US auto industry

Someone in the Obama administration seems finally to have read a copy of Negotiating for Dummies and realised there should have been a bad cop, not just a good one, as Detroit tried wringing concessions from lenders and employees. As long as a sympathetic, pro-labour White House and congressional leadership seemed willing to paper over cracks with taxpayer cash, it is no shock General Motors and Chrysler’s restructuring plans were timid, but a pleasant surprise they were rejected. The Obama administration has belatedly grown a backbone, possibly letting Chrysler go bust in a month if it can not link up with Fiat. GM is more viable, but not without more government cash.

The task force’s conclusions are refreshingly free of wishful thinking. GM’s plan, it said, was too sanguine about pricing and market share and does not tackle the critical issue of shedding brands. Even if it muddles through, legacy costs will grow to $6bn a year by 2013. Chrysler’s prospects are bleaker, so the administration is offering a $6bn carrot and a bankruptcy stick to spur a deal. It lacks scale, spending 3 to 4 percentage points of revenue more on fixed costs than GM. Its poor product mix and shoddy quality are also concerns, the assessment said.

If making GM chief Rick Wagoner (and possibly Chrysler) sacrificial lambs elicits breakthroughs at the negotiating table, the experiment of restructuring Detroit outside of bankruptcy remains flawed. The cost of guaranteeing working capital, warranties and Chrysler’s dowry, plus existing “loans”, is already more than $100,000 per US autoworker. Even if GM slashes wages, debts and legacy costs, it has too many brands and cutting involves hundreds of separate negotiations with dealerships due to state franchise laws. This could be handled more effectively in Chapter 11.

Tough talk aside, Detroit is seen by Congress as more deserving than Wall Street. A government already bleeding red ink should realise that you do not get what you deserve – you get what you negotiate.

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