Saturday, November 15, 2008

A way to save the Big 3: Turn your clocks ahead one year

The cost for bailing out the Big 3 automakers (if they get everything they want) is now $75 billion and rising, yet the problem for the automakers is time as much as it is money. In John McElroy's column in Autoblog, he argues that the contract between the automakers and the United Auto Workers that goes into effect in 2010 will dramatically decrease the automakers' costs by shifting the burden for medical expenses to the UAW. In addition, a two-tier pay scale will be implemented, with new hires getting significantly lower salaries than existing workers. Therefore, a key goal of any government bailout should be to keep the automakers alive until the new contract goes into effect.

If McElroy is right, one way that the U.S. government could help the automakers would be to turn the clock ahead one year, figuratively speaking. Here's the idea: In return for Government financial aid, the contract scheduled to go into effect in 2010 would go into effect one year earlier, on January 1, 2009. The initial cash payments into the UAW's health care funds would be paid by the U.S. Government, not the automakers, in the form of loans to the automakers. (The money would go to the UAW directly from the U.S. Treasury, so that the automakers couldn't divert the money for other uses, just as banks are diverting funds that were supposed to be used for lending to other purposes.) This would save the automakers billions of dollars that they can use to finance their operations. The loans would be repaid by the automakers once they regain profitability.

This plan would give the Big 3 more flexibility to open and close plants as needed to meet customer demand, and it would also give them incentives to implement the kinds of cost-saving platform engineering strategies adopted by the Japanese manufacturers decades ago. With labor costs under better control, and with more flexible production, this plan would do many of the things that bankruptcies would do, with dramatically less "trickle-down" impact.

One other thing that the U.S. Congress could do would be to preempt car dealership franchise laws in the states. These laws require massive payments by car manufacturers to dealerships that they want to close. There's plenty of attrition in the ranks of car dealers today, but it would make much more sense for the car manufacturers to be able to take active control of their distribution strategies. This wouldn't cost the taxpayers a thing, although it would increase unemployment due to the closed dealerships.

The key is not to simply throw money at the problem, but to make business changes that will finally bring the U.S. auto industry into the 21st century.

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