The Great Debate

The uncharted waters of government ownership

– Louis E. Lataif, a former president of Ford Motors of Europe, is dean of the Boston University School of Management. The views expressed are his own. —

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.

Transfusions don’t stop the bleeding

– Louis E. Lataif is dean of the Boston University School of Management and a former Ford executive. The views expressed are his own. —

The federal government now wants to shore up ailing auto suppliers with a $5 billion bailout, despite a rising chorus of criticism against more government bailouts. The public is beginning to see bailouts as “transfusions,” rather than a closing of the wound, and is losing patience with them. The “wound” is falling housing values and toxic mortgage-backed securities which have paralyzed financial markets – not the auto industry.

The hastily approved $787 billion “stimulus package,” including aggressive spending programs unrelated to declining home values or the constricted capital markets, is tantamount to administering repeated, expensive blood transfusions rather than stopping the bleeding. Of course, if the blood flow at the wound eventually coagulates (one day the economy will rebound) then the transfusions can be claimed to have worked. But the delayed cure would have come at a crippling cost to the next generations of taxpayers.

Concerning help for “Detroit,” there may be no manufacturing industry more fundamental to the U.S. economy than the auto industry, accounting as it does for more than 10 percent of American jobs. Detroit is not without fault, but it has been dealt a lethal blow by the consumer credit crunch which it did not create. At a nine million-plus vehicle annual selling rate (three million below the scrappage rate), no auto company, American or foreign, can survive. But bailouts, a few billion dollars at a time, first to the auto manufacturers and now to suppliers, are both a political and business nightmare.

If the federal government is willing to spend trillions to “right the economy,” then it should reasonably serve as lender of last resort for critical industries. It should grant interest-bearing bridge loans to the ailing auto manufacturers — probably $150 billion for 18 months. The pent-up auto demand in 2010-2013 would be enormous. The companies could then be required to repay the loans with interest, making the taxpayers whole.

If these companies are “bridged” until auto demand recovers, their supply base will survive without separate bailouts. To let auto manufacturers fail, in this environment, will create untold collateral damage; the already weakened supply base, so intertwined among all the manufacturers, could shut down the entire industry. An auto bankruptcy would seriously deepen and lengthen the recession for us all.