Memo To Congress: Merge The Big Three (GM)(F)

Look at the GM (GM) 10-Q. The company had $3.3 billion in sales, general, and administrative expenses. That is all of those white collar workers, the R&D and product development staffs, the marketing men and dealer relations people, and the accountants in the basement of the headquarters in downtown Detroit. Ford’s (F) number is nearly as large and Chrysler’s must be $2 billion. Robert Nardelli makes a lot of money.

Added up, those costs of being in business, costs that are duplicated among all three companies, are $33 billion a year. Even in Detroit, that is a lot of money.

Car CEOs will argue to Congress that they can cut costs more and make better cars. None of them can take out $20 or $25 billion. None of them has the balance sheet to make all of the new cars that they will have to and spend all of the R&D money necessary to be competitive five years from now.

Jerome York, former car executive and servant to Kirk Kirkorian, says that a bailout of $25 billion is not even close to what Detroit needs. He puts the number at better than $40 billion.

The fact of the matter is that The Big Three have already cut most of the costs that they can. Cutting more now invites taking out things which are necessary to build a future. Cutting at this point involves too much risk, especially if it is left to the ham-handed people who run Detroit today.

The only way to have a shot at a competitive US auto industry is to rescue one company and not three. The government can simply say that it will provide a bridge loan if the firms do what GM and Chrysler already contemplated–marry up. Take out the overlap. Push $20 billion in costs out the window.

The argument against a three-way merger is that it would create a new operation with 48% of the domestic car market. Overseas companies should not worry. It is not so long ago that GM had that level of market share. It has lost over half of it by letting buffoons like Roger Smith take the wheel.

Skeptics would say that putting the three companies together would be a nightmare of organization and constant fighting over which people get to stay and which don’t. Putting in one good CEO might help keep those problems to a dull roar. A lot of discontent is better than bankruptcy. If each company stay in business and makes its own cuts, there will be a lot of internal wars anyway. It may as well be one big war. The same applies to negotiations with the UAW.

If a plan to create a new company shows it can make some progress, a bridge loan can become a real loan and the government might even get its money back.

Douglas A. McIntyre