Bankruptcy is the best course

By Stephen Bowen | Apr 10, 2009

President Barack Obama’s recent meddling in the affairs of automakers General Motors and Chrysler is a troubling development. The president recently ordered the resignation of GM CEO Rick Wagoner and is forcing Chrysler into a shotgun marriage with the Italian automaker Fiat. These two actions represent a largely unprecedented intrusion by a U.S. president into the affairs of private industry. Obama’s actions should, as Tennessee Sen. Bob Corker put it, “send a chill through all Americans who believe in free enterprise.”

It should be remembered, though, that both GM and Chrysler recently came to Washington to beg for taxpayer dollars, in the midst of a crushing recession, in order to save themselves from bankruptcy. They were given $17.4 billion, which, as it turns out, was not enough. They want $20 billion more.

Perhaps they deserve the humiliation of having the 47-year-old president, who has never run anything in his life, dictate to them how they are to manage their businesses.

The far larger problem, though, is that, as any number of commentators have observed, bankruptcy is the best course for both companies and for the nation. GM, especially, is a financial basket-case. The company is $60 billion in debt. Its interest payments on that debt total $3 billion a year. That is money that is not going into new product development or efforts to improve the quality of cars or the efficiency of auto plants.

Chrysler is little better off, struggling to stay afloat after being cast off by Daimler Benz last fall. Its $18 billion in debt pales in comparison to GM’s, but as recently as late December, the company was ready to idle its North American plants and hinted that a permanent shutdown was likely.

Bankruptcy would let the two companies restructure their debt and deal with the onerous union-negotiated labor contracts that are dragging them under. As one commentator observed, GM has gone from being a car company that offered its employees health and pension benefits to a pension and health insurance company that occasionally sells cars. The company employs 96,000, but provides health insurance to more than a million people. According to former CEO Wagoner, the company spent $103 billion over the past 15 years on benefits for workers no longer employed by the company.

The weight of these burdens helps explain why two of the most storied companies in American history are currently getting trounced in the automotive marketplace by upstarts like Hyundai.

When it made its first foray into the American market in the 1980s, Hyundai did poorly. The company’s cars had reliability issues and its reputation suffered. Unlike its burdened American counterparts, however, Hyundai could afford to invest heavily in engineering and design. The quality of the company’s cars began to climb and sales grew, especially after it began offering an industry leading 10 year/100,000 mile warranty. Hyundai sold only 183,000 cars in the United States in 1989, but by 2005 was selling 472,000 a year. Chrysler and GM, by comparison, saw their car sales slashed almost in half over this same period.

Today, Hyundai is one of the few bright spots in the otherwise dismal auto industry. While its competitors teeter on the brink of insolvency, Hyundai has seen its sales climb. The company’s novel offer to buy back the cars of customers who lose their jobs has led to a spike in sales over the last couple of months that stands in sharp contrast to plunging sales elsewhere in the industry.

Hyundai did many things right to get where it is, but the most important thing it did was avoid the kind of burdensome union contracts that have choked the life out of GM and Chrysler. Hyundai builds cars here in the United States, like many of its foreign counterparts, but it builds them in Alabama, one of 22 so-called “right-to-work” states where employees cannot be compelled to join a union as a condition of employment. In Alabama 750,000 cars are now produced every year, up from zero a dozen years ago. Kia Motors, of which Hyundai is a subsidiary, will soon open an auto plant in Georgia, employing 2,500 workers. Georgia, like neighboring Alabama, is also a right-to-work state.

The auto industry’s slow but steady migration from the unionized Midwest to the nonunion South, which repeated federal bailouts for GM and Chrysler would simply postpone, is a good thing. It will result in higher quality cars at lower prices, it will preserve the nation’s automobile industry and the thousands of jobs it creates, and it means that Americans will still have plenty of cars from which to choose even after Chrysler and GM either close or, more likely, are significantly restructured.

The failure of underperforming businesses is a critical element of the free market. The president’s interference in the affairs of these two iconic American companies is not only troubling because it is indicative of the new administration’s boundless presumption and arrogance, but it is preventing the right thing from happening, which is, hard as it might be to believe, the bankruptcy of GM and Chrysler.
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