Let GM Fail

In 1950, when GM signed a contract with the UAW, the Big Three's share of America's domestic auto market was about 95 percent. The economies of Japan and Germany were still ravaged by World War II and were not a threat. The Big Three and their workers' union were certain their oligopoly was secure.

But now, GM is a huge healthcare and pension liability, with a small and struggling car business attached. GM simply cannot compete with that albatross of obligations around its neck.

The president of the United Auto Workers union recently claimed the parlous state of the three U.S. auto makers is the result of the spike in gas prices and the credit crisis, rather than mismanagement or high labor costs. But that is clearly wrong. GM's problem is not a short-term liquidity crisis that needs a temporary bridge loan. It is a fundamental lack of ability to compete in a global economy. Their troubles have been building up for decades. And while the unions are bestowed with lavish benefits and above-market compensation, the auto business has changed and can no longer support those embedded costs.

And this is the worst time to be strained, because while in America's saturated market, there is almost one car for every person of driving age, in China there are three for every 100, and fewer than that in India. As Chinese and Indians are moving into the middle class, they will be buying more cars. And the GM brands have a special allure overseas.

Yet GM's stock is trading at but a tiny fraction of its peak. For all practical purposes, GM has already failed. It should now be allowed to do so formally.

We must not be afraid of the bankruptcy process. Bankruptcy does not mean liquidation. The process will help the company, not eliminate it. It would give GM the cover to do what it absolutely must: close plants, eliminate unprofitable brands and dealerships, and shed its bloated cost structure. It will enable GM to wipe the slate clean and emerge stronger. Going forward it will be able to compete again, without the inspissating heavy burden of past obligations.

Subsidizing the industry is not going to solve the root of the problem, but will simply mean perpetuating an unproductive structure, which will almost guarantee bigger problems later on. Why should we transfer capital from the successful businesses to the doomed? Throwing taxpayers' good money into that sink hole called the US auto industry will be tantamount to a transfer of wealth from tax payers to GM employees. The capital that will be consumed by GM is needed elsewhere, perhaps for re-training people to make them more employable, and could be used more efficiently if not allocated by Congress or the bureaucrats at Treasury.

In capitalism, the consequences of failing to compete are that you vanish, making way for more efficient organizations. That is how the economy rejuvenates itself.

Let GM fail.

Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm.

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