in the middle of the night

General Motors Chairman & CEO Rick Wagoner just became the newest poster boy for the Obama Administration’s new industrial policy – let’s call it whack-a-mole. Or as the Queen of Hearts proclaimed, “Off with their heads!”

The auto industry problem is very complex with many causes and few obvious solutions. Here are just a few of the challenges:

• Even before the recent sales downturn, there was a growing glut of car manufacturing capacity around the world. Every developing country sees manufacturing as its path to prosperity and auto makers are at the top of the list because of the potential for large numbers of high-paying factory jobs and the long supply chain needed to support the industry. Absent massive state-sponsored protectionism, the younger, leaner and more efficient companies will usually win.

• The UAW’s pattern bargaining technique whereby all of the Big 3 have been forced to accept the same labor terms is a legal monopoly. Like all monopolies, the UAW continuously seeks to maximize its own profits. Their goal is to preserve the largest number of jobs with the best possible pay and benefit packages for as long as possible. Even worse are the numerous restrictive work rules which limit management’s flexibility to re-allocate work among different factories and individual workers. Shareholder returns are not their concern as long as the car companies have a pulse.

• Auto company management, especially at GM, has been weak and feckless for many years regularly failing to make the hard decisions. But after a while there is good no alternative other than yielding to the UAW’s choke chain – a company wide strike could put the company out of business. But the management problems run deeper – poor product development choices, a lengthy and costly product development cycle, too many brands and models, insensitivity to labor concerns, and poor and ineffective relations with Washington policy makers among others.

• State franchise laws have protected local dealers to the detriment of the car companies. Few industries can long survive profitably with so little control over their distribution channels. The Big 3 have long had far too many dealers relative to their market share and smaller dealers are ill-equipped to compete with the better capitalized mega dealers. GM’s closure of the Oldsmobile brand cost the company over $1 billion in compensation payments to local dealers. That’s not a great incentive for rationalizing one’s brands.

• Congressional mandates on fuel economy, emissions, and safety issues have simply added to the burden. Politicians have the great luxury of not having to worry particularly about costs as long as someone else is paying for them. There is no free lunch, however; sooner or later someone has to pay. In a free market, that gives the advantage to the lowest cost producer.

In the end, nothing lasts forever: empires unravel, people die, and companies go out of business. And in most cases, the end comes by way of a long bout of chronic and debilitating illness rather than the acute pain of a sudden death. The auto industry is on life support with a terminal case of hardening of the arteries. And while most people would privately agree that the end of the industry as we know it today is inevitable, no one can quite bring themselves to pull the plug.