The Case of the Auto Bailout

The question facing the class was not easy. Should the federal government bail out American automakers by providing billions of dollars in loans, or should the companies be allowed to fail? If the answer to the question was already difficult, the two men sitting before the students demanded that they consider more than just the impact the Big 3 major automobile companies have on the nation’s economy and whether it’s worth it for the federal government to try to save them.

When SOM students discuss cases in their courses, they often get to meet with the subjects they’ve been reading about. On February 23, first-year students in State and Society, a core course in the Yale integrated MBA curriculum, were able to debate the fate of the U.S. auto industry with Mo Davison, director of United Auto Workers Region 3 (Indiana and Kentucky), and Greg Goodnight, mayor of Kokomo, Indiana. The two have been working to convince the federal government to lend the auto companies — General Motors and Chrysler, in particular — billions of dollars to stave off bankruptcy. Goodnight is the focus of an SOM-produced case, created by Lisa Tepper-Bates ’09 under the supervision of Professor Connie Bagley and with the support of the SOM Study Research Group, on how a city dependent on the auto industry grapples with a future that appears less than rosy; Davison has worked in the auto industry since he graduated high school thirty-five years ago.

State and Society, one of eight Organizational Perspectives, focuses on where business, government, and culture meet. A leader cannot set effective business strategy without understanding everything from the regulatory and political environments to the structure and tenor of the legal system. In the case of GM and Chrysler, their survival as businesses is likely to be determined on Capitol Hill.

"Why can’t they get money from anywhere else?" asked Bagley, professor in the practice of law and management, who co-teaches the course with Doug Rae, the Richard S. Ely Professor of Management and a professor of political science.

"There’s just not much capital for them to turn to other than the government," said Eliza Johnson ’10. "And bankruptcy would be far more expensive than a bridge loan and insuring that the company keeps running and keeps as many people working as possible."

Not all students agreed with Johnson. Isadora Tang ’10 argued that while no one wants to see the automakers fail, she’s not convinced that government loans — and the restructuring plans that go along with them — will work. "There’s a lot else we can do to make for a more stable economy and prepare for the future than giving money to the Big 3," she said. "The money won’t help them be competitive."

To Davison and Goodnight, not getting the loans would be a disaster. Goodnight spoke about how the bankruptcy of Delphi Corporation, an autoparts manufacturer, which has a plant in Kokomo, has wounded the city. Not only have thousands of jobs been shed, but businesses throughout the region suffered, property tax revenue declined, and the company announced plans to cut the healthcare benefits of retired workers, a move seen by Goodnight as a violation of the covenant between Delphi and its workers. The two largest businesses in Kokomo, a city of about 50,000 people, are Delphi and Chrysler, which together employ about 8,000 workers. During the 1980s, the area employed more than double that number, before seeing steady auto industry declines through the 1990s. "The social network in Kokomo has been badly strained," Goodnight said. "When people start talking about allowing the Big 3 to go, I just think we wouldn’t be able to bear it. The entire region, the entire state, will suffer." But Goodnight is not passively waiting for government aid. Kokomo has taken steps to reduce its reliance on nonrenewable energy sources and to attract green industry.

Davison, warned of a national decline if the automakers go under. As a union leader, he defended both the UAW and its workers. He believes auto workers get a bad rap for quality issues that are long gone. "Our members build good products," he said. "But there’s a hangover in perception." Just as important, he said, has been the union’s willingness to make concessions with management as a way to help improve the health of the automakers. He said he thinks that the turnaround plans submitted by the companies are viable and give them a chance to right themselves. "Our big fear is that bankruptcy would turn into liquidation," he said. "And I don’t think anyone is going to buy cars from a company in bankruptcy."

Davison pointed to the 1979 bailout of Chrysler as an example of how government intervention can work. Not only did Chrysler rebound, but it paid back the U.S. loans four years later with more than $300 million in interest. He said all the automakers are asking for today is a similar chance. "We have workers who have been in the plant for fifty years," he said. "All they want is to be able to walk out of the plant with respect and dignity. And while they’re in the plant, they want to be able to make a decent wage and be able to afford a home, just like you do. I think the companies need to be given the opportunity to come back and survive. The only way is with a loan."

Bagley said that this case was particularly beneficial to students because the financial crisis underscores the importance of training managers to appreciate the consequences of their actions. "Having the government and labor leaders responsible for crafting strategies for ensuring the continued employment of more than 25 percent of a major city’s workforce participate in the classroom debate gives students an unparalleled opportunity to test their ideas and to hone their own leadership skills," she said.