This is crunch time for the US auto industry—and with good reason. The industry is facing a crisis unmatched since the Great Depression. When crises occur, the opportunity presents itself to achieve dramatic change. We’ve known for years that the American industry is in desperate need of dramatic change. So far it hasn’t been able to engineer it internally. Now a crisis presents an opportunity—indeed an obligation—for external forces to impose that change. By Karl Ludvigsen
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There’s no question that the US industry not only needs help but also deserves help. The companies and their lobbyists have eloquently and fairly depicted the many ways in which the three companies contribute to the North American economies. If America can’t make and market sophisticated products like cars it’s really in trouble. While direct aid to the industry’s suppliers seems a step too far, State and Federal help for the car makers is a good idea.
But not across the board. Assistance should only be provided to companies that are demonstrably viable.
That viability must be unquestionable and verifiable by a panel of independent experts who are competent to assess the business plans of all three American companies. Who could chair such a panel and help choose its members? Professor Gerald Meyers of the University of Michigan comes to mind.
Emphasis must be on the American companies. Clear demarcation must be established and maintained, legally and factually, between the North American operations of the Big Three and their overseas affiliates. Any help given by the US Government must be seen to take effect only in the NAFTA region.
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By GlobalDataThis demarcation will suit the Europeans, who are worried that any help given to arms of US companies there will be siphoned off to America. They’re also wary of assistance in the US that could create competitive distortion in Europe if it means that it insulates the European arms of the US companies from developments in their respective countries.
This approach is feasible because in general the foreign affiliates of the US auto makers have stepped up to the challenge pretty well. Where deals have been made to source products from abroad, such as Ford’s Fiesta from Europe, they can still take place—but at arm’s length. In fact with the strengthening dollar they’ll be advantageous for the companies abroad. Nevertheless this could be the time for Ford and GM to merge their European operations into a single company, a strategic move that would bring tremendous scale economies.
As to the auto companies themselves, it’s time for any funding entity to pick winners and losers. Across-the-board support would be a big mistake. Not all three companies are equally able to make use of funding to move forward.
Surprisingly Chrysler seems best poised to take advantage of financial support. After its split from Daimler it has already been through the trauma of reorganisation. It has scheduled major changes that drop some models and eliminate work shifts. Chrysler’s merits as a patient for life support must be viewed separately from its private ownership. The latter doesn’t disqualify it for assistance, especially in view of the fact that Chrysler is the least integrated of the three firms and thus the company of greatest importance to its network of suppliers.
Ford is in the middle ground. Under ex-Boeing man Alan Mullaly Ford has made progress, but there’s real doubt that it has the toughest people at the top. The political influence of the Ford family still works against the creation of a fighting-fit motor company. Ford is currently sitting on the cash cushion it created by mortgaging everything including the blue oval on its cars and buildings. To justify government funding Ford must put forward a plan that shows that it knows how to make money in a tough marketplace.
General Motors is the toughest pick of all. In its present state GM doesn’t qualify for funding. It hasn’t convincingly demonstrated its viability in difficult times, let alone in crisis mode. Backing the current GM would be throwing good money after bad. GM should only be given support funding if it presents to the world a completely new company with a business plan that passes an independent viability test.
GM can achieve this in two ways. One could be action by its board to carry out a much-needed cull of its top ranks. Who’ll run GM? There are capable people near the top of this once-great company who know what needs to be done and know how to do it. They realise that GM needs to be smaller, sharper and more flexible, less pompous and full of itself. The old days of unbridled optimism in the American industry are over, these executives know. These people need to be empowered to carry out immediate change.
The other way is to enter voluntarily into Chapter 11. With court protection GM can reorganise on more efficient lines. GM’s people have said that this isn’t a viable option. To be sure, there’s only one important example of an American car company that has revived successfully from receivership. This was Studebaker, which operated under protection from 1933 to 1935. It emerged successfully thanks to shrewd management and the loyalty of its suppliers and dealers. If it manifests an ability to grovel, to show some evidence of humility, GM could do the same.
From these three companies the US Government should pick winners and losers on the basis of the plans that they individually put forward. They should not be funded en masse. It’s clear that they won’t all go to the wall at the same time. In an ideal world—if that expression can be used in this crisis—one would fail. The other two would soon expand to take up the slack in a depleted market, then rebuilding to produce at a higher level when markets revive. In this scenario under present evidence GM is the company that most deserves to fail.
Some other factors must be considered. The unions must come to the party if they wish to retain some jobs in the auto industry rather than none. They have already shown flexibility but more will certainly be needed.
Speaking of the unions, another option could have long-term benefits to the US industry. What would be needed in the way of funding to take the extra burdens of pensions and health care out of the equation? To put American auto makers on an equal playing field with their foreign rivals producing in the US? This could be a solution that would benefit from Government intervention and support.
The bottom line is that action is needed soonest because delay will only strengthen current perceptions of an industry whose cars should not be bought because the companies making them will soon fail. Once such thoughts become widespread it will be very tough indeed to bring the industry back from the brink.
– Karl Ludvigsen
Karl Ludvigsen is an award-winning author, historian and consultant who has worked in senior positions for GM, Fiat and Ford. In the 1980s and 1990s he ran the London-based motor-industry management consultancy, Ludvigsen Associates. He is currently an independent consultant and the author of more than three dozen books about cars and the motor industry, including Creating the Customer-Driven Car Company
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