Government ownership of General Motors (60% U.S. and 12% Canada) will be fraught with difficulties.

Given the large taxpayer stake in the company, it will be impossible for elected officials to stay out of the fray. Congress inevitably will interject itself in business decisions affecting employment, the kind of vehicles the company builds, or the company’s position on nationalizing health care – just as it is now asserting itself on the question of dealership closures.

Imagine the new General Motors (i.e., the government) attempting collective bargaining with the United Auto Workers’ union (on whose behalf the government stepped into the fray in the first place).

Consider the company lobbying Washington on an issue favored by the government (e.g., tax policy or the elimination of secret ballots for workers) but ill-suited for the company. And there there’s the matter of types of vehicles to be built.

With a strong environmental agenda, the government will understandably favor alternative fuel vehicles. Yet, there is no company in the world making any real money on such vehicles, given the current economics of alternative propulsion methods.

The government points to Toyota as a car company that has been responsive to the need for small, fuel-efficient cars, but Toyota reported a first quarter loss much worse than that of General Motors. That’s because the vehicles that keep these businesses viable — larger cars, SUV’s and trucks — are not selling in sufficient volume during this consumer credit crunch.

If GM’s new owner find that the company’s products are not selling well (while competitor vehicles are selling better) it may decide to institute expensive purchase-incentive programs. When those programs are matched by the competition (which is what happens in normal competitive marketing), thereby eroding the profitability of the healthier competitors, where do those stronger companies go to complain about predatory pricing practices by their government-owned competitor?

I think the current approach to “saving General Motors” will prove untenable.

If the government truly believed that America needed to save its domestic auto industry, it would have been far wiser if the U.S. Treasury served simply as a lender of last resort. It then could have granted the ailing automakers interest-bearing bridge loans with restrictive covenants requiring sacrifices from management, the union, the bond-holders, and suppliers — and then let professional managers run the private businesses.

Then when the demand for automobiles rebounds (as it always does following a recession), the taxpayers would be the first to be repaid.

But by becoming an owner, a role for which government is singularly ill-suited, the federal government has taken us into difficult, uncharted economic waters — a market-damaging move I suspect we will regret. Hopefully, the Treasury realizes this and will work to find a swift way out of its ownership position.

GM declared itself bankrupt on Monday in one of the largest bankruptcies in U.S. history, in an attempt to seek protection from creditors.

The firm has stacked up over $80 billion of losses in the last four years, also swallowing some $20 billion in cash from the Obama administration. It is likely to need another $30 billion before emerging from Chapter 11 substantially slimmed down and free of debts.

A bankruptcy judge will decide who gets what assets. It's not clear whether during Chapter 11 the firm will continue to function and assemble cars.

It used to be said that "whatever's good for GM is good for the U.S. economy". Whilst GM is no longer the world's biggest carmaker, by some estimates it still accounts for 1 percent of the U.S. economy. The bankruptcy is not only hugely symbolic of the fate of the ailing U.S. car industry, but is of huge importance for all the workers, suppliers, dealers and creditors caught up in its travails.

Republicans have begun to criticise the U.S. president's handling of the GM affair, but it is difficult to see what else the U.S. president could have done.

Obama had to give GM time to come up with a credible plan, and I have always thought that the firm would need up to $50 billion of government support to get through the downturn and restructuring.

Under the proposed plan, the U.S. government would get a stake of over 70 percent in GM in return for another $30 billion of state cash, with the United Auto Workers union taking 17.5 percent initially, with the union accepting shares in GM instead of cash owed by the firm for retired employees healthcare cover.

A majority of GM's bondholders have accepted the offer to swap their $27 billion in debt for an initial stake of 10 percent with the option of buying 15 percent more later. Their agreement to do this should help in speeding GM's progress through Chapter 11 and avoid expensive legal battles.

Whilst a minority group of bondholders are holding out for a better deal, in reality this restructuring is the only game in town.

Hopefully, the new GM that emerges from Chapter 11 will be leaner, fitter and free of debts. It will include the firm's best models and R&D and will scrap brands like Pontiac, Hummer and Saturn.

By 2012, the new GM will comprise the Chevrolet, Cadillac and Buick brands, plus its GMC truck brand. Of particular importance, its forthcoming electric Chevvy Volt car will be part of the new firm.

"GM-Lite" will cut the number of assembly sites across North America, including Canada, to 33 within three years, from 47 at the end of last year.

Eventually, the goal is to float the new firm on the New York Stock Exchange. It will shed some 20,000 or more workers in the U.S., and has also told over a thousand dealers in the U.S. that they are at risk of losing their franchise. GM plans to lose 2,300 from its 6,000-strong network.

In a deal with the UAW which saves the firm $1 billion a year, rules on breaks, vacation and overtime have been changed, retiree benefits have been cut, and the UAW has agreed not to strike until September 2015 at the earliest.

GM will never be the biggest manufacturer again, but Chapter 11 is anyway about restructuring the firm, erasing the debts, cutting costs and reorienting the firm towards more environmentally friendly cars.

A viable car company may yet emerge from the ashes of the old GM, thanks to an interventionist U.S. government which is investing heavily in new green technologies.

The situation here in the UK is rather different. An efficient and world class car industry is struggling given the impact of recession and credit crunch, and the British government has largely been a spectator as GM Europe has been sold off.

That in turn could have a very significant impact on jobs at Vauxhall here in the UK.

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.

The troubleshooter who turned around the Italian group seems to want both deals. “It is quite possible for Fiat to engage in both of those transactions and to execute them properly,” he said on Thursday. Marchionne sees a wave of consolidation coming in the automobile sector and is determined to gain critical mass to survive. But his strategy looks over-ambitious.

Fiat has little cash and 4.8 billion euros in debt to repay this year, so Marchionne needs deals that cost little or nothing. That means he has to target companies in a weaker position than his.

Fiat would not take on any of Chrysler’s debts, and GM seems willing to give away a 51 percent stake in Opel free to anyone who will invest in it as a going concern, with the U.S. auto maker keeping a minority holding. GM needs Opel’s technology to produce the smaller, greener cars which are the condition for a U.S. government lifeline.

But even if the financials were to add up, which is a big “if”, the challenge for Fiat of turning such an alliance into a viable, profitable group looks daunting.

Germany’s richer, fitter Daimler bought Chrysler in better times and failed to turn the Detroit dinosaur around despite sending in its best managers and engineers, which also had the effect of causing Mercedes’ quality to decline at home.

Marchionne has made clear Fiat would need German state aid to restructure Opel. Since the two firms have lots of overlap in small and mid-range cars, it would have to close plants and lay off thousands of workers, with pain in both Germany and Italy. But Berlin would want guarantees on jobs and production sites in return for its aid, crimping Fiat’s room to make synergies.

Making all this work is a tall order, even for a turnaround maestro like Marchionne, and could be a dangerous distraction from Fiat’s own recovery, as Daimler found with Chrysler. Fiat’s controlling Agnelli family, which brought him in in 2004 to rescue Fiat, should be having an anxiety attack at his strategy.

(Editing David Evans)

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.

GM and Chrysler must complete these negotiations by March 31 or repay the money and face bankruptcy.

At U.S.-based Toyota factories, workers receive about $25 dollars an hour and good health care benefits. But they don’t retire at 50 after 30 years or get as much time off and huge severance packages. Toyota does not endure the medieval work rules and job classifications imposed by UAW contracts.

Most other Americans would be happy to get Toyota pay, benefits and working conditions. If Gettelfinger continues stubborn resistance to a better package than most Americans enjoy, then Detroit automakers will continue to require government subsidies or not have enough profits to invest and compete in hybrid and other new technologies that will transform personal transportation over the next decade.

Eventually, Washington will tire of their begging, they will march through bankruptcy, and their factories will be sold off to Japanese, Korean, European and Chinese automakers.

If Gettelfinger takes the Toyota package, then Washington should take a hard look at policies that can promote U.S. automaking as effectively as do industrial policies abroad.

This would include addressing undervalued currencies in Asia — currencies kept cheap in foreign exchange markets by government intervention in Japan, China and elsewhere.

Over the last two decades, Japan has kept the yen at least 30 percent undervalued against the dollar, and this provided Toyota with an average subsidy of at least $2,000 on every car it sold in the United States.

Through 2004, the Bank of Japan directly purchased dollars in currency markets to keep the yen undervalued, and since, it accomplished the same by keeping Japanese interest rates very low. This encouraged the so-called “carry trade,” where private investors borrow yen, use those to purchase dollars and then invest in short-term U.S. securities to exploit higher U.S. interest rates.

Now, the Federal Reserve has dramatically reduced U.S. interest rates, and the yen has risen closer to its true market value against the dollar. Japanese officials appear poised to again intervene directly in currency markets to restore Toyota’s unfair advantage, and Washington should take whatever steps are necessary to head off such Japanese protectionism.

In addition, Washington should take assertive steps to encourage production of fuel-efficient vehicles in the U.S. and create a strong export industry.

Washington could offer incentives to car buyers to trade in gas guzzlers for more fuel-efficient vehicles — the newer and the bigger the clunker and the more fuel-efficient the replacement, the more dollars the car buyer would receive if the guzzler is destroyed. This would raise the price carmakers receive from selling more fuel-efficient vehicles and boost car sales.

Washington could provide substantial product development assistance to U.S.-based automakers and suppliers. The latter include Toyota, Nissan and Honda, as well as the Detroit Three, battery makers and other suppliers to accelerate the production of innovative, high-mileage cars.

The condition for assistance would be that beneficiaries do their R&D and first large production runs in the United States, and share their patents at a reasonable cost with other companies manufacturing in the United States. The huge U.S. market would help attract producers from around the world and rejuvenate the U.S. auto supply chain.

Such smart industrial policies would contribute to national efforts to reduce CO2 emissions and reduce oil imports.

Finally, individual Americans should open their minds. Many are considering trading in trucks and SUVs for sedans and are naturally attracted to the Toyota Camry and similar import brands. Visit a Ford or Chevy showroom and test drive a Fusion or Malibu and be pleasantly surprised. Those are high-quality, affordable and reliable vehicles.

Washington is giving Detroit a second chance, and Americans should give its cars a second look.

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.

These goals are generally consistent with the conditions I outlined as necessary for the Detroit Three to achieve viability when I testified before the Senate Banking Committee on November 18. For example, laid off workers could no longer sit in the Jobs Banks collecting 90 percent of pay and benefits indefinitely and engaging in productive activities like pinochle.

Financial viability requires projecting a positive net present value, taking into account all current and future costs. It does not require a positive cash flow by March 31. In fact, wage and benefit cuts only need be accomplished by December 31, 2009.

Given the depressed auto market, a positive cash flow cannot be accomplished soon, and GM and Chrysler will be asking for more federal loans when they table their plans by March 31. If the auto market stays depressed into 2010, Ford will likely seek assistance. Given the likely duration of the recession, loans of well over $100 billion will be needed. Much of those could prove gifts, with the loans never truly repaid.

Unless the automakers significantly reduce their debt, jettison retiree legacy liabilities, and align wages, benefits, work rules with those of Japanese transplants, they simply cannot hope to be consistently profitable.

Yet, the agreement permits the automakers to vary from those conditions if they can still demonstrate a net positive present value. Enter the accounting magicians.

UAW contracts are exceedingly complex. GM and UAW leaders have mastered obfuscating the consequences of their pay structure and work rules. Calculations of net present value will importantly hinge on forecasts of future car sales and wages paid by Toyota, Nissan and Honda. A few quick pen strokes and a lousy business plan can be made a winner, with costs to taxpayers in unpaid loans only becoming apparent years later.

Barack Obama owes organized labor a huge debt for his November victory. UAW President Ron Gettelfinger can be expected to try to sell Obama labor agreements that appear to create more concessions than are real and leave the Detroit Three in the red going forward.

Fooling Obama would create loans the Detroit Three never can really repay.  The government could force payment at the expense of the next creditors in line—the large U.S. banks—but the federal government is already subsidizing their losses.

One way or the other ordinary citizens who don’t earn nearly the pay and benefits autoworkers receive would be paying taxes to subsidize their rather generous lifestyles, much as taxpayers are financing the bloated bonuses at large New York banks requiring federal dole to stay afloat.

President Bush has punted the auto mess to his successor, and one of three outcomes is possible:

1. President Obama can require the automakers and UAW to come up with a contract ordinary mortals can understand, eliminate all the foolish job classifications and work rules, and establish pay rates that make the Detroit Three competitive.

2. Obama can push the automakers into a prepackaged Chapter 11, perhaps by providing some financing to ensure suppliers are paid and companies can continue to operate, and let a bankruptcy judge impose the essential conditions of the Bush agreement.

3. He can let the Detroit Three continue their profligate behavior, providing subsidies masquerading as loans.

Obama faces the same kind of tough choice Bush did when he lavished generous subsidies on agriculture at the beginning of his presidency. If Obama caves to union pressures and chooses to subsidize the automakers, other unionized industries will line up. Market discipline will not apply to the eight percent of private workforce represented by unions, and damn the majority that really elected him.

For full coverage of the auto industry, click here.

For previous debate entries by Peter Morici, click here.

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.

The Big Three, who less than a generation ago dominated the car business, submitted business plans on Tuesday ahead of scheduled hearings before the Senate Banking Committee on Thursday and the House Financial Services Committee on Friday.

Should Congress authorize the requested loans of $18 billion to GM and $7 billion to Chrysler, and a $9 billion line of credit to Ford?  How far should taxpayers go to rescue an ailing industry?

In their business plans, the three said that they would change their model mix and drop some brands, shrink their workforces, and consolidate and retool plants.

Unfortunately, neither loans nor the companies’ promises address the basic problem:  Americans just aren’t buying cars, whether GM, Toyota, Ford, or Nissan.

Consider the November sales data, showing GM ’s sales down 41% from a year earlier, Ford’s down 30%, and Chrysler’s down 47%.  Foreign brands were hurt, too: Toyota down 34%, Honda 32%, Nissan 42%, Hyundai 40%.

It’s not that Detroit isn’t making good cars. Although GM has offered to drop its Pontiac line in exchange for government loans, Americans like Pontiac.  It’s GM’s third best-selling brand, with U.S. sales comparable to VW, Mercedes, and Mazda.  The idea that former Pontiac consumers will just switch to Chevys doesn’t make sense.

And the Big Three are healthy abroad.  Most sales of Ford and GM cars are made overseas.  GM sold 1 million cars in China last year, including 300,000 Buicks, and over 12% of vehicles sold in Russia.

Detroit’s costly labor structure is a handicap that needs to be overcome through negotiation with unions or with reorganization in bankruptcy.  But even foreign brands, with their lower labor costs, are unable to sell cars in today’s environment.

Until American consumers feel confident enough about the economy and their own finances to fill up dealer showrooms, the huge sums under discussion on Capitol Hill would be money wasted, merely postponing the inevitable bankruptcies of one or more companies—even though House Speaker Nancy Pelosi says that bankruptcy is not an option.

Potential buyers can’t get credit—and most new cars are sold on credit.   In October, GMAC, the credit arm of GM, began to require a higher credit score to qualify a potential customer for a loan.  According to GM, half of its sales decline in October—no word yet on November–was due to GMAC restricting its lending, costing about $1.4 billion a month in cash flow.

Congress needs to work on thawing out the credit market—and not just for autos but also for housing and other products.  Until that happens, and it could take many months, if the lawmakers believe that the auto industry deserves special help, members could simply give Americans money to buy cars.

This could be done in several ways.  The government could guarantee no-interest financing on cars—and itself pay lenders the cost of credit.  It could issue vouchers worth thousands of dollars a car to consumers. Or, it could award tax credits to buy cars, as it did with the Toyota Prius.

All of these incentives might cost the taxpayers less, depending on amounts and duration, than giving money directly to the automakers, and could be rolled back as the economy strengthens.

So, rather than lending $25 billion to the Big Three, here’s another idea.  Take the money and give consumers incentives to get into the dealer showrooms—and tell them to go car shopping for Christmas.

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.

The Detroit Three are rapidly running out of cash and face filing for Chapter 11 reorganization. It would be better to let them go through that process and reemerge with new labor agreements, reduced debt and strengthened management that would permit these companies to produce cars at costs comparable to those enjoyed by their Japanese and other foreign competitors assembling vehicles in the United States.

Circumstances are dramatically different today than in 1979 when Chrysler received assistance from the federal government. In those days, the challenge at Chrysler was to become competitive with Ford and GM, and Lee Iacocca had a clear plan to achieve that objective and succeeded. Today, the Detroit Three, though improved in productivity and with lower labor costs thanks to concessions from the United Auto Workers, are still not as competitive as the Japanese transplants.

Margins in automobile manufacturing are thin and there is no such thing as being competitive enough. Either a company is competitive or it is not—either it accomplishes the cost structure enjoyed by Toyota and Honda, operating in the United States, or it will continually cede market share and run into financial difficulties.

By assisting the Detroit Three, Congress can delay one or all of them going through Chapter 11 reorganization but sooner or later one or all will face reorganization. The communities and suppliers dependent on these companies would be better off going through that process now than by delaying it with assistance from the federal government.

Without a new labor agreement that brings wages, benefits and work rules in line with those at the most competitive transplant factories, and without reduced debt and other liabilities, the Detroit Three will continue to lag in product innovation and field too few attractive new vehicles, because their higher costs, debt and other liabilities require them to spend less on new productive development than they should. Also, they are inclined to field products with less desirable content to compensate for higher costs.

As consumers find vehicles made by Japanese and other transplants more attractive, like those imported from Korea and eventually from China, the Detroit Three will cede market share of one or a few percentage points each year.

If Chapter 11 is put off, the successors to GM, Ford and Chrysler that emerge from a bankruptcy reorganization process will be smaller and support fewer jobs than if these companies endure this difficult transition in 2009.

More jobs can be saved among GM, Ford and Chrysler and their suppliers if bankruptcy reorganization is endured now than in the future.

When Americans buy automobiles from the Detroit Three, more is contributed to the vitality of the U.S. economy than when Americans buy vehicles assembled here by transplants or imports. These vehicles have more U.S. content in terms of jobs, engineering and profits than do foreign nameplate vehicles.

The Congress could take steps to improve the attractiveness of making cars and parts in the United States by improving the public policy environment. This would include finally addressing, directly and forthrightly, undervalued currencies in Asia—currencies kept cheap by intervention by foreign monetary authorities in China and elsewhere. In addition, assertive efforts to develop fuel efficient vehicles could strengthen the industry and create export strength.

For example, Congress could offer an incentive for car buyers to trade in their gas guzzlers—the newer and the bigger the clunker, the more the car buyer would receive under the condition the vehicle is destroyed. This would raise the price carmakers receive from selling smaller vehicles.

Congress could provide substantial product development assistance to U.S.-based automakers and suppliers. The latter includes Toyota, Nissan and Honda, as well as the Detroit Three, battery makers and other suppliers to accelerate the production of innovative, high-mileage cars.

The condition for assistance would be that beneficiaries do their R&D and first large production runs in the United States, and share their patents at reasonable costs with other companies manufacturing in the United States. The huge U.S. market would help attract producers from around the world and rejuvenate the U.S. auto supply chain.