Saving Detroit

As all (sports) eyes converge on Detroit this weekend for the NCAA Final Four, all (economic) eyes will also be converging on the city’s “brand” industry: autos. Today, the White House will announce details of its auto industry survival package. But leaks and actions have already outlined much of the plan, including the firing GM head Rick Wagoner (see stories in the Washington Post, New York Times, the Wall Street Journal and Politico). The Administration has rejected the company submitted plans and essentially said “try again.” According to the White House fact sheet:

  • Viability of Existing Plans: The plans submitted by GM and Chrysler on February 17, 2009 did not establish a credible path to viability. In their current form, they are not sufficient to justify a substantial new investment of taxpayer resources. Each will have a set period of time and an adequate amount of working capital to establish a new strategy for long-term economic viability.
  • General Motors: While GM’s current plan is not viable, the Administration is confident that with a more fundamental restructuring, GM will emerge from this process as a stronger more competitive business. This process will include leadership changes at GM and an increased effort by the U.S. Treasury and outside advisors to assist with the company’s restructuring effort. Rick Wagoner is stepping aside as Chairman and CEO. In this context, the Administration will provide GM with working capital for 60 days to develop a more aggressive restructuring plan and a credible strategy to implement such a plan. The Administration will stand behind GM’s restructuring effort.
  • Chrysler: After extensive consultation with financial and industry experts, the Administration has reluctantly concluded that Chrysler is not viable as a stand-alone company. However, Chrysler has reached an understanding with Fiat that could be the basis of a path to viability. Fiat is prepared to transfer valuable technology to Chrysler and, after extensive consultation with the Administration, has committed to building new fuel efficient cars and engines in U.S. factories. At the same time, however, there are substantial hurdles to overcome before this deal can become a reality. Therefore, the Administration will provide Chrysler with working capital for 30 days to conclude a definitive agreement with Fiat and secure the support of necessary stakeholders. If successful, the government will consider investing up to the additional $6 billion requested by Chrysler to help this partnership succeed. If an agreement is not reached, the government will not invest any additional taxpayer funds in Chrysler.
  • A Fresh Start to Implement Aggressive Restructurings: While Chrysler and GM are different companies with different paths forward, both have unsustainable liabilities and both need a fresh start. Their best chance at success may well require utilizing the bankruptcy code in a quick and surgical way. Unlike a liquidation, where a company is broken up and sold off, or a conventional bankruptcy, where a company can get mired in litigation for several years, a structured bankruptcy process – if needed here – would be a tool to make it easier for General Motors and Chrysler to clear away old liabilities so they can get on a path to success while they keep making cars and providing jobs in our economy.
  • A Commitment to Consumer Warrantees: The Administration will stand behind new cars purchased from GM or Chrysler during this period through an innovative warrantee commitment program.
  • Appointment of a Director of Auto Recovery: The Administration also announced that Edward Montgomery, a top labor economist and former Deputy Secretary of Labor, will serve as Director of Recovery for Auto Workers and Communities. Dr. Montgomery will work to leverage all resources of government to support the workers, communities and regions that rely on the American auto industry.

(See also other key documents: the Warrantee Commitment Program, the GM Viability Assessment and the Chrysler Viability Assessment.)
The analysis touches on a couple of points I’ve made earlier. Concerning technology, the assessment views the technology transfer from Fiat to Chrysler as a positive step. However, even with the Fiat deal, “Given Chrysler’s limited financial resources, it can not make the necessary catch-up investments in R&D required to refresh its portfolio and bring it up to par with its competitors.” As damning, “Chrysler also lags its competitors in terms of manufacturing flexibility.”
The assessment also sees GM’s movement toward green technologies as positive. However, with respect to the Volt:

GM is at least one generation behind Toyota on advanced, “green” powertrain development. In an attempt to leapfrog Toyota, GM has devoted significant resources to the Chevy Volt. While the Volt holds promise, it is currently projected to be much more expensive than its gasoline-fueled peers and will likely need substantial reductions in manufacturing cost in order to become commercially viable.

They also see GM getting rid of Saab, Saturn and Hummer as a positive. As I’ve argued before, I hope that Saturn is spun-off and not shut down. It started as an innovative company and should be given a chance to fulfill that potential. (In case you missed it, Saturn has been running “we are still here” ads during the NCAA basketball games.)
The last part of the plan may be the most telling. It appoints a Director of Recovery for Auto Workers and Communities changed with dealing with the economic dislocation. As I’ve noted before, the auto industry task force has to missions: creating a new industry and mitigating the effect of the demise of the old industry. In my earlier comments, I thought those two missions were an either/or. Now I am beginning to believe they are really a both/and. Creating the new industry will require mitigating the negatives. It sounds like auto taskforce has laid out a plan for that latter. It remains to be seen if they can pull off the former.

By the way, on the Final Four: Go MSU! As a diehard Wolverine, giving any credit to my across state rival is tough. But Big 10, and especially Michigander loyalty wins out.

One thought on “Saving Detroit”

  1. Chrysler is beyond saving. Being behind in both manufacturing flexibility AND technology simply dooms it. Let someone else pick up the slack.
    GM cannot be saved until the UAW is brought into line.


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