A swimmer with a 100-pound weight around his neck won’t go very far. Even if you help him swim 25 yards, in the end he still is burdened by that 100-pound weight.
That’s essentially the situation facing the three largest domestic automobile makers who have asked for $25 billion in taxpayer money to bail them out of financial straits.
Ford, General Motors, and Chrysler – commonly known as the “Big Three” automakers – are riddled with structural deficiencies and weighed down by tremendous “legacy costs,” the financial burdens resulting from agreements with labor unions, obligations from previous contracts, and state laws restricting them from dropping local dealer franchises.
Even when these companies design cars that can compete with cars made by foreign-owned companies, these legacy costs make it impossible to turn a profit. For example, the hourly cost of labor for the three domestic auto companies averaged $73 in 2007. In comparison, the average for the Japanese auto companies operating in the U.S. was $48. The vast majority of the difference can be attributed to benefits, since U.S. employees at foreign car companies earn comparable wages. Health benefits, for example, add $1,900 to the cost of every Ford, GM, or Chrysler car.
Another cost of the domestic automakers is the unsustainable number of dealerships nationwide. For example, General Motors has approximately 7,000 franchises nationwide compared with Toyota, which has fewer than 1,500. Yet both companies control roughly 20 percent of the market share in the United States.
Until there are fundamental changes in the way the Big Three do business, simply infusing $25 billion of taxpayer money would only temporarily keep them afloat. In the end, like the swimmer, they’ll still have the 100-pound weight around their necks. No amount of money will solve their problems until they restructure, that is, until they eliminate these extraneous costs.
Unfortunately, these companies can’t do that voluntarily because they have labor union agreements and other contractual obligations. The unions are not going to make the concessions sufficient to enable these companies to compete. The only way to address their problems is under an existing code in our bankruptcy laws known as Chapter 11.
Under Chapter 11 protection, these companies would obtain an immediate stay, suspending debt payments and giving the companies breathing room to plan for the future. A company in bankruptcy reorganization must negotiate new labor agreements with their employees. This process would allow the car companies to get out from under their crushing labor costs, but only after negotiations with the labor unions and approval by a judge. U.S. car makers could also use the bankruptcy protection to reorganize their dealer networks, reducing the overall number of franchises they need to maintain.
No one believes these companies should fail. It’s actually the opposite. Like many other industries, including the airlines, the goal under Chapter 11 is to gain temporary protection, reorganize in a way to reduce legacy debts, and emerge as a more viable and competitive company. Some reductions in employees and operations (maybe even car models) are inevitable, but instead of asking for help to swim 25 more yards, the Big Three should work to remove the 100-pound weight from their necks.
