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The Grade On Detroit's Bailout Proposals: Incomplete

Susan Helper is the AT&T Professor of Economics at the Weatherhead School of Management, Case Western Reserve University, and an expert on the auto industry. In December, she co-authored an article making the case for a rescue of the Detroit Three--and then sketching out what such a package should look like. On Tuesday, when Chrysler and General Motors submitted their new viability plans, we asked her to write a follow-up:

GM and Chrysler have submitted their plans for getting $22 billion in additional government loans. The terms of their original loans--the ones the Bush Administration extended in January--require them to show that they can pay back the $17.4 billion they've already received, plus the new amounts. Below are some tentative thoughts based on a speed read of the proposal.

In their new plans, the companies say they can achieve these goals largely by cutting. The cuts are dramatic in the case of GM: 40,000 workers and five plants. The cuts are more modest for Chrysler: Just 3,000 workers.

But what's missing in both proposals is an honest, humble appraisal of why more consumers haven't wanted to buy their cars at a similar price point to their competitors--and a demonstration of how they intend to fix this situation. Or, to put it another way, why do Detroit Three's cars sell for $2,000 less than comparable Japanese models? This is the key issue--not labor costs, which including the legacy costs account for less than 10 percent of the cost of a car.

The government has to evaluate these plans and then respond, one way or another. As it does, it should ask itself the same question: What would it take for Chrysler and GM to start consistently making cars people want to buy? The newly created Presidential Task Force should seek far more detail. And those details have to go beyond financial ones, to include operational decisions and strategies--that is, the way the companies actually make cars. In the auto industry industry especially, financial outcomes reflect operational decision strategies adopted long before.

For example, both GM and Chrysler point to rave reviews of some new models, like the Chevy Malibu. This is fair. But the companies don't talk about what led them to produce these models and produce them so well--or how they can repeat that success while avoiding some of their well-known failures. This is especially important for GM, since its product czar--Bob Lutz--just announced his retirement.

A key area in which to look for operational improvements is in relations with suppliers. More than half of GM's costs--$50 billion per year--come from parts the company purchases from suppliers. But GM relegated its discussion of suppliers to a two page appendix, which is hardly enough for something with so much effect on both cost and value. GM says it wants to work with healthy suppliers, but that's very incomplete. How are the suppliers, themselves on the edge of bankruptcy, supposed to achieve this?

There is no mention of joint efforts to eliminate waste, which is a highly successful method of cost-cutting, or of working together with suppliers so that components interact better in order to produce, say, a smooth, quiet ride, or a pleasing interior. Instead, the report suggests, suppliers are somehow supposed to come up with money to improve technology on their own.

The Chrysler plan is actually somewhat better on this score: It mentions both joint efforts with suppliers to reduce costs, and provides a good discussion of the company's efforts to improve quality (leading to reduced warranty expense, fewer recalls, and better fit and finish). But it provides few estimates of how much these efforts might contribute to increased revenues and lowered costs--which, after all, are the key numbers for showing viability.

An impressive point that comes through in both plans is the relatively high levels of local content the companies use, which provide a powerful reason to support them in this current recession. However, there is no mention from either of them what future local content will be.

While I'm disappointed in the plans so far, I still feel the industry is worth saving. Note, among other things, that this level of detail is far more than the banks have ever been asked to provide--despite getting orders of magnitude more money from the taxpayers.

Also, the automakers remain key to preserving 2 to 3 million manfuacturing jobs in states already very hard hit by the economic downturn. For this reason alone, industry collapse would be a disaster. But, these plans make clear that tough oversight is key to producing a viable industry.

--Susan Helper