Friday, November 28, 2008

Professor Morici: "Big 3 Bankruptcy Now, Not Later"

From Maryland Professor Peter Morici's Senate testimony on the Big Three bailout (click arrow above to watch video):

Circumstances are dramatically different today than in 1979 when Chrysler received assistance from the federal government. In those days, the challenge at Chrysler was to become competitive with Ford and GM, and Lee Iacocca had a clear plan to achieve that objective and succeeded. Today, the Detroit Three, though improved in productivity and with lower labor costs thanks to concessions from the United Auto Workers, are still not as competitive as the Japanese transplants.

Margins in automobile manufacturing are thin and there is no such thing as being "almost as competitive." Either a company is competitive or it is not—either it accomplishes the cost structure enjoyed by Toyota and Honda, operating in the United States, or it will continually cede market share and run into financial difficulties.

By assisting the Detroit Three, Congress can delay one or all of them going through Chapter 11 reorganization but sooner or later one or all will face reorganization. The communities and suppliers dependent on these companies would be better off going through that process now than by delaying it with assistance from the federal government.

Without a new labor agreement that brings wages, benefits and work rules in line with those at the most competitive transplant factories, and without reduced debt and other liabilities, the Detroit Three will continue to lag in product innovation and field too few attractive new vehicles, because their higher costs, debt and other liabilities require them to spend less on new productive development than they should. Also, they are inclined to field products with less desirable content to compensate for higher costs. As consumers find vehicles made by Japanese and other transplants more attractive, like those imported from Korea and eventually from China, the Detroit Three will cede market share of one or a few percentage points each year.

If Chapter 11 is put off, the successors to GM, Ford and Chrysler that emerge from a bankruptcy reorganization process will be smaller and support fewer jobs than if these companies endure this difficult transition in 2009. More jobs can be saved among GM, Ford and Chrysler and their suppliers if bankruptcy reorganization is endured now than in the future.


At 11/29/2008 12:13 AM, Blogger @sethstorm said...

As consumers find vehicles made by Japanese and other transplants more attractive, like those imported from Korea and eventually from China

What to say of those who are irreversibly pro-Detroit that are a large enough block not to ignore? That is, they buy Detroit because they cannot get what they want anywhere else.

At 11/29/2008 12:23 PM, Anonymous Anonymous said...

Very informative i loved the parts where chris dodd looks bewildered lol!

At 11/30/2008 4:35 PM, Blogger The Daily Pander said...

If the top managers (say, ranked by salary) of GM, Ford, Chrysler, the UAW and each member of Congress who advocates a non-bailout bailout puts at least 25% of his or her net worth into common shares of the Big 2.5 then I, speaking strictly for myself, will support government financing. If not, then that's all anyone really needs to know about their prospects.


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