Looking to the Future of the Big Three
There has been much discussion in Washington and in the media about what to do with the Big Three. One school of thought is that the country cannot afford for GM, Ford and Chrysler to fail and fall into bankruptcy so they must be bailed out The other line of thinking is to let them fail as they have run the companies into the ground with an ostrich-like approach to strategic planning.
I have written a few columns about the Big Three, GM and the Chevrolet Volt. I have written about how Ford has created a car manufacturing plant in Brazil that points the way to effective and profitable car production. I have been a strong supporter of the limited efforts of the Big Three to move to a new paradigm that is required to become a future, most clearly represented by Larry Burns. In spite of all that there is much to be angry about.
If, in 2006 I could see that oil would reach $125 a barrel in 2008, why couldn’t Detroit? If Toyota can prove that selling a hybrid that gets up to 50 miles per gallon is a popular and profitable idea, why can’t Detroit produce such cars? Well those are very valid questions. The only answer is that the eye on the profits generated by gas guzzling trucks and SUVs was such that the Big Three had a myopic strategic view on the vehicle marketplace. That is why I have been predicting for the last 6 months that the Big Three would become the Big Two, at best.
There are only three options to consider.
1. We let the companies fall into bankruptcy so they can be reorganized. This is what troubled companies do when continuing to operate as they have no longer seems valid. The airlines are a recent example of this. I would normally support this option in stronger economic times. Tough love for companies to come back as stronger entities has a history of success. However the current financial and economic disaster that America is now in would be greatly amplified by this process. There might be 5-7 states where unemployment would immediately shoot beyond 10%. Without a plan to retrain employees and retool manufacturing, bankruptcy will just cause greater economic damage to the country and would significantly prolong the economic downturn.
2. We nationalize or semi-nationalize the Big Three. Fire all the board members and top management that have “led” the companies to this point. We bail out the industry by essentially financing it and dictating management. The key here is to find the right management. As Tom Friedman suggested, bring in Steve Jobs to lead innovation and R&D. As my wife suggested, bring in Warren Buffett as Chairman of the Board. In other words, bring in leaders who do not come from the insular world of Detroit. Make the American Taxpayer the largest owner in the companies with a risk reward scenario that provides an upside. This option will still result is an increase in unemployment and lost benefits, but at least new leadership might improve the chances for success and will also create the opportunity for government funds (read taxpayer funds) to be repaid.
3. Embrace competition and set metrics. This option I have yet to see anywhere, so I offer it up for consideration. Tell each of the Big Three that the goal is to have dramatic increase in average fleet MPG and the entire product line be either hybrid, plug-in hybrid or pure plug-in. In simple terms it could work in the following manner. Give each company the money they are requesting but set performance standards. The first company that gets to a fleet average of 45 mpg based upon building cars for the future, cars that are not totally reliant on the internal combustion engine, will have the federal investment forgiven. The second company that reaches the goal gets to repay the loan at a low 2-3% interest rate. The company that comes in third will have to repay the loan at 5-6% interest rates. If any of the companies fall, the federal government is in first place to recoup funds in the liquidation of assets.
There are several things I like about this option. It will smoke out current management as to their intentions and capabilities. If they resist it, it will show that they are not sincere or confident in their capabilities to completely reinvent their industry. It will set the Big Three goals in perfect alignment with the needs of the country to move away from the gasoline internal combustion engine as quickly as possible. President Elect Obama has correctly stated this as an essential goal for this country. Align the financial bail out of the Big Three with this goal directly. Businesses all over the country are lent money based upon performance metrics. It is the performance that counts, not the perpetuation of failed business models or management teams.
Finally, this option promotes the American values of competition, of rewarding superior performance, of avoiding nationalization that many call socialism and also provides a better probability the taxpayers will get repaid.
We stand at the beginning of the Shift Age. We must face it with forward looking intelligence rather than “solutions” that honor the past with strategies that will no longer work.