Today I had a chance to skim through the restructuring plans presented by GM and Chrysler to Congress (GM Plan, Chrysler Plan). GM’s situation is much alike Citi’s; both are too big to fail, both have a lot of toxic assets on their books, and both have a far reaching ripple effect on the global economy. What is different is how Obama is dealing with each situation; while the government is TARPing Citi’s assets, it is giving free cash to GM and Chrysler despite the expectation of an at-best diminutive return on its investment. I think a more simplistic and radical approach is the only way to save the GM goliath from falling off the cliff.

1. Fire the UAW – Over the years the UAW has outgrown its real purpose and has graduated into more of  a political party than a workers advocacy group. If Toyota, Honda, and even Walmart can successfully run their large organizations without a union, why cant the automakers? In 1981, when 13000 of the 17000 air traffic controllers striked, then President Reagan sternly said the striking employees would simply be terminated if they did not return to their jobs within 48 hours. The public sided with the government, and most of the air traffic controllers promptly returned to their jobs, except a few that kept standing in the picket lines. So I say, fire the UAW, its about time; I can guarantee that 90% of those employees will return as non-union employees given the economic situation. Nobel laureate Fredrick Hayek rightly said, “We have now reached a state where unions have become uniquely privileged institutions to which the general rules of law do not apply”. While I am not an anti-collectivist per se, I do believe there needs to be a boundary between good faith bargaining and unchecked strangleholding. Union workers across this country take home a 21% premium over their non-union counterparts and the goverment’s steady protectionism  has only bolstered such arrogance. If the United States is the greatest free-market economy in the world, there need to be limits to the powers of workers unions; why should a company that is on the brink of collapse be incessantly begging its union to negotiate pennywise paycuts.

2. Become a three-brand company – Hummer, Saturn, and Buick have far outlived their usefulness; for a company that is trying to stay afloat, this is not the time to attempt a rejuvenation of its niche brands. Toyota though technically has three brands, it is in all reality still a one-brand company. I am fairly confident that most people don’t even remotely associate Toyota with Lexus and Scion. This may be in part due to the company’s smart brand development over the years as well as the fair amount of differentiation within its three brands. On the other hand. Chevy, Buick and Pontiac offer almost no significant brand differentiation and instead cannibalize each others sales. With a portfolio made of Chevy, Cadillac and GMC (for its truck business), GM could actually offer some real differentiation and become more competitive. Most of the new Chevys are somewhat on par with the Japanese offerings, despite being slightly behind on their engineering. A more focussed campaign and an emotionally appealing marketing strategy that plays on people’s patriotism might actually put Chevy in the peer group of Toyota within two years.

3. Bailout the retirees and let the company run its course – Every GM vehicle carries a $2000 retiree tax which clearly becomes evident in the quality of the cars produced. In essence, an Avalon could actually have an extra $2000 worth of goodies in addition to better engineering and still sell for the same price as a full featured Impala. Between GM and Chrysler, the pension and retirement liabilities are a staggering $30 billion and that is not even counting the ridiculous benefits programs like the unemployment-differential coverage, etc that GM offers. I think Congress, in one sweeping populist act, should take these liabilities off the automakers and administer them through a Veterans’ Affairs like agency. Then, GM, Ford and Chrysler would have a level playing field with Toyota and Honda, and can actually prove their competence or lack thereof without the excuse of a “pre-existing condition”. If GM can resurge without being bogged down, then it will regain its prominence within ten years, if not, it should be allowed to go bankrupt. Free enterprise exists because firms are allowed to seal their own fates, if private institutions are allowed to constantly haemorrage and need continuous life support, they are not being true to their shareholders.

Every newspaper in the country has been running front-page stories about the impending collapse of the industry and the two million jobs that could disappear in the aftermath. But then, there is absolutely no way in which a significant turnaround could be achieved without massive layoffs. GM, in its plan to Congress, has stated that it would cut 47,000 people as part of its restructuring if it were to get the additional bailout loan. Chrysler on the other hand, desperately needs the strategic alliance with Fiat in order to refresh its lineup, plus there maybe a few lessons to be learned from Fiat about small cars. In another life, I had once studied a case om how the Nissan-Renault alliance made Nissan profitable within two years and Carlos Ghosn the poster child of the auto industry. While both Nissan and Renault are both reporting losses primarily due to the flogging economy, there were indeed several significant synergies realized in the alliance that helped Nissan streamline its lineup and revive its brandname.

The economic repurcussions of a GM failure could be catastrophic in all reality, and hence it is even more important to ensure its long-term survivability and accept the short-term consequences. Just as we are becoming aware of that baggage fee for every extra bag, GM also needs to start recognizing the price it has been paying for its baggage over the last ten years. Much like a patient that sometimes only wakes up from an electric jolt rather than constant CPR, the automakers need to send a jolt to their troops instead of another memo. If even one of the big three can start breathing again, the other two will follow suit.