Let Detroit Go Bankrupt

“Let Detroit Go Bankrupt” is an article written by Mitt Romney in the NYTimes on the 18th of november, 2008.  Once upon a car has recently been looking at the near bankruptcy of Ford and GM due in large part to issues brought up by Mitt Romney in this article.  Obviously the issues faced in 2005 differ significantly from what was occurring in 2008 with the collapse of the financial industry and subsequent severe worldwide recession.  However, there are striking similarities between the two circumstances and possible even an argument for the case that if Ford and GM had filed for chapter 11 in 2005, then the companies would have fared much better during 2008.

Romney writes this article arguing for the government to not intervene in the United States auto industry until after the Detroit big 3 have filed for bankruptcy.  If the auto industry is let alone then filing for chapter 11 bankruptcy will allow it to restructure thus dumping large fixed cost items (pensions and healthcare benefits), which would streamline efficiency and allow the firms to compete in the global market.  As Vlasic points out in his book, Romney highlights the cost disadvantages felt by US firms relating to labor costs, legacy costs, and exorbitant retirement benefits, which all contribute to significant restraints in competing within the global automobile market.

The article also discusses the inability to create innovative, stylish, and marketable cars by US auto firms, and cites poor management as the key player in this problem.  Perhaps, Romney’s discussion of ineffective executive leadership parallels the themes discussed by Vlasic of a culture among these firms that bred intra-company rivalry, an archaic hierarchical corporate structure, and segment heads driven by short term goals that benefit the individual rather than the company itself.  Romney offers his opinion that in order to better the American auto industry, firms should substantially lower executive pay and perks (no more private jets and luxurious getaways), focus on long term goals as opposed to meerly beating quarterly analyst estimates, and become more vertically integrated such that they work with dealers and suppliers rather than seeing them as an obstacle.

Romney ends his article by answering the question he raised initially, if the government should not save the US auto firms from bankruptcy then what part should they play?  The article answers this question with rather broad strokes, but this is as to be expected in an op-ed piece.  Romney believed that the government should let the US auto firms file for bankruptcy with the promise of federally guaranteed loans in order for them to have cash on hand for restructuring and the continuation of their respective businesses in the meantime (i.e. pay suppliers etc).  The government should also significantly increase its budget in energy research as this is the most likely future for the long term profitability of the US as a whole and in particular the US auto industry.  In particular, research should be directed toward investigating better fuel efficiency, the viability of alternative fuel sources, and energy policies in general.  I found this article to be an interesting look at the auto industry, obviously through the eyes of a politician whose own agenda and political ideology must be taken into account when analyzing the article as a whole.

2 comments to Let Detroit Go Bankrupt

  • Peter Wittwer

    I definitely think Romney is correct when he states the future of the US auto industry lies in alternative energy sources. It definitely falls somewhat on the government as well as the U.S. auto industry for not taking the correct steps in developing more fuel efficient cars as well as enhancing alternative energy fuel sources. This is probably one of the reasons Ford and GM were caught in a bind in the 2000’s, consumer preferences were changing, and U.S. car companies didn’t have the same technology as Japanese automobile manufacturers who specialized in producing smaller automobiles. What I find interesting in Vlasic’s book is that in Chapter 16 GM continues to push SUV’s and trucks as a way to land on their feet. Although there is no doubt the American car companies were superior in producing bigger cars, in order to change their image and diversify product lines, a major part of Ford and GM’s strategy for economic recovery, they had to stop relying on the sale of trucks as the main source of profits. American car firms needed to diversify product lines and become more knowledgeable on fuel efficiency in order to change their image and compete with the rapidly growing foreign car companies.

  • As we’ve learned, the lack of fuel efficient cars is not why the Detroit Three ran into trouble; it was legacy costs amplified by downsizing, all over the course of decades. Retirees refused to die, and GM in particular had ceded too much market share to cover their pensions and (especially) healthcare.
     
    But Romney was either engaged in sophistry or really was not the competent investment banker that he claims. That’s because by the time he wrote this op-ed Bush had already granted GM and Chrysler billions, with essentially no strings attached. Furthermore, in order to pursue Chapter 11, a company needs DIP financing. As Romney surely knew, that was unavailable in late 2008 and early 2009 for any large company, much less ones where their underlying business strategy (and hence value was an ongoing enterprise) was in doubt. It was either government money or allow a disorderly collapse of the entire industry, suppliers included, that would have halted all production in North America (you now know that Toyota is dependent on the same suppliers as GM and Chrysler and Ford). That would have closed dealerships as well – early 2008 direct employment in manufacturing and retail was 2.8 million, and throw in their suppliers (steel) and the multiplier at local businesses, and we would have had a second depression, not just the (still awful) Great Recession.

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