Mitt Romney Advises: “Let Detroit Go Bankrupt”

Governor Mitt Romney offers some interesting advice regarding the Big Three in his November 18, 2008 New York Times Op-Ed “Let Detroit Go Bankrupt” summarized as follows:

“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.

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…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…

In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.”

Governor Romney is correct.

In a July post on my blog I opined that running out of cash may be the trigger that puts them into bankruptcy, but it will be a blessing in disguise. My reasoning is that the Big Three’s hourly labor costs are reportedly $20 to $30 higher than their USA based Japanese competitors. In my experience as a Turnaround CEO, this will not be reduced in a voluntary agreement with their union. If it is not corrected, they will continue to decline and probably will not survive.

Chapter 11 Bankruptcy protection does not mean the end. The companies will continue to operate. While it will be a severe shock to the USA, it is not liquidation. It will allow modification of the factors contributing to losing money - including the high cost labor contracts.

Click here to review my July 28, 2008 post: “Bankruptcy – The Fate of General Motors, Ford and Chrysler?”