Mitt Romney: Let Detroit Go Bankrupt

[Hurricane]

Let Detroit Go Bankrupt

By MITT ROMNEY
November 19, 2008
Boston

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 relations.

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.

Full text here: http://www.nytimes.com/2008/11/19/op...mney.html?_r=2

[RamJet502]

Romney is a smart man when it comes to business matters, people should pay attention.

[Hoboken Tim]

His father knew bankruptcy wasn't the answer in 1955. It was a stylish new Rambler in
1958 that saved the company. It's the credit crisis that causing the problem now. The Auto companies didn't cause the credit crisis. Bankruptcy won't end the credit crisis, only make it worse.

[zabolots]

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.

Obviously, addressing those two issues will help the domestic auto industry, but what many people don't bother to consider is the effect that it will have on our nation as a whole.

GM is largely responsible for the growth and success of the middle class. They paid good wages to workers, who then were able to buy more things and send their kids to college. This is good for the nation as a whole.

In addition, they agreed to take care of their workers with pensions and healthcare. Obviously, when these agreements were made, nobody had any inkling of how screwed up healthcare would become in this country so now it's really coming back to bite them in the butt.

The thing to remember, however, is that making GM cost-competitive with the imports will hurt a lot of people. Assembly workers will see their incomes reduced (as new workers come on board with the new rates). Retired workers will have their incomes reduced (pensions) and their expenses increased.

People seem to forget that these costs incurred by the domestic auto industry benefit an awful lot of people. Forcing them to drop these liabilities will be good for the industry but bad for a lot of people, and therefore ultimately bad for the economy as a whole. The domestic auto industry is being blamed and ridiculed for taking care of it's workers (both past and present).

Perhaps the geniuses in gov't should have thought about all this when they allowed the imports to set up shop here in the US.

[Rngr07]

I would say that he pretty well sums up what many of the problems with the Big Three are and what the response should be.

[K-1]

Newsflash: A lot of what this guy said is already being done. The VEBA and two-tier wage structure eliminates most of the cost gap. Where has Romney been the past year, besides making a fool of himself on the election circuit?

[wescoent]

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.

Agreed, and they've already negotiated this.

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 relations.

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 mean like Alan Mulally? Bob Nardelli?

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.

Agreed.

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.

Ford, GM, and Chrysler need to do what they have to to attract talented executives. Keep the perks, but make them performance incentives.

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.

You mean like Ford keeping its product blitz full speed ahead, current losses be damned?

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.

Agreed. The best dealers are a great asset to automakers.

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.

NO MITT!!! DON'T SAY THAT!!!

The federal government should also rectify the imbedded tax penalties that favor foreign carmakers.

Yes.

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.

Umm... if you say so.

[texassierradude]

Obviously, addressing those two issues will help the domestic auto industry, but what many people don't bother to consider is the effect that it will have on our nation as a whole.

GM is largely responsible for the growth and success of the middle class. They paid good wages to workers, who then were able to buy more things and send their kids to college. This is good for the nation as a whole.

In addition, they agreed to take care of their workers with pensions and healthcare. Obviously, when these agreements were made, nobody had any inkling of how screwed up healthcare would become in this country so now it's really coming back to bite them in the butt.

The thing to remember, however, is that making GM cost-competitive with the imports will hurt a lot of people. Assembly workers will see their incomes reduced (as new workers come on board with the new rates). Retired workers will have their incomes reduced (pensions) and their expenses increased.

People seem to forget that these costs incurred by the domestic auto industry benefit an awful lot of people. Forcing them to drop these liabilities will be good for the industry but bad for a lot of people, and therefore ultimately bad for the economy as a whole. The domestic auto industry is being blamed and ridiculed for taking care of it's workers (both past and present).

Perhaps the geniuses in gov't should have thought about all this when they allowed the imports to set up shop here in the US.

Your last sentence pretty much sums up the entire situation.

[Hoboken Tim]

Newsflash: A lot of what this guy said is already being done. The VEBA and two-tier wage structure eliminates most of the cost gap. Where has Romney been the past year, besides making a fool of himself on the election circuit?

Newsflash is right, how come no one in the media talks about this?

[texassierradude]

I agree with everything Mitt says. Especially the line about new labor agreements. The UAW hacks that populate this site will be screaming, but hey the times have changed. Possibly when the Big 3 heads are ousted, maybe old Ron Stinkfinger and his gang should be ousted as well. They are in a time warp, its not 1970 anymore.

[nadepalma]

Romney is a smart man when it comes to business matters, people should pay attention.

I agree. He makes a lot of sense and is an even handed approach.

And I think that he covered almost everything. He recognizes that Detroit has a built in cost-disadvantage. He compliments them on doing a remarkable job of delivering solid products to market despite having one hand tied behind their backs. He sees that management must put a better image on things to not only placate the unions, but the rank n' file.

Overall, I agree with him.

However, I don't know if I agree that the top execs should leave though. The current circumstances that all the automakers face is pretty historic. At the point that vaunted Honda and Nissan are cutting back profit forecasts and even heralded Toyota is cutting production in North America, you KNOW that things are bad.

Regardless, I don't know if Rick deserves to go or not - but if he does, I can deal with it. Nardelli arguably should NEVER have been there anyway and that job should be Jim Press's job right about now.

But Alan Mulally really seesm to "get it" and has been doing a remarkable job of fixing the company in light of the economic environment. If there is one top-exec that should say in his post, its Mulally.

I'd be interested to see what happens next...

[KingElvis]

Newsflash: A lot of what this guy said is already being done. The VEBA and two-tier wage structure eliminates most of the cost gap. Where has Romney been the past year, besides making a fool of himself on the election circuit?

I was gonna say - isn't the UAW already doing this stuff?

[nadepalma]

Newsflash: A lot of what this guy said is already being done. The VEBA and two-tier wage structure eliminates most of the cost gap. Where has Romney been the past year, besides making a fool of himself on the election circuit?

You are right, but they don't go into affect til 2010. And while we all recognize it is coming, some analysts out there think that while the last round of contract talks are historic, they didn't go far enough. There is still too much dead weight that should have been cut.

I don't know if Romney is the in the latter camp or not, but the larger point is made: the UAW cannot continue as they always have. They need to turn the corner and put aside the typical labor-management mantra for the last 50 years if they are to stay relevant in the future. That means that some of those items he mentions (profit sharing, stock, inclusiveness, etc) must be part of the new paradigm.

[04bonnie]

Well, glad I didn't vote for him in the primary. I'm a Republican, but don't agree with what he's saying. Sorry. He may be a smart man, but if GM doesn't get the "loan" (not "bailout"), they will surely die. Wonder what vehicle you drive, Mr. Romney? I bet it's a foreign. (since he obviously thinks quality is better, and price is lower on the foreigns). Sorry Mitt, don't agree with you. You may have made a good President, but this write-up would not have won you Michigan, that's for sure.

By the way, on a news clip, they showed John McCain driving away (after he lost) in his personal Toyota SUV. As a Republican, and GM supporter, that made me sick. All I can say is, I won't agree with the Democrats on most stuff, but if Obama can fix the auto industry, that's a step in the right direction.

[mrgto]

Well, glad I didn't vote for him in the primary. I'm a Republican, but don't agree with what he's saying. Sorry. He may be a smart man, but if GM doesn't get the "loan" (not "bailout"), they will surely die. Wonder what vehicle you drive, Mr. Romney? I bet it's a foreign. (since he obviously thinks quality is better, and price is lower on the foreigns). Sorry Mitt, don't agree with you. You may have made a good President, but this write-up would not have won you Michigan, that's for sure.

By the way, on a news clip, they showed John McCain driving away (after he lost) in his personal Toyota SUV. As a Republican, and GM supporter, that made me sick. All I can say is, I won't agree with the Democrats on most stuff, but if Obama can fix the auto industry, that's a step in the right direction.

Mitt drives a caddy escalade. He should have been the party nominee.