What Should Be Done About the U.S. Auto Industry?

Warren Buffet and I are in total agreement that bankruptcy would be a wasteful, totally inefficient way to force the imposition of a new business model on U.S. automakers.

opaThe plight of U.S. Auto manufacturers, General Motors, Ford and Chrysler, and inaction by Congress to date on the industry’s collective request for a loan of $25 billion to stay afloat during these economic hard times has been a topic of discussion in my economics classes lately. My students have offered various opinions on what should be done, but almost all agree that something should be done. After all, they point out; billions have already been given to the financial sector to little or no avail. They ask, isn’t the manufacturing sector worth saving too?

My students seem to sense that failure to act and to act soon, letting this other linchpin of our domestic economy fail altogether, would be reckless and would, at a minimum, add insult to injury to the economy. In my own opinion, Congress should act and do so soon. Abandoning General Motors, Ford and Chrysler at this critical time would seal their fate — bankruptcy — which would give foreign automakers already in this country just the opening they need to permanently dominate the “world” market for automobiles. In addition, it would cost America millions of jobs. The unemployment these workers would draw following the industry’s demise could easily cost the government more than the $25 billion for which the automakers are initially asking.

So… it’s a pay-me-now or pay-me-later situation, right? But, how should Congress act, and what kind of package can the Democratic leadership in the House put together that would have sufficient minority support in the Senate to avoid an almost certain veto from President Bush? Can the automakers hold-on until after Obama’s Inauguration on January 20th 2009? Maybe, just barely.

One of my personal heroes, an important economic advisor to the Obama Transition Team, is Warren Buffett. Buffett, if you don’t already know, is a legendary American investor, businessman, and philanthropist. He is the largest shareholder and CEO of Berkshire Hathaway and was ranked by Forbes during the first half of 2008 as the richest man in the world with an estimated net worth of $62.0 billion. Often called the “Oracle of Omaha”, Buffett is noted for his adherence to a value investing philosophy and for personal frugality despite his immense wealth. Buffett is also a notable philanthropist. In 2006, he announced a plan to give away his fortune to charity, with 83% of it going to the Bill & Melinda Gates Foundation. In 2007, he was listed among Time‘s 100 Most Influential People in The World. So, what would Buffet suggest?

In a recent interview with FoxBusiness, Buffet said, “I would drive a deal like I would drive myself if I were buying a business.  And I think, I would say there’s plan A or plan B.  And if you don’t want to do it this way, you know, then… take bankruptcy. I would make the CEOs buy in.  I would say, you know, the United States government is willing to put in X dollars, but we’re going to have you put in a certain percentage of your net worth right along with us. We’ll give you more upside, but you’re going to lose if we lose.”

I like that approach, making the industry’s executives buy-in, but rather than allowing them the choice of taking bankruptcy, which they just might do rather than risk their personal fortunes, I would propose a middle road. How about buying them out? Yes, rescuing the industry by partially nationalizing it, actually buying into the business as Buffet alluded to in his interview, at least temporarily. Sound un-American? Smack of socialism? Yes, but desperate situations call for desperate measures. The U.S. Treasury has already established a president for this by recently purchasing stock in the beleaguered insurance giant AIG.

Warren Buffet and I are in total agreement that bankruptcy is a wasteful, totally inefficient way to force the imposition of a new business model on U.S. automakers. But I think it is impractical to expect industry executives to put their personal nets worth into the companies they currently run. They all know, as many in Congress seem to know, that their money, and ours if given in a no-strings-attached bailout, will be used up in no time supporting liabilities on existing union contracts and on retired employees’ pensions. Who knows how long the current recession will last and how long it will be before Americans start spending again? So, unless their companies do go through bankruptcy, is there any option left to us other than nationalization?

With representatives of President Elect Obama’s Car Czar, Professor Daniel Tarullo of Georgetown University, temporarily providing direction and oversight on the industry’s Boards of Directors and with the United Autoworkers’ (UAW) union cooperating fully (perhaps the only way to avoid bankruptcy and collapse of the union altogether), a more practical way to save the industry might be possible. A pay system based on company performance from the top down would have to be implemented with union contracts renegotiated in the process. Everyone, in fact, would have to sacrifice with base salaries and benefits set to the same levels as those offered by Toyota and Honda with quarterly or year-end bonuses paid only if the companies do well. This way, everyone involved would be motivated to save company money and to be more productive and more innovative. This way the playing field would be leveled giving U.S. manufacturers an equal chance to compete in the new international marketplace and, this way, the government might just get the taxpayers’ money back someday.

I invite your comments regardless of your views.

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Published in: on November 22, 2008 at 6:53 pm  Comments (6)  

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6 CommentsLeave a comment

  1. Ho, ho, Kent, I loved your last paragraph. Way to go!
    Personally, I do not wish to see the Big 3 go into bankruptcy. I am very fond of anything that is American since American made products are really hard to find these days. After saying that, I do opt for a loan based on the principals listed in your last paragraph. BTW, who are these people that are running companies into the ground? They might have MBAs or whatever but to me they are just a bunch of greedy clowns—out for themselves. As for the market correcting itself, just remember, someone should be watching the fox when he/she is in the hen house.

  2. I was beginning to worry about you as had not heard from you lately.

    The last paragraph says exactly how I feel. How do we make the large companies stop spending so much money foolishly with large salaries and bonuses for the top brass as well as the lavish trips and parties? I know they think this is the way companies have always done it so why change. Guess we will have to wait and see how it all ends while many of us are loosing our life savings in the stock-market.

    Keep up the good work.

  3. I agree with the principles outlined by Warren Buffett. Obviously, he’s someone who walks the walk and talks the talk. I’m also in favor of the top CEO’s, etc. putting their wallets where their mouths are. They should be obligated to put some of their big paychecks into the mix as well. What’s that saying, “Put your money where your mouth is.”
    Keep up the good work and Happy Thanksgiving.

  4. Kent- You and Buffet should stop your wishful thinking. No politician- democrat or republican- is going to force the harsh , but necessary, terms on union or management. They do not have the courage. Only a bankruptcy judge has the guts to do what needs doing, so we should get on with it. Regards and happy thanksgiving. -john-

  5. You may well be right, John, but the UAW and management of Chrysler did make some concessions when Congress loaned them money back in the 70’s. Then too, the Democrats are feeling pretty powerful with the mandate voters have given them the last two elections. We’ll see.

  6. Though I hate the idea of Government bailouts I do believe they are necessary in this case.

    Lately I have been toying with the pros and cons on the issue. One idea sticks out to me.

    Why arent we making these auto makers bring back their manufacturing plants back onto US soil? I’m honestly not sure where their major manufacturing plants are (a google search reviled that Ford does product its products here in America)

    It seems that would be logical for them to generate a few jobs here in America if we bail them out.

    Not by any means a HUGE and all encompassing fix to anything, but I think it would help.

    Just wanted to throw that out there.


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