Pearlstein: Restructuring the Auto Industry
Wednesday, February 18, 2009; 11:00 AM
Washington Post columnist Steven Pearlstein was online Wednesday, Feb. 18 at 11 a.m. ET to discuss the restructuring of the auto industry.
A transcript follows.
About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.
Pearlstein was honored with the Pulitzer Prize for commentary for his columns about mounting problems in the financial markets. His award was one of six Pulitzer Prizes won by The Washington Post this year.
Read Pearlstein's latest columns.
Clifton, Va.: Obama should have named Bob Lutz car czar. A committee of fools will destroy the U.S. auto industry. They need car guys not number crunchers and lawyers. For 98 percent of the American public a car is a emotional purchase.
And finally the government needs to stay out of the business of telling us the American consumer what kind of vehicle to buy. If we all want to buy Dodge pickup trucks with hemi's that get 10mpg and warm up the planet so be it. This is not the Soviet union yet.
Steven Pearlstein: I certainly share your concern that the government shouldn't be telling us which cars to buy. But it should be taxing fuel higher to pay for the social cost of environmental damage, which may discourage you from buying that big truck you like so much.
Bob Lutz as car czar. You gotta be kidding!
Herndon, Va.: Steve,
Do you think GM and Chrysler will come back to feed at the trough for a third time in about three months? My guess would be yes. I mean the banks are getting ready for their 3rd course in the next month of so right? Please tell me this ends at some point and the end of the story isn't government default or massive inflation.
Steven Pearlstein: No, they won't. This is the real deal and the final deal, if it happens, which I think it will. Let's not get into this phase where we get so cynical about everything and everyone. This is a solvable problem, albeit one that requires some radical changes in the way things are done and perhaps even who is doing them.
Ocracoke, N.C.: I am a 73 year old retired attorney who has been a motorhead since age 15. In that time I have owned more than 150 automobiles and race cars. Quite frankly, driving an automobile from Detroit or Japan, whether new or used does not enter into my equations because the Japanese cars are boring and the Detroit cars are too harsh. So what I do is purchase older Saabs and Volvos with low mileage, improve their handling and safety with after market products and run them until 250,000 miles are on the clock. The last American car I owned was a 1967 Chrysler Imperial used as a tow car for an Elva Porsche I was racing in the Pennsylvania Hillclimb Series back in the middle '70s. I am very happy. Gerald
Steven Pearlstein: I tend to be with you on this one, buying cars from Sweden and Germany. I'm not enough of a car person to know about refitting them with better aftermarket products, although I have figured out that bringing cars to those dealerships for repair is not the most effective in terms of cost or my time. Glad to know that it is the inferior replacement parts that is part of the explanation.
Southwest Nebraska: Are the automakers being sober, thoughtful and honest in their assessment of how many layoffs there will be or is there a touch of extortion in their numbers?
Steven Pearlstein: No, no extortion. I think they, like the union, are playing things pretty straight right now. I do wish they'd stop this last minute brinksmanship, however. It's tiresome and unnecessary.
Tuscaloosa, Ala.: With regard to GM, if GM is not viable, we need to let them go. We cannot sacrifice the whole for the good of a few. It is the shareholders and executives that have the burden to handle GM's crisis. Do not shift this burden to the taxpayers. They should be forced to restructure in court. The bailouts should end. Lind
Steven Pearlstein: The shareholders are effectively getting wiped out, so don't spend too much of your energy complaining about how they are being bailed out. The top executives have largely changed, and may need to be changed a bit more, but that's also not a big factor here. These companies will be run for the benefit of their creditors, primarily, including the taxpayer and the retired workers who will have to put their future health benefits on the line. And, importantly, they will be run with a primary focus on the customer rather than on fulfilling financial obligations to workers or satisfying the short-term focus of Wall Street investors.
Toledo, Ohio: I work in a sub-industry of the Auto Industry and I see this current economic crisis going one of two ways. If the current Stimulus Plan and other subsequent stimuli gain traction, the U.S. consumer could potentially go back to spending as we have over the past 15-20 years and lead the world out of this economic crisis by mid-2010. If the U.S. consumer completely digests this crisis, we could see a radical change in spending within our generation similar to the generation that grew our of the Great Depression. In this scenario, I think the crisis will last much longer (maybe 10-12 years) and bring about a series of other socio-economic changes that will ultimately solidify the U.S. economy for the next 100-200 years of growth. Given these choices, which do you think is more likely?
Steven Pearlstein: You are right, I think that there is a tipping point ahead that can either be avoided, or set us on a course for a very unsatisfying decade. Either is possible and alot depends on how the recession unfolds and how governments around the world, including the US, respond. But you should be clear on one thing: the idea can't be to get things back so the US consumer and US government is using debt to prop up the whole world's economy. The idea isn't to return to the status quo ante.
Los Angeles, Calif.: It appears that you have changed your opinion on auto industry bankruptcy. You sound rather optimistic regarding the future of the U.S. auto industry. What contributes to your change in tone?
Steven Pearlstein: This IS a bankruptcy process, by another name. And I still think that, at the end of the day, the deal will largely be struck outside of bankruptcy and then run through the bankruptcy process very quickly because there will be some parties that won't agree to deal and have to have it crammed down their throat. It may also be necessary for legal reasons. So I don't think I've changed my position on this at all.
That said, I have always thought that GM is viable and Chrylser is not (some of its more valuable brands will be sold off to a foreign firm).
Mt. Lebanon, Pa.: Wall Street. Detroit. Big Pharma. Big Agra. Banking. Global Energy. The Next Wowwie.
Why don't we just bailout everyone? My taxes will pay for you; you pay for the guy behind the tree; he pays for the limo liberals; they'll spend for oldsters; they'll leave their loot to the young; they'll give to Rush and his Ditto nation; ad nauseum...until something comes back to me. I hope it's not the tab for the Decline of Western Civilization close-out party.
Like Voltaire said, we'll all get rich taking in each other's laundry.
Something wrong with this analysis? If so, maybe there's a high-wire career in big bailouts coming my way.
After all, with Paulson, Rubin, Corzine, Ace Greenberg, Dimon, Geithner, Alan "Crazy Al" Greenspan, Jumpin' Jack Flash (Welsh), et al - how hard could it be?
Thanks much. HLB
Steven Pearlstein: Your view is widely shared. Not sure it is the right one, though. We'd be in for a long winter if the government keps its hands off.
Manassas, Va.: Mr. Pearlstein,
If GM is going to cut some of its divisions, why not cut GMC and leave Saturn alone? GMC makes mostly gas guzzling trucks. Saturn makes gas sipping cars, has a Hybrid Vue and has another PLUG in Vue in its future. At least Saturn is thinking alternate power sources! By constantly selling trucks is how GM got in this mess in the first place!
Steven Pearlstein: I think you are letting your environmentalist impulses override good business sense. In the end, you have to produce what people want to buy. As I said, we could tilt what people wnat to buy a bit by increasing the fuel tax. But this is America, and people get to drive what they want as long as its legal. Liberals should be careful about trying to impose their lifestyle and their values on other people, just like conservatives should be careful of the same thing.
Great Article!: I especially liked your point about how journalists have been among the "aristocracy among professionals", and how the combination of disintermediating technologies and the present economic situation are bringing about positive change. Journalists are just going to have to realize they don't deserve the excessive pay and job security their profession paternalistically gave them, and they arrogantly came to expect.
You're absolutely right about that, and I'm glad you never wrote about that business in sickening language of "protection", or other suych insane market interventions to prop up an excessive income and lifestyle which is unsupported ina true market society. Good show, sir!
Steven Pearlstein: Actually, journalists are not particularly highly paid, compared to people with similar skills, job experience and education. That just doesn't pass the fact test.
It is true, however, that technology is disintermediating journalists and putting downward pressure on journalistic wages. So be it.
Detroit, Mich./District of Columbia: As a Detroit native the industry from even two years ago, looks nothing like the industry of Henry Ford. Instead of cars the lower and middle classes can afford, Chevy offers a new electric Volt for $40,000 while cutting new factory worker wages to $14-17 an hour. These aren't vehicles the lower and middle classes can afford, especially now. We need a return to simple, easy to repair/maintain, and durable vehicles that cost $5,000. Will we get there?
Steven Pearlstein: Hey, there are a lot of very inexpensive cars out there, many of them foreign made but some US made. You can get new cars now for under $12,000. And of course there are a lot of deals out there now on used cars for under $10,000. By Henry Ford standards, that's affordable.
Laurel, Md.: Another different-but-similar problem facing auto workers and banking executives is how to turn current good times into lifetime security. We've all heard that every GM car contains more health insurance than steel because of union contract commitments. Those executive pay packages were essentially compensating a lifetime of loyalty with a couple of years of premium earnings.
But this is a key issue in our current economy -- how does a 50 year old plus blue collar worker whose industry is downsizing start a new career? We currently have a baby boom generation who hasn't started retiring yet (and who we can't afford to let retire early) while the baby boomlet is starting their careers. How we handle the "right-sizing" of the employees in the auto industry is going to say a lot about the value we place on humans as opposed to money in our economy.
Steven Pearlstein: I agree with your second graph completely. But the first graph, trying to put the blame on executive pay and pensions, isn't really a big factor in the car industry.
Atlanta, Ga.: Much to your column, CNN (and other websites) have been publishing stories about those poor poor people who were making well into the six figures and they are now 'forced' to take jobs that make less than $50k. Some of those profiled barely have any education.
My thoughts on that is that they were probably overpaid before, and they should have been grateful that someone paid them that much for as long as they got it. And if they were really worth it, they would be making it still. (I'm a huge believer in the capitalist system, I think many of the screw ups were due to over-regulation and/or under-regulation - but seriously, I do hold the regulators/government to a higher standard than others - they have the public trust...Wall Street does not).
And any company that would hire Bob Nardelli after his fiasco at Home Depot should NOT be getting a penny of government money.
Steven Pearlstein: I made a similar point, somewhat more tactfully, in a column a couple of years ago and, as you might imagine, got a lot of letters from auto workers who didn't like being called overpaid. But its true -- they were, because their companies earned the rents necessary to do so and still have something left over for their shareholders. Now the competitive situation is such that the companies can't afford to, so they won't. Unfortunately, it took just so long to get to this point that the viability of the companies has been put into jeopardy.
McLean, Va: You've taken some interest in the Russian economy in the past. How big of a time bomb are we looking at there right now?
Steven Pearlstein: Big.
Urbana, Ohio: After 40 years in the auto industry as a suppier (now retired) and having dealt with each of the big three the ONLY solution is make them file chapter 13. The public will see it as a positive not negative. I have been in many of their operations and until they get rid of the bad practices and legacy costs they will never become profitable. We are just prolonging the inevitable. By the way my brothers have a Ford and Chysler dealership and agree with me. We know what Obama promised the unions, but he better make the right decision here or he will be dealing with it for a long time. One on them actually must fail to take out the capacity in the industry, downsizing is a bandaid.
Steven Pearlstein: Its nice to think we can just make these companies go away, but that's not gonna happen and shouldn't happen. There is too much of value there that should be saved, and the adjustment process from simply liquidating the companies would have a very negative impact on a very fragile economy just at the moment.
District of Columbia: You mentioned last week that you prefer writing columns to writing books, which means that you explain and teach in that short format. Given that one of your recurring messages is how little most of us understand about the economy - and how quickly we jump at shadows, fads and gimmicks - is there a book or two you'd recommend to start us on the way to discovering the things we don't understand?
I know this is a simplistic question, and "something more than Economy For Dummies" isn't very specific. However, most of us have never been in greater need of the basics of an economic education but we're drowning in competing books with no idea where to start. Any help would be greatly appreciated!
Steven Pearlstein: You know, it sort of depends on what you want to learn about. Finance. Or macroeconomics. Or micro. I think what I'd say is get a subscription to the Economist and begin reading here or there on subjects that interest you. You'll pick it up before too long. And then you'll be able to figure out what books are best for you, because they or their authors will become familiar.
Richmond, Va. : Re: your column today. I can see (sorta) the parallels between where Wall Street and the autoworkers have been and where they need to go to stay variable. Problem is, it sounds more like a movie script with a happy ending than reality. Wall Street will not give up their high salaries/bonuses since they believe they earn them, and the autoworkers ... well ... just this morning, on NPR, a report says they are fighting every give-up suggestion. In the meantime, you have the executives of both Detroit and Wall Street -- the architects, those that set the standard for all these failures -- and they are still in place. Tell me if I am wrong (and also unrealistic), but these are the people that need to be replaced before any new direction -- and recovery -- can happen.
Steven Pearlstein: Its changing, trust me on this. The unions have already given up almost everything that is inconsistent with the market realities, particularly for current and new employees. And the gravy train is over for Wall Street, as these guys are going to find out in the coming couple of years. Its not just the government that will make that so. The markets, also, will be the big driver.
Arlington, Va.: Mr. Pearlstein,
One change you didn't mention in your column is permitting the shareholders of publicly traded corporations to approve the compensation packages of their highest-paid employees. Though somewhat difficult to implement, this requirement will reduce much of the bloat.
Steven Pearlstein: I think that is coming, but it may require one more megacrisis to get that through.
Potomac, Md.: By the way Steve, I don't think Chrysler will go away anytime soon, especially if the deal with Fiat goes through. There are some neat Mini-size cars they have that, if they build them here in the US and pass testing, I think will be popular.
To the earlier poster about GMC: That is about the dumbest thing you can do, to shut down the GMC division. What are you, some anti-blue-collar guy who wants to put all the plumbers, roofers, painters, and construction companies of the world that buy all these trucks and flog them to death to go out of business? Sheesh, at least hybridize 'em!
Steven Pearlstein: Think you got that right.
you have to produce what people want to buy.: Ah yes, the "people want to buy" fallacy. Twenty years ago the management of U.S. car companies decided to sell huge, unsafe, inefficient, macho trucks and cars. They spent billions in advertising to get this done. Even today, on this year's super bowl, over half the ads were for gas guzzling trucks and SUV's. U.S. companies produce the F-150 and the Yukon while Toyota makes the Prius which is years ahead of anything designed in the US.
Steven Pearlstein: I suspect more F-150 trucks are sold than Priuses.
Columbia, Md.: Hi Steve, Well, another bailout for Detroit. Most everybody knew that Detroit would come back for another round of dole, but we were told the first one would be it. When we talk about home mortgages, we get told that lenders need to be 'encouraged' to either lower rates or principal. What is it about Capitalism, our financial culture, that always frames 'relief' for big companies or businesses as a fait accompli while anything that is done or should be done for the common man is always debated to death? Why 'encourage' lenders? Why not force them to deal with the issue? If they don't want to play, let them go out of business. Why is that so unusual or unthinkable a concept? Is it because the 'common man' doesn't have an association or bureau or institute that lobbies for it? Please humor my cynicism...I am really at a loss to explain it. Thanks for another good column.
Steven Pearlstein: Its because the failure of big companies can have big impacts on the economy. That's the only reason.
Arlington, Va.: Lately I have been reading some real pessimists who basically say this is already a depression and will remain so. They argue that depressions bring about needed structural changes in the way we do things. I think this seems about right. And that most of us have no idea how radically things must and will change. Do you think we are all living in denial about the gravity of this situation? Sure, people are worried about losing their jobs and so forth. But what about the big picture changes we are in for?
Steven Pearlstein: I think this is a good question, because people are only slowly coming around the the degree of structural change necessary to come out the other side of this crisis. Lots of things about the way we do business and how we structure our lives and our finances have to change.
Richmond, Va.: Interesting analogy between Detroit and Wall Street. I would however note that there appears to be less out and out fraud in Detroit, given the recent events with Madoff and Stanford Financial.
Steven Pearlstein: Have you heard of the Chevrolet Corvair?
Madison, Wis.: Mr. Pearlstein, thank you for today's column and for taking questions.
You stated, "Customers will be afforded greater protection through more aggressive regulation, greater transparency and higher capital requirements."
It appears that for the past 10 to 15 years, shareholders' have rewarded companies that stressed reducing payroll, rather than creating new markets or new products. This has been done to moderate the peaks and valleys in share value caused by business cycles.
My question is, will any of this new emphasis on transparency and oversight help to prevent another "jobless recovery," or are employees of publicly-traded companies going to continue to suffer stagnant wages and layoffs?
Steven Pearlstein: I don't think stagnant wages and slow job growth are found only in publicly traded companies. It is true that public companies have had a shorter and shorter time horizon because the people who own much of the stock are more traders than real investors. But if you think small business owners pay above average wages because they are nice guys, I don't thinnk you've met enough small business owners.
Philadelphia, Pa.: "Liberals should be careful about trying to impose their lifestyle and their values on other people, just like conservatives should be careful of the same thing."
Wow, this is a pretty relativistic statement from a journalist. The "lifestyle" referred to here is one based on a set of FACTS -- that human behavior is bringing drastic, rapid, potentially catastrophic changes to the planet. Obviously, we can't KNOW so certain the consequences of climate change. But they hold significant potential to make our economic crisis seem trivial in comparison. Now is the time for ACTION -- that's not a liberal or conservative point of view; it's one that simply acknowledges the FACTS as they are today.
Steven Pearlstein: I don't there is a problem passing a rule saying that cars have to get minimum mileage standards by a certain date, as long as the technology is available to do that. And it may well raise the price of cars, which is reasonable. But in this country, we generally value personal choice and rely on markets to sort out a lot of things. Is the next step for you to insist that everyone wear earth shoes and eat granola because the FACT is that this is better for their health?
Laurel, Md.: You touch on this somewhat in today's column, but could you expand a little on how the executive salaries at bailout banks should be structured. Obviously it was wrong to encourage short-term thinking with stock price incentives. But what should be offered to top-tier executive talent to attract and keep them to the not-much-fun job of overseeing a long-term restructuring of these large institutions?
Steven Pearlstein: Its not just executive salaries on Wall Street -- lots of people get paid with big bonuses if they or their unit perform well during a year.
The trick is to structure the performance pay so that it reflects the creation of real, longterm value for customers and shareholders. If you give somebody a bonus for structuring a record among of mortgage debt one year, and it turns out the mortgages are lousy and the securities nearly bring down the bank two years later, then that's not a good incentive pay plan.
Princeton, N.J.: Here is my usual left wing comment on auto unions. Are my figures wrong?
Let's get the facts about auto labor costs. Labor only accounts for 10 percent of the price of a car. If you cut GM labor costs (wages, benefits and retirees) by 50 percent that would only lower the price of a car by 5 percent which is less than most of the discount plans.
Here are the numbers:
Base wages for Toyota and GM are the same - $30 per hour or $60,000 a year. If you add in overtime, bonuses and profit sharing, the Toyota worker takes home more. (I can't give exact numbers since Toyota won't.)
There is a difference of about $20 a hour ($70 v. $50) in total labor costs which is almost entirely due to the 432,000 retirees GM supports. The retirees get a lot less than current workers, but if you lower their support by $5 a hour and lower the base wages of current GM workers by the remaining $15 a hour, Toyota workers will be getting over twice what a GM workers gets, both the GM current workers and retirees will be destitute,.... and you will have lowered the price of a GM car by less than 3 percent.
Steven Pearlstein: The problem is in the retiree costs, primarily, and some of the work rules for current employees, plus the job security guarantees. To a lesser extent it is in current workers health care insurance costs.
Also, in your analysis, you've left out an important part of the calculation. These companies are losing money. And any fixup has to now only close the cost gap, but generate sufficient profit to make these viable companies for the long run, having the money to invest and being able to ride through downturns. All of which means that the changes have to be bigger than you assumed.
Wilmington, N.C.: P.S. Don't forget that "idiot" out there driving a Dodge Durango might be doing carbon exchanges or personally planting a bunch of trees or have it specially tuned for better mileage. Sometimes you just don't know. Thank you
Steven Pearlstein: Fair enough.
Regarding books: Michelle Singletary has column on Book of the Month which your can find in the Post archives. She explains why each book was chosen and even gives one copy away to her readers.
Steven Pearlstein: Good point.
Chevrolet corvair: Actually I haven't cause I'm pushing 50 and that thing was canned in what 1964?
Although maybe the Pinto would have made the same point....except for anyone under 40!
Steven Pearlstein: Right. I'm showing my age.
Monroe, Mich.: I understand the concept of corporate restructuring. Has anyone explored the fact that the Big Three make cars that people do not want to buy? American cars are not as sleek and sport as Japanese and European cars. Many people prefer the Accord, Acura TL, and Camry over the Fusion, etc. As for high-end cars, I don't see people falling over themselves to buy Cadillacs, when they can buy Mercedes, Lexus, and BMW. Detroit needs to make a competitive product and right now, their cars are not competitive on an international stage.
Steven Pearlstein: Yes, they do. But let me turn the question around and ask yo why they don't. They know the problem you just describe. They have marketing data up the whazoo. They have engineers. They want to do it right. What is it about the company, its employees, the culture that has them turning out so many cars that have limited appeal?
My own answer to that question is that it has a lot to do with people getting into ruts and thinking about things in the same old way. And one way the Detroit auto companies might do that is to move their product design shops out of Detroit, where there seems to be a kind of group think that has a bad effect.
Boston, Mass.: A little off topic, but I was surprised to see GM keeping the Buick label. I get Chevy (middle class), Caddy, and GMC (work), but why Buick? Why not turn Saturn or Saab into a funky entry/testing ground like Scion?
Steven Pearlstein: Obviously they sell enough Buicks to make it worthwhile, in their opinion.
Rockville, Md.: "Have you heard of the Chevrolet Corvair?"
What most people do not know is that it was too technically advanced for the mechanics to maintain. The air cooled motor required lots of sheet metal to move air to the right places for cooling. My mechanic just tossed it all away. So it always over heated.
I knew to be careful for "spin outs" and that was not a problem.
It could have been the American version of the VW Bug. But GM never trained the mechanics it needed for the technology it used.
Steven Pearlstein: Interesting. Good to hear from the over 50 set.
I suspect more F-150 trucks are sold than Priuses: But I have never seen a Prius ad. They sell all they make.
Steven Pearlstein: So why don't they make more? maybe because they have a pretty good sense of what the market is.
Richmond, Va.: Why do you think Ford has thus far been able to avoid having to take government money, and do you think they will be able to continue to do so?
Steven Pearlstein: No.
Pittsburgh, Pa.: "These companies will be run for the benefit of their creditors, primarily, including the taxpayer.."
So the U.S. Taxpayer is going to have an equity position in Chrysler, GM, and Ford?
When will John Q. Citizen see his earnings statements?
Otherwise, let's not let the catastrophic (present situation) be the enemy of the absolutely horrible (all go to bankruptcy court).
Grandpa survived the Great Depression (with mirror-gazing, world central bankers like the ones we have now). We can survive the present fait accompli. We're humans: made to adapt.
Good session this morning. Thanks.
Steven Pearlstein: Thanks to you. And that's all the time we have. "See" you next week.
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