Columnists - Jack & Suzy Welch;How to save Detroit

How to Save Detroit

Should the government bail out the U.S. auto industry to keep the players from going into bankruptcy?

—Bill VanderMolen, Pittsfield Township, Mich.

How about this instead: The boards of Chrysler and General Motors (GM) put their companies into bankruptcy with the clear intent of reorganization and merger. As radical as that sounds, it's the best road we can see to a viable future for the industry.

And yes, the U.S. car industry does belong in the future. Free-market proponents have a point about the industry's "natural demise." Despite huge progress in American quality and design, well-run German, Japanese, and Korean companies have taken about half the U.S. market, and the competition—which will include China and India—is only getting tougher. But like many others, we believe that for the sake of jobs, national defense, and self-respect, America needs to keep its "true" domestic auto industry alive.

A government handout, however, isn't the way to make that happen. Washington would impose conditions and promise strict oversight, but it simply can't push through the kind of transformative change the industry needs. There would be too much political opposition, and regardless, the bailout sums being bandied about—$25 billion of taxpayer dollars, for starters—would only keep the Big Three heaving along, basically as they are. It's a life-support solution, not a cure.

Time for a Bold Move

That's why the boards of the automakers should take the courageous step of putting their companies into bankruptcy. Some creditors might make the case for liquidation, but given the diminished worth of the automakers' assets, that's an unattractive scenario. Instead, creditors would most likely opt for the government stepping in as the debtor-in-possession financier supporting the reorganization.

Talk about a fresh start. For more than a decade, U.S. carmakers have chipped away incrementally at massive legacy costs. But reorganization would open the doors to meaningful structural change through the renegotiation of contracts with creditors, dealers, and unions. And it would offer better odds of paying back taxpayers.

Once in Chapter 11, a merger would further galvanize real change. Three companies are too cumbersome to unite, and Ford has a two-tiered, family-owned structure, so we'll leave them out of this for now and propose GM and Chrysler join forces. Such a merger could create $15 billion in synergies from reduced capacity and overhead, money that could lower production costs and boost R&D spending. Granted, GM and Chrysler could lose share during the transition, but a merged entity would still end up with more than a quarter of the U.S. market.

Worth the Long, Bumpy Ride

We don't want to make this sound easy. Mergers are challenging under any circumstances, and a merger of two companies in bankruptcy would be at the outer limits of difficulty, requiring the commitment of constituencies steeped in old, adversarial ways. And there will be real pain before a turnaround begins. Shareholders will see their investment evaporate. Thousands of jobs will be lost. Many employee benefits will shrink. And banks will see much of their debt converted to equity.

We also realize there are dozens of reasons to shoot at such a drastic solution. Some argue that American consumers won't "invest" $30,000 or more by buying a car from a bankrupt company. But Americans regularly invest their most precious asset—their lives—in bankrupt airlines when they fly. That said, if the government wants to see Chrysler and GM emerge from bankruptcy sooner rather than later, it could show its long-term support, perhaps by backing new-car warranties.

Others will argue that the mechanics of two bankruptcies and a merger are impossible to execute, and still others will say too many contractual concessions have already been made. Leaders, too, may balk at championing painful change. That's a brutal task in normal times—and it will be Herculean in this highly politicized environment.

But for the U.S. industry to get from here to there—"there" being a globally competitive future—it has to get off the beaten path of incrementalism. With reorganization and a merger, a long and bumpy trip awaits, but the destination should make it worth the ride.