I think very highly of Ron Bloom, the Steelworker Financial adviser just named by President Obama as the car czar. Ron and Diana Farrell of the National Economic Council will head up the task force that will oversee the restructuring of our car companies. Both are first-rate appointments.
Ron is a bankrutpcy rock star who works out of a union office not a Wall Street highrise. He has jumped into some 50 bankruptcies in the past 20 years and he is very good at it. (And I take nothing from Diana Farrell who, with her McKinsey colleagues, has done some pathbreaking work on global productivity).
Ron and I worked together for almost a year to turn around Algoma Steel (McKinsey was on the other side of the table). Ron did an amazing job — he is a superb financial analyst, a strong and creative bargainer, and able to find deals in places where deals are very hard to find. He is smart, funny, and mildly profane — my kind of guy.
After Algoma, Ron went on the staff of the Steelworkers, where he has done more than anyone to help create a competitive US Steel industry. When Ron joined Leo Gerard, the tough and slightly crazy Canadian who had just been elected USWA President, the Autoworkers were twice as big as the Steelworkers. Today, the United Steelworkers are larger and a good bit of that that is due to Ron (and to Leo’s courageous decision to put up with a Harvard trained investment banker on his staff).
Can Bloom work his magic on the auto companies? As an economic matter, the patients require massive and painful surgery. This is why we have bankruptcy proceedings. In bankruptcy, the shareholders and most creditors are wiped out. Labor, dealer, and supplier contracts are restructured, assets liquidated, new lines of credit negotiated, new management brought in, etc. It is tough work that tests not just the patience but the values of the people who do it. Whether bankruptcy is the right tool for restructuring auto companies and if so, what flavor of bankruptcy works best has become a pundit’s parlor game. The patients, meanwhile, are declining quickly.
Three challenges make Ron’s task unusually tough.
First, Ron has the curse of the federal treasury behind him. Companies on public life support frequently conclude that federal money is really nice. Restructuring becomes a game of political chicken: the President will not let GM fail, so GM doesn’t take the really painful steps it needs to succeed.
Chrysler is not the problem — it looks utterly hopeless. Ford is not the problem, since at present anyway it prefers to sip its bailout funds, not gulp them. The big risk is that GM becomes like many banks — a federally subsidized zombie who cannot live and cannot die. A federal bail out may be perfectly good policy in a recession and bankruptcy may actually be as unworkable as some in the auto industry assert, but a credible death threat always helps a tough restructuring. Stern lectures from Congress just don’t count.
Second, the car business is massive, slow, and complex. Cars are regulated fashion goods with integrated and sometimes fragile supply chains. They have highly politicized workforces and distribution channels. They are culturally and politically iconic. They are not a global commodity like steel or a fungible service like airlines.
Auto makers live and die with new products, which take years and billions to develop. If you managed to eliminate chronic legacy costs and operational inefficiencies, you still have a product development pipeline that is 2-3 years long with a tendency to produce Hummers (exciting, impractical, expensive), Saturns (dull, practical, cheap), and Volts (exciting in theory, impractical in practice, and expensive). To fix this industry is not simply a matter of quickly reengineering very complex balance sheets. It requires a long-term product strategy against large, efficient global competitors. It is a very tall order and not one that the US Treasury Department is ideally equipped to handle.
Finally, in bankruptcy creditors compete with each other but in bailouts the healthy compete with the sick for public money. In other words, transplants want and arguably deserve a piece of whatever bailout money Congress puts up. The 19 transplants employ tens of thousands of Americans to produce cars that consumers often prefer to Big Three models. They will understandably resist the use of public funds to strengthen their half-witted competitors. This is a huge factor in the Senate already and will become an even bigger factor over the next 12 months.
Paradoxically, the Big Three will probably address this by doubling down — gambling that taxpayers will commit more money to a complete transformation of the car industry if it involved a transition to high mileage vehicles and alternative fuels. This, of course, makes the restructuring climb even steeper and asks Americans to trust in managers who have spent decades fighting against change, not for it.
So on balance, I don’t like Ron’s odds and if the economy turns I am likely to question the mission. That all said, I would never bet against him.