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The Detroit Three Must Embrace Reforms

December 8, 2008
Weekly Columns

As Congress returns to Capitol Hill this week, a divisive issue that was put on hold before Thanksgiving has reemerged. Three Detroit-headquartered automakers - Chrysler, Ford and General Motors - have asked members of Congress to consider giving them a multi-billion dollar bailout. Even though the current economic crisis has increased the burden on American automakers, these so called "Big Three" are in the midst of a financial crisis that has been decades in the making. And since the automakers have thus far failed to present a realistic plan to get their houses in order, Congress has been justifiably skeptical about the wisdom of simply handing over tens of billions of dollars to the bail them out.

There is no doubt that the American auto industry is floundering. Only a few weeks ago, legislation passed through Congress that awarded a $25 billion dollar federal loan to help American automakers build cleaner and more efficient vehicles. But with the economy continuing to struggle, the Big Three executives have returned to Washington to ask for more financial assistance. Unfortunately, another costly investment by U.S. taxpayers does not guarantee that automakers will reform the habits that caused their current spiral. In fact, a bailout may only encourage the status quo.

The Big Three are also plagued by other long-term problems. These automakers have structured their factories to build oversized, gas-guzzling vehicles such as SUVs and minivans. While that may have been a smart-move in the early part of this decade, they have been slow to transition to manufacturing more fuel-efficient cars. Being out of sync with current market trends, the needs of the consumer, and slow to change their ways, has devastated Detroit's auto industry. And pleas for a handout have caused many people to scratch their heads after comparing Detroit's auto firms to other non-Detroit based firms, such as Toyota, who have continued to post small profits despite the current economic downturn.

But perhaps more than anything else, the high cost of labor - including exorbitant salaries and bonuses for corporate executives - and the expensive, open ended employee benefits are preventing the Detroit automakers from restoring themselves to solvency. For far too long management and labor have pointed their fingers at each other and blamed one another for the industry's woes. Management accuses labor of forcing them into unsustainable contracts while labor bemoans the $25 million salaries and bonuses that several of the executives enjoy. In truth they are both to blame and they both better come to the table ready to make significant concessions if the industry is to survive. With or without government assistance, all parties must come to the recognition that the model under which they have operated for the past 30 years is simply unsustainable.

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