[Viewpoint] A pound of flesh from car firms

It’s been a long time since the American auto industry has lost its competitiveness. To the rest of the world, the prospects of America’s three auto giants had long been in doubt.

But from the time he first became a presidential candidate right up until recently, U.S. President Barack Obama has repeatedly expressed his affection for the auto industry, so many believed he would not allow the Big Three to fall. He has said the auto industry is the cornerstone of the U.S. economy and that the country should support it in order to protect the jobs it creates.

But now, two of the Big Three - General Motors and Chrysler - are on the brink of bankruptcy after Obama rejected their recovery plans at the end of last month. He issued ultimatums, giving GM 60 days and Chrysler 30 days to come up with radical plans for change.

The two companies will only be rescued if and when they each fulfill two conditions. First, they must meet the deadline. The U.S. government has no intention of delaying the restructuring of the auto industry. Second, the recovery plans must exceed the government’s expectations. The administration has no intention of handing out bailout funds without seeing actual progress.

If they fail to meet the conditions, they will face bankruptcy.

Chrysler is planning to form an alliance with Fiat of Italy, which has resurged after surviving a crisis four years ago. If Chrysler fails to conclude the deal before April 1, it will go bankrupt.

GM sees no possibility of survival in forming an alliance with another company or through receiving funds. Unless the company manages to avoid insolvency on its own, there is no chance it will survive. The company must shut down unproductive businesses and factories in order to avoid this fate. Of course workers will lose jobs. The government is asking the patient to cut off chunks of its own flesh with a surgical knife.

Will GM be able to make such a choice? Fritz Henderson, GM’s new president and CEO, has said the company will go belly up if it fails to achieve its goals by June 1.

The Obama administration appears to have already decided on its answer, because it overtly talks about the possibility of GM going bankrupt. If GM fails to restructure itself, it will either self-destruct or the government will take over the process, the government has warned.

The Obama administration is weighing the option of a “controlled bankruptcy” for the floundering GM. Under the plan, the firm would file for prearranged bankruptcy, U.S. media reports have said, and then the company will be split into two pieces. The valuable assets will be sold off to a new company using government financing as GM’s new corporate face, while liabilities and bad assets would remain with the old company for disposal.

The plan is similar to what Korea did with financial companies in the aftermath of the 1997 financial crisis - creating good and bad banks.

Under the plan, pain and loss are inevitable, because the labor union and creditors will have to bear the burden of disposing of bad assets.

Whether GM seeks to find a way out on its own or files for bankruptcy, the outcome will be the same. Obama knows this better than anyone.

But he also knows very well that the company won’t recover if tax money is simply poured into it. If everything can’t be saved, only those parts with potential should be rescued, and the rest should be disposed of. That’s the only way to save at least a part of GM, which was the pride of America. Obama is probably realizing the painful truth of restructuring that Korea experienced 11 years ago.

In comparison to the situation in the United States, Korea’s lagging domestic car sales are not a huge cause for concern. While domestic sales went down, exports boomed. Media reports said Korea’s carmakers have seized the opportunity presented by the decline of the U.S. auto giants.

The Korean government, however, appears desperate to maintain the health of the auto industry. Although the condition of improved labor-management relations is attached, the government made a grand promise of tax cuts.

It is premature to talk about support measures when the companies have shown no effort to make improvements on their own. Instead, labor unions at carmakers are demanding wage hikes. It appears that their situation is not so desperate that they need to take self-recovery measures.

The writer is an editorial writer of the JoongAng Ilbo.

by Kim Jong-soo