Pittsburgh Steel's Lessons For Detroit

A Times story, believe it or not suggests that the auto industry take a lesson from the Steel industry collapse of the eighties, whose vital restructuring and ultimate, at least partial revival came in part through the pain of bankruptcy.

"Yet steel’s savior was not the government bailouts it ardently sought but exactly what it so long tried 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 G.M., Ford and Chrysler, the steel industry may offer a model.

The steel and auto industries are both capital-intensive enterprises that peaked a half-century ago and have been intermittently embattled ever since. Both secured peace with their unions by vastly expanding benefits, a bargain that eventually hobbled them. Both had entrenched layers of management that believed — despite all evidence — they could wish away change."

One should always remember to distinguish between the disease of bloat, legacy costs, toxic business culture and failure to satisfy customer demand is the problem and that as long as it lasts-- death is inevitable. My post about Homestead talked about the diseased culture that had grown in the mills and management by the 1960's and 70's. This was the problem as was the chain letter of unrealistic entitlements which sapped the companies of the capital. Most doctors don't tell patients who are obese, smoke or do heroine to keep it up cause the pain of withdrawal is to great. But this is what politicians do every day.

"The failures also allowed for the renegotiation of labor contracts, something Wilbur L. 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."

Ross, today thinks the pain and impact of the free fall bankruptcies impact on the economy would be too great to bear and recommends that the government make near term loan guaranties and force a tough restructuring on them, something to my knowledge there is no record of the government ever doing.

Please feel free to argue with me but come to the table with more than a tale of how painful and devastating the death of these companies will be. Death is usually a drag.