Friday, October 31, 2008

Save GM's workers, but not GM

I've just listened to a discussion on KQED about whether the US government should bail out the auto industry. The reason the solution here is not obvious is that everybody assumes that to save the job of someone who works for GM, you have to save GM. I suspect that's not true.

Toyota makes lots of cars in the United States. I suspect the majority of Toyota's domestic sales are domestically built. It saves them shipping, and avoids exposure to foreign exchange risk. The overall point is that there is no problem with American workers making cars that sell. The problem is that some American workers are making the wrong cars, and that is the fault of their engineering and management.

The usual way for these things to work out is that GM would go bankrupt and it's assets would be sold. Toyota would hire some of those workers, and buy some of those assets on the cheap, because they'd know that with GM gone there would be a reduction in the supply of cars and so they could make more money by increasing their own production.

Crucially, the assets (e.g. assembly plants) would be sold for a fraction of their original cost because Toyota would have to adapt them to Toyota's production style. This is very important -- GM's production style isn't profitable, so those assets have to be changed to become profitable.

Also, crucially, the former GM workers hired by Toyota would have to be retrained. This takes a lot of time for Toyota. The rehiring process also tends to weed out at least some of the poorly producing workers.

All this adaptation of physical capital and retraining of workers is all good stuff. So what's so bad about bankrupcy?

GM's shareholders lose a lot of money. Actually, GM's shareholders lost a lot of money a long time ago. GM's total market cap isn't very large, and hasn't been for a long time, because GM has had bad management for a long time. I claim that this problem is not terrible and does not warrant intervention from the government.

GM's workers and suppliers have no business for a long time. This is the real problem, and this is something that the government can help with.

So, here is what I suggest. I suggest that because GM, Ford, and Chrysler are "too big to fail", the government should intervene before they shut their doors, and negotiate an orderly transfer of their assets to companies that can make those assets perform. I suggest that Toyota and Honda and Mercedes and so forth would be willing to purchase much of the assets of the big three for a fraction of their orginal price, and would be willing to take government inducements to keep the factories open and the workers employed while they are restructured and retrained.

The result will be that some assembly people will be put out of work, because not all the Big Three's plants will be purchased. The corporate management of the big three will go unemployed, which is fine, as they are responsible for the current distress in those companies. There will be differences between the financial commitments that GM has made to its workers, and those that Toyota makes its own, and the differences between those commitments will have to be worked into the sale price from GM to Toyota.

We need to clarify the idea of "too big to fail". Our commitment is to our people, not to our companies.