THE SYSTOCRAT PAPERS

By Paddy O'Brien

I've been having a lot of discussions lately regarding the bailout of the Big Three U.S. automakers and the general consensus from both sides seems to be that everyone is getting fed up with all these bailouts.  (I know that this isn't technically a bailout but a loan but as someone once said, you can put lipstick on a pig yada, yada, yada.)  Regardless, we are helping them out (saving them) and the ultimate question is do we really need to save them?  All of them? 

I was forwarded Thomas Friedman's recent NYT article on the bailout and it helped inspire this blog.  With this bailout of the Big Three are we in fact pouring money into a catalog business in the time of ebay?

Friedman's article questions whether Detroit is capable of any innovation whatsoever.  It was shocking for me to learn that the 1908 Model T got better gas mileage than most of the vehicles currently on the road.  THAT'S ONE HUNDRED YEARS AGO (100!!)  In other words, The Big three have failed to substantially increase gas mileage in a century.  Remember that we went from the Wright Brothers to the Moon in about sixty five years. 

While I'm not a "greenie" like Friedman, I do believe that the key to mass acceptance of an electric car is the ability of the vehicle to go long distances and to travel at an acceptable speed for the average highway traveler; approximately 80 MPH.  By mass acceptance I mean that people in Nashville, Boise, Amarillo and Jacksonville will buy the cars, not those who live on Louisburg Square, Wilshire Boulevard or the People's Republic of Cambridge.  The key to Friedman's article seems to be that the right kind of battery needs to be invented for the electric car and a national plug in network needs to be formed.  Friedman, as do most rational people, doubts that Detroit is capable of achieving either.  As currently constituted I agree with Friedman as Detroit has never grasped the need for vehicles with better gas mileage why would they now grasp the need for the appropriate battery for an electric car.

It's my opinion that we shouldn't bailout the Big Three UNLESS....they develop the right battery, a battery capable of producing the power to propel a vehicle for 80 MPH for 8-10 hours.   I find it hard to fathom that they can't use some of this money (as originally designed) to advance the progress on this development.   Regardless of the need to pay salaries, health care, bad union contracts, etc, a portion of this money MUST be designated toward technological development; i.e. electric cars and/or natural gas/hydrogen vehicles.

But alas, the bailout of the Big Three is an inevitability for several reasons; not the least of which is the fact that one of every ten jobs in America is directly related to the auto industry.  The tentacles of the Big Three stretch far as they are the largest purchasers of steel, glass, and computer chips and we would be remiss if we also didn't mention rubber, aluminum and plastic.  So it's not just the auto jobs but all the jobs from their suppliers and other industries as well that would be effected by a failure of one or more of the Big Three.  As the great German philosopher Udo Dirkschneider once said, they got your balls to the wall.  While this is true, we should be able to dictate some terms to the Big Three, some of which are set forth below.

I wouldn't bailout all three.  I'd bail out Ford and GM and tell Chrysler...owned by a private equity/venture capitalist firm to hit the road and sell off the good parts of the company to GM or Ford (not Toyota, Hyundai or Tata.)  At the very least, Chrysler needs to get rid of their CEO, Bob Nardelli, who was essentially FIRED b/c he helped drive Home Depot into the ground.  Nardelli lacked the vision to foresee the impact Lowe's would have on Home Depot; how can we expect him to counter the new up and comer Tata Motors?  Prior to Nardelli becoming CEO Home Depot doubled in size about every four years.  Nardelli and his supporters argue that Home Depot was reaching it's limit.  If it was reaching a limit, how do you explain the explosion of Lowe's, essentially Home Depot's only competitor? Couldn't Home Depot have put some stores in those areas?  During his duration as CEO of Home Depot the stock price was essentially unchanged while Lowe's nearly doubled.  Moreover, Nardelli's salary was double that of the CEO of Lowe's.  Are these the marks of a good CEO?  Your competitor's share price doubles and yours does nothing and then you obtain a $210 MILLION DOLLAR Severance package so that you will leave in hopes someone can run Home Depot with a vision and awareness of competition.  Any bailout that would include Chrysler, a PRIVATE company, must include the removal of Nardelli.

GMs CEO, Rick Wagoner doesn't exactly instill confidence either.  He is essentially a career auto industry man  who has run GM for nearly eight years and in that time the stock has essentially become slightly more than worthless.  It appears he's too far ingrained in the industry system to act as a CEO with the appropriate vision to resurrect GM.  If your a fan of sports and your team was always competitive and had won recent championships and the next manager or coach takes over and the team goes from perennial title contender to one of the worst franchises would that manager or coach keep their job?  It certainly appears that Wagoner has attempted to make the correct moves at GM and it can certainly be argued that if he hadn't made those moves GM would have come begging a couple years ago instead of today.  Who knows, maybe with the appropriate parts of a Chrysler break-up Wagoner is the guy to turn around GM.  It is Sen. Chris Dodd who is pushing for Wagoner to resign and that makes me think that if a political hack/crook like Dodd, who has no comprehension of business wants him gone that's probably good evidence that he should stay.  Let's not forget that Dodd's last endorsement of "a leader for ALL times," was Klansman and 1964 Civil Rights act opponent Robert Byrd.  I digress...despite the Dodd "endorsement," I don't think we'll be disappointed if Wagoner goes.   

Ford is another story, Ford's CEO Alan Mulally only came on board about two years ago when the company was already hemorrhaging.  Granted he's failed to stop the bleeding but that's probably has more to do with the fact it was a Sisyphean task than any actions (or inactions) he has undertaken.   Moreover, it is important to note that Mulally comes from Boeing who 1) competes well w/ foreign makers (thanks in large part to Mulally) and 2) has come back from the abyss not once but twice both of which Mulally deserves a lot of credit.  It seems clear to me that Mulally deserves more time as he has a history of being able to compete with foreign competitors and saving troubled iconic manufacturers.  Additionally, he was a proponent of the 777, the plane that helped save Boeing...maybe he can use that experience to develop and electric or alternative car that will save Ford.

Lastly, I would make it clear to the Big Three that this is it.  The public trough is now empty to you guys.  This is Chrysler's second time here and certainly there cannot be a third.