In discussing the topic this weekend with my business partner, I was reminded of another US industrial sector which experienced the same pressures and difficulties in the 1970s and 80s.
I am referring, of course, to the once-significant US steel industry. In fact, while researching some history for this piece, I found, to my shock, this article, appearing recently in the Herald Tribune, a unit of the NY Times.
The opening of that piece observes,
"A few years ago, an industry whose history and mythology were indelible parts of the U.S. identity was dying. The great steel mills of Pennsylvania and the Midwest had literally built the United States, but the twin burdens of competition and self-inflicted wounds had brought them to the edge of extinction.
If they were allowed to go under, their partisans warned, the consequences would ripple through the economy at a cost too high to bear. The old saying, "As steel goes, so goes the nation," was as much a threat as a boast.
The Detroit automakers are using the same argument as they seek a $25 billion bailout from Congress. "What happens in the automotive industry affects each and every one of us," a General Motors Web site declares, warning that the consequences of a shutdown would be "devastating."
Yet steel's savior was not the government bailouts it ardently sought but exactly what it tried so long to avoid: bankruptcy. Only when the companies failed were they successfully slimmed down and retooled into smaller but profitable ventures. As debate continues over what, if anything, should be done for GM, Ford and Chrysler, the steel industry may offer a model."
I could not agree more.
Back when I was in graduate school, the old-line steel industry in this country was on the ropes. The situation was eerily similar to that of today's US-domiciled auto sector.
Just to refresh your memory, I am referring to: US Steel, Bethlehem Steel, Lukens, LTV, Republic, Armco, to name a few.
As the Herald Tribune article correctly notes, the steel industry- both companies and their union- claimed the same disastrous results if they were allowed to go bankrupt as GM, Ford, Chrysler and the UAW now do.
Back in the 1970s, it was mini-mills, cheaper foreign steel, and bloat USW contracts that led to Big Steel's demise.
And, make no mistake about it, they were left to file Chapter 11, consolidate, and, ultimately, emerge as a smaller, profitable sector.
The sky did not fall. Economic ruin did not visit America once these firms began to reorganize.
And it won't, now, either, when the auto makers are allowed to choose filing for bankruptcy.
The Herald Tribune piece notes, near the end,
"Over the decades, the companies had shed employees to stay afloat. Soon, retirees greatly outnumbered the actual workers. At Bethlehem, the ratio was six retirees for every worker. All these retirees had good pensions and good health care plans, which they thought were guaranteed. But these costs were a tremendous weight on the companies.
Bankruptcy changed the rules, allowing the steel makers to unload billions of dollars in pension obligations onto the government's Pension Benefit Guaranty and to cut more than 200,000 workers from their supposedly guaranteed medical care.
The failures also allowed for the renegotiation of labor contracts, something Wilbur Ross Jr., a specialist in distressed assets, realized when he began looking at the moribund industry. The only bidder for the bankrupt LTV Steel, he proceeded to buy Bethlehem and other old-line companies, putting them together as International Steel Group. He cut more employees and revamped work rules, taking Bethlehem, for example, from eight layers of management to three.
Steel's turnaround was dramatic. The 17 leading companies went from a combined loss of $1.1 billion in 2003 to an after-tax profit of $6.6 billion in 2004, according to an analysis done for an industry trade group. Ross sold International Steel to the Indian entrepreneur Lakshmi Mittal for $4.5 billion in 2005, earning a tremendous return.
Thanks to all of steel's tribulations and consolidations - and a world economy that was booming until recently - the industry is relatively healthy."
The article goes on to note some issues which could make an auto sector bankruptcy result in a different outcome than that of the US steel sector. For example,
"Not so fast, Ross said. He doesn't dispute that the auto companies are as bloated as the steel companies were, and certainly doesn't think they should get a blank check. But he thinks the consequences of what he calls free-fall bankruptcies - ones without any government role - could be disastrous.
GM would drag hundreds of suppliers down with it, and they would all have trouble getting back up again.
Furthermore, it is a tremendously problematic time. The final collapse of the steel industry came when the economy was relatively healthy and could absorb the blow. The current economy is the weakest in decades."
Well, a Federal DIP loan is solution in which the government will play a role. Just not one which puts a dead corpse on life support.
In my opinion, it's more than worthwhile to learn from the success of letting market forces work in the sector of 30 years ago, and do so, again, in the auto sector.
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