estate costs. The federal
government should provide guarantees for post-bankruptcy financing and
assure car buyers that their warranties are not at risk.
In a managed bankruptcy, the federal government would propel newly
competitive and viable automakers, rather than seal their fate with a
bailout check.
