What Can Automakers Do To Win Bailout?

America's automakers have been ordered to come up with a profitable business plan before Congress will consider bailing them out. John Paul MacDuffie of the Wharton School of Business talks with Andrea Seabrook about what that business plan might be — if such a plan is even possible.

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ANDREA SEABROOK, host:

America's carmakers won't be getting a bailout just yet.

House Speaker NANCY PELOSI (Democrat, California): Until they show us the plan, we cannot show them the money.

SEABROOK: That's House Speaker Nancy Pelosi at a news conference this past week. Congress has just decided to send the titans of the auto industry back home with empty hands and a big homework assignment - come up with a business plan to get the big three, Chrysler, Ford, and GM, back in the black. Pelosi added that she hopes to see that plan in a week or two.

John Paul MacDuffie is a professor at the Wharton School of Business. He's also the co-director of a thinktank called the International Motor Vehicle Program. Welcome to the show, Professor MacDuffie.

Professor JOHN PAUL MACDUFFIE (Wharton School of Business, University of Pennsylvania): Thank you. Glad to be here.

SEABROOK: Is this task even possible? I mean, if automakers could have come up with a way to be profitable, wouldn't they have done it already?

Professor MACDUFFIE: I think this is really a plan to justify the government providing some assistance to the industry. I do have to say that one thing I think is missing from the whole approach so far is, there hasn't been any encouragement so far for management to sit down with the union, with suppliers, with dealers, you know, all the parties and come together with a plan that involves some sacrifices and choices for all of them and hopefully, some creative problem solving.

SEABROOK: If you were going to write this plan, this business plan, what would it look like?

Professor MACDUFFIE: I think there ought to be four categories. There are things that the industry is already doing right - gains in productivity, gains in quality. Certainly, we all want to see that continue, but we want to hold them to it. Secondly, I think there are things the government has a public interest in having the industry do, making these payments into the trust funds that will take over the retiree healthcares, some of the goals on perhaps even exceeding the current requirements for fuel-efficient vehicles or developing alternative fuel vehicles.

I think there are things the government probably doesn't want to see the money spent on - the payment of dividends, excessive executive compensation, but I think there could also be a prohibition of using the funds for actions that are viewed as unwise or maybe detrimental.

SEABROOK: Like?

Professor MACDUFFIE: My view is that I don't think the fund should be used to facilitate a General Motors-Chrysler merger, for example. I think it's a bad idea. I don't think these companies are doing all that well reducing their own brands, and so why would you think they can do this better in the context of a merger at a time of crisis?

SEABROOK: Uh hmm.

Professor MACDUFFIE: And then my final category is really changes in management personnel or management policy. This is the same kind of thing that a bankruptcy judge might very well require if this thing went into bankruptcy. I don't see why it couldn't possibly be a government condition as well.

SEABROOK: One of the big questions is whether the industry should be allowed to go bankrupt, as in survival of the fittest in business.

Professor MACDUFFIE: My view on that is partly due to the exceptional circumstances and the unknown depths of the financial crisis. Usually, you need a lot of credit at the beginning of a bankruptcy. No credit market is going to provide that. It's going to have to be the government putting in the money even to get that process going. The complexity of the claims probably guarantees years and years of working those out. That takes management attention away from any other more positive initiatives.

And I personally think that, with bankruptcy, I just worry about it turning people off. You know, why would you want to buy a car from a company that's bankrupt when you have lots of other good choices?

SEABROOK: Now, you've laid out what you think the big three should put into their business plan. What do you think they will come back with?

Professor MACDUFFIE: Well, there's a risk here that they may approach this as they've approached dealing with the government in the past. So the government is going to put some conditions on us. We're going to first try to weaken the conditions. Secondly, we're going to drag our feet.

I mean, that's just not going to fly, and frankly, they risk alienating both congressional and public support that would be needed to get this help. I think everybody has to accept that the sustainable level for this industry is going to be a lot smaller. Fewer factories, fewer brands, fewer products, fewer dealers, and if people can't get behind that, I think it doesn't go anywhere.

SEABROOK: John Paul MacDuffie, he's a professor at the Wharton School of Business at the University of Pennsylvania and co-director of the International Motor Vehicle Program, a thinktank. Thanks very much, professor.

Professor MACDUFFIE: My pleasure.

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