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Diane Francis

Diane Francis

Posted: May 3, 2009 11:23 AM

Detroit: From Socialism to Capitalism

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There are many ironies in the Detroit Saga but most striking is the fact that state "socialism" may finally turn North America's car industry players into capitalists.

Workers will no longer have Cadillac benefits, thanks to pliant managements and an oligopolistic business model. They will have skin in the game. And their managements will no longer fleece shareholders while being overpaid for sitting atop a business model that depended upon an oligopoly and cheap oil. Both will have skin in the game at last and have to work harder and smarter than ever before or be carefully wound down by their government backers.

The Chrysler deal, bankruptcy and one-third ownership by two governments, will become the template for General Motors and Ford Motor Co. This is because the Chrysler bailout enhances the company's survival at the expense of the other two, also struggling. It will also be a template because the UAW and CAW have agreed to a new floor wage as well as agreeing to take stock in lieu of pension fund and health care obligations.

Fiat by Fiat
The Chrysler deal, involving comeback kid Fiat of Italy, will change the landscape. It was driven into the ditch by storied playboy, the late Giovanni Agnielli, but rescued. Now its professional management is making a swashbuckling entry into North America through Chrysler and thanks to backstopping by the American and Canadian governments.

The strategy is that Fiat's small, fuel-efficient car models will become a competitive advantage once the U.S. and Canada imposes severe fuel-emission standards. The Americans are also wisely considering tax credits for those swapping gas-guzzlers for new efficient cars.
Irony of irony, however, is that anything can happen because Detroit is going to be true engaged in free enterprise.

In the past, unions had a monopoly over Detroit's automakers, were able to extract uneconomic concessions and boards plus managers were mostly interested in their own pay packages.

Another problem was that working for these companies, whether blue or white collar, appeared to be a family affair rather than a meritocracy run by people who think out of the box and have international experience.

What's ended here is not the car industry but the American car industry business model which was fossilized and impervious to shifts in trends or competitors. They deteriorated in profitability as foreign interlopers nibbled at the margins of their market.

Meanwhile, managements and boards were preoccupied with lobbying Congress and state legislatures to prevent any emission restrictions on vehicles rather than developing innovative, profitable products.

In essence, the North America auto industry behaved like a trust-fund brat whose fourth-generation mentality consisted of keeping the cash flow going so that everyone could carve up the money.

The perfect storm of economic crisis, oil price volatility and American overspending brought the trust fund kids to their knees, both in Detroit and Wall Street alike.

So now what we will see, if this bailout and the two others in the offing for GM and Ford, really work is that workers and managers will have skin in the game, take paycuts if necessary and concentrate on selling good cars.

On the other hand, Chrysler may be too far gone to salvage and be forced into the arms of a struggling General Motors and Ford orphaned and at sea.

But I prefer to take the optimistic attitude which is to say that free enterprise may have finally broken out in Detroit and government ownership plus bankruptcy may turn them into capitalists for the first time since I got a driver's license.