Opinion

The Great Debate

Car czars

This piece originally appeared in Reuters Magazine.

Henry Ford had to fight to build the Model T, even within the company that bore his name. The Russian immigrant engineer who saved the Chevy Corvette bucked the General Motors brass to do it. Lee Iacocca and Hal Sperlich built the minivan at Chrysler only after the vehicle—and they—had been rejected at Ford.

Those three cars were not just huge commercial successes—each also placed its stamp on American life, much as the iPad has today. Two were utterly practical while the third was ostentatiously stylish, but what they all had in common is this: The people who created them overcame formidable obstacles to put them on the road. Unblinking determination is a common theme in the biggest American business success stories, such as Ray Kroc’s damn the-odds effort to build McDonalds and Steve Jobs’ audacity in reshaping Apple. Luck and timing are involved too, but they aren’t enough. The special sauce (apologies to Kroc) is a strain of determination that blends self-belief with belief in the commercial potential of a product.

Determination and self-belief sometimes goes awry in the auto industry, as in other arenas. Exhibit A is the Chevrolet Corvair, introduced in 1960 with an innovative air-cooled, rear-mounted engine that produced 29 miles a gallon, more than double most cars of its day. Despite the weight concentrated in the car’s rear, Ed Cole, the Corvair’s creator, stoutly rejected putting a weight-stabilizing bar under the car’s front end. The result was a plethora of accidents and a muckraking 1965 book by an unknown lawyer named Ralph Nader: Unsafe at Any Speed. The Corvair scandal prompted a boom in product-liability litigation that continues to this day.

Then there’s John Z. DeLorean, whose 1970s effort to build an “ethical sports car” in Belfast collapsed amid financial overreach. Most guys would have tried to rescue their company with an IPO or junk bonds, but DeLorean tried selling cocaine. Though he was acquitted at trial when a jury judged that the FBI entrapped him, his career and his company were finished.

But both Cole and DeLorean enjoyed enormous success before their signature failures. Cole created a small-block V8 engine that powered the legendary ’57 Chevies and was a key figure in the success of the Corvette. DeLorean created the Pontiac GTO, which launched the muscle-car craze of the 1960s and still invokes strong emotions among onetime boy racers. A sign on a restored GTO displayed in suburban Chicago a few years ago declared: “This car was built in honor of Almighty God, in memory of my dad, and of my fellow hometown veterans who did not have the chance to live these memories.”

Chrysler makes a comeback, again

By Paul Ingrassia
The opinions expressed are his own.

History repeated itself this week, more or less. Back in 1983 Chrysler, recovering from virtual bankruptcy three years earlier, paid off $1.2 billion in government-guaranteed loans seven years before they were due. On Tuesday Chrysler, recovering from actual bankruptcy in 2009, repaid $7.6 billion in loans made directly by the U.S. government six years before the due date. Chrysler refinanced its debt with private money.

Who would have thought two years ago that Chrysler would survive longer than, say, Charlie Sheen on the airwaves or Osama bin Laden on the lam? American and Canadian taxpayers might not ever recover their full investment in Chrysler because the value of the stock that they bought in the company, and still own, remains uncertain. But the bailouts of Chrysler and General Motors helped prevent the Great Recession from becoming Great Depression II, and stand as President Barack Obama’s only outright domestic-policy success to date.

The auto bailout also could serve as a template for addressing the budget deficit and entitlement reform, the current pressing issues in Washington. In rescuing Chrysler and GM, the Obama administration spread pain among workers, dealers, managers, shareholders, bondholders and the taxpayers. It was shared sacrifice, not entirely voluntary, but it worked.

from James Saft:

Learning from Ken Feinberg

Sometimes it's what doesn't happen that is most illuminating.

When Pay Czar Kenneth Feinberg first slashed executive compensation at U.S. firms that benefited most from a government bailout the cry was that this would hurt these weakened firms when they could least afford it, as the best and brightest would leave for better money elsewhere, where the free market still ruled.

Well, the door didn't hit them on their way out, but mostly because they stayed rooted to their desk chairs.
Feinberg evaluated the compensation of 104 top executives at affected companies in 2009, reducing pay for most to levels far below financial industry norms and their own former earnings.

Yet here we are in 2010 and about 85 percent are still working for the same firms, still toiling for the kinds of wages that may well make them wish they'd gone into the law rather than finance. Remember all those articles in glossy magazines about how impossible it is to make it in New York City on $500,000 a year?

Fiat’s over-ambitious expansion strategy

paul-taylor
– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

Could Italy’s cash-strapped Fiat, Europe’s sixth auto maker, build a workable alliance with Chrysler and Opel to become be a profitable global player? Or would it be a marriage of losers, doomed to fail?

Fiat CEO Sergio Marchionne has made clear that his interest in Opel, the European arm of ailing General Motors, is more than just a well-timed tactic to get better terms in the alliance he is negotiating with troubled U.S. number three Chrysler. Chrysler faces likely bankruptcy if a deal is not clinched by April 30.

Revival of U.S. automaking awaits if UAW will follow Toyota

morici– Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission. The views expressed are his own. –

General Motors and Chrysler are on the anvil of history. United Auto Workers President Ron Gettelfinger holds the hammer and will determine whether they emerge more competitive or shattered in pieces and sold to foreign investors.

In December, George W. Bush granted $17.4 billion in temporary loans on the condition those firms convert two-thirds of their debt into equity. Another condition was to persuade the UAW to accept stock for one half of what these companies owe to fund retiree health care and align wages, benefits and work rules with those of the Japanese automakers operating in the United States.

Bush’s auto plan will test Obama’s union loyalties

morici– Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.  The opinions expressed are his own. —

President Bush has agreed to lend GM and Chrysler $17.4 billion on the condition these firms complete a plan to accomplish financial viability.

The agreements set goals for automakers: converting two-thirds of their debt into equity; paying company stock to fund one half of the Voluntary Employee Benefits Associations, which fund retiree health care benefits and remove these costs from future liabilities; aligning wages, benefits and work rules with U.S. Nissan, Toyota or Honda operations.

Bail out the car buyers

diana-furchtgott-roth1– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The opinions expressed are her own. —

As disastrous auto sales figures for November were reported this week, the Big Three auto companies–GM, Ford, and Chrysler–told Congress that they want government loans to keep from going bankrupt.

The pleas of General Motors and Chrysler were the most urgent.  Ford allowed that its cash position was better and that it might get through 2009 without tapping the federal line of credit it seeks.

Don’t junk the U.S. auto industry

eugene-ludwigMr. Ludwig, a former U.S. Comptroller of the Currency, is founder and CEO of  consulting firm Promontory Financial Group. Any opinions are his own; GMAC Financial Services is one of Promontory’s clients.

The economic upheaval wreaking havoc on the global financial system is threatening to claim another victim: the domestic automobile industry and its financing arms.

General Motors Corp. could run out of cash by January without help. Ford Motor Co. and Chrysler LLC also need fast government intervention to stay solvent. Automakers and the UAW are making their case to Congress this week for emergency help. But even the supporters of a $25 billion aid package for the auto industry are dubious about whether they have the votes to pass it.

This raises the question, why not just let them go bankrupt?  The domestic auto industry is everyone’s favorite whipping boy, and its problems have been growing for decades. Some are of its own making; many are circumstantial. But we cannot blithely accept its failure as somehow inevitable or deserved.

Don’t let U.S. automakers delay restructuring

morici– Peter Morici, a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission, testified before the Senate Banking Committee on the proposed bailout for the domestic auto industry. The following is his written testimony to the committee. The opinions expressed are his own. —

The domestic automobile industry has two major components—the Detroit Three and the Japanese, Asian and European transplants that also assemble and source components in the United States and Canada. Both contribute importantly to the vitality of our national economy. Ensuring these companies have the means to compete globally is vitally important.

The gradual erosion of the market shares of the Detroit Three over the last several decades stems from higher labor costs—having origins in wages, benefits and work rules–poor management decisions, and less than fully supportive government policies. Although the U.S. government has been sympathetic to the needs of the industry, the industry has fallen victim to currency manipulation and other forms of protectionism in Japan, Korea, India, and China.

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