Monday, February 16, 2009

Businessweek: A few things for Obama's auto task force

From David Welch of Businessweek.

It appears now that there may not be a car czar after all. Instead the Obama Administration may set up a task force which reports to both Treasury Secretary Timothy Geithner and Lawrence Summers, chief of the National Economic Council, says the Wall Street Journal. That’s probably a good thing if it results in less bureaucracy. Plus, Treasury doles out the money that Detroit wants to borrow. So Geithner should play a key role.

Whoever the Obama Administration has overseeing the bailout and the restructuring plans that General Motors and Chrysler plan to put forth tomorrow, the task force needs people who really understand the complexity of the auto industry and the problems facing the domestic car companies. In November and December, members of Congress and various experts who testified in Washington threw out a lot of bad information. Let’s hope the people on this task force actually know something. Here are a few things they should be aware of as they assess the situation in Detroit:

1. Despite what the green wing of the Democratic party says, the Japanese do not make the hybrids that consumers crave. They make the hybrids that a small minority craves. Despite record gasoline prices last summer, hybrids are still less than 5% of the market. We don’t need to mandate more hybrids unless we mandate a gasoline tax that makes consumers want them.

2. Some southern Republicans think this is all the UAW’s fault. Not so. Wages are pretty competitive. The JOBS bank (that paid layoff clause that everyone hates) is on its way out. The union does need to give on its rigid work rules and its gold-plated healthcare deal. But you don’t save Detroit solely on the UAW’s back.

3. Some of GM’s bondholders will get hurt in a cram down of the debt to 30% of its value. But many of them also bought these notes at 15% to 25% of their face value. Treasury should assess how many of these bondholders will really lose something by taking 30% and equity in GM and use muscle to get them to play ball.

4. Watch GM and its plan to dump brands very closely. This company is culturally incremental. Without holding them to disposing of the brands, GM could hangdesign and onto some of them for years. That will sap billions of dollars in marketing and product development to peddle Saturns, Pontiacs, Saabs and Hummers that few buyers want.

5. It’s the retirees, stupid. That’s one of the biggest culprits when it comes to eating cash and profits. Pension and healthcare costs have been a big problem at GM for a long time. Management and the union are trying to set up a fund to pay for more than $50 billion in long-term retiree healthcare liabilities. They could make that easier to manage if they jacked up premiums and co-pays to equal 29% of total medical costs like the rest of us pay. The UAW pays less than 10%. Social safety nets in Japan and Europe keep their automakers out of the benefits trap.

6. Get credit moving. Obvious, I know. But nothing has managed to ease up lending much yet.

There’s my two cents. We’ll see who is on this task force and what they will do. Hopefully, there will be some sensible people looking at all of the problems and coming up with practical solutions.

I find myself in agreement. Point number 5 is troubling in that the US does not have a national health care arrangement. The automakers had arranged to fund the VEBA (the health care trust they designed with the UAW) in cash, but that was just before things really hit the fan.

Switzerland and the Netherlands operate private insurance-based systems that cover 99+% of their citizens, as detailed in a report by the Commonwealth Fund, a US health policy think tank. Both countries mandate a core set of benefits, although individuals may purchase supplemental insurance policies that cover non-core benefits (i.e. a lot of specialist care). This is one route the US should investigate.

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