November 19, 2008
Let Detroit Go Bankrupt
By MITT ROMNEY
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
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.
Mitt Romney, the former governor of Massachusetts, was a candidate for this year’s Republican presidential nomination.