Auctioning Detroit To The Japanese And Germans (TM)(GM)(F)(HMC)

When it comes to the trouble with the US car industry and a potential government bailout, the first and most important consideration is that no one is at fault. The dog ate everyone’s homework.

Yesterday, GM (GM) chief Richard Wagoner said the a collapse of his industry would ruin the US economy. He did not say that his company had any hand in the matter. Wagoner’s comments were a foretelling, not a confession.

At about the same moment that Wagoner was droning on, UAW boss Ron Gettelfinger said his union and its contracts with The Big Three did not do a thing to bring the industry down. The fact that US manufacturers have a labor cost per vehicle higher than their Japanese counterparts does not count for much. Gettelfinger did volunteer that the credit crisis and high fuel costs had savaged the auto business even though both conditions are less than a year old and gas prices are falling.

Over in Congress, members are fashioning one of the most complex pieces of legislation seen in the history of the Capitol. They want fuel emission restrictions as part of a loan package. They want management salary caps, and an oversight board which could veto any major decisions by the companies seen as unwise. That would mean turning down 90% of a car firm management’s initiatives. It would also prolong a process which needs to be finished in a remarkably short period of time.

One of the most powerful arguments for saving The Big Three is that consumers will not buy a car from a bankrupt car company. People get concerned about whether their warranties will be voided or if dealers will be in business to fix their cars. Since Detroit models have more defects that many from Japan that part about repairs is fair.

That does not leave many avenues out of the trouble, but it does make a powerful argument for one.

According to The New York Times, "many industry experts say the big foreign makers are established enough to take control of the industry and its vast supplier network more quickly than is widely understood." But, the risk that this would happen in a matter of weeks is substantial. Auto parts companies are already financially troubled and may not last that long.

Detroit’s assets are remarkably valuable if they are stripped of their union obligations and debt loads. Several Japanese and European car companies have the management capacity and balance sheets to handle the costs of integrating the American auto companies into their firms. The list of corporations which would have to be interested would include Toyota (TM), Honda (HMC), VW, and the Nissan-Renault alliance.

For the government to make an auction work, it would have to provide bridge financing to the two US car companies which face the greatest risk of Chapter 11-GM and Chrysler. But, instead of the money going to keep operations which will still be hobbled by their balance sheet and employee obligations, the capital would be available for the period it would take to run an auction. The federal government would need to appoint a receiver, probably a federal judge, to manage the process.

The right hands to hold Detroit’s assets are not the hands of their managements or their unions. These groups have already demonstrated that they are not competent stewards and will nearly always act in their own self-interests. To break that cycle, the ownership of the American industry needs to be held abroad by companies which have proved over a long period of time that the industry is not the problem. Detroit is.

Douglas A. McIntyre