Twinkie’s lesson for the Detroit auto bailouts

Posted by hpayne on September 17, 2013

Hostess's iconic Twinkie emerged from liquidation as a strong, competitive brand. But liquidation of GM and Chrysler's brands brought fears of larger economic collapse.

Hostess’s iconic Twinkie emerged from liquidation as a strong, competitive brand. But liquidation of GM and Chrysler’s brands brought fears of larger economic collapse. (Robyn Beck/AFP/Getty Images)

What if General Motors and Chrysler had not received government bailouts? Would the Detroit auto industry have disappeared, or emerged a lean, mean, fighting machine?

Observe the simple Twinkie for insight into what might have been.

With products as iconic as the Jeep and Corvette and a bitter union history to boot, bakery giant Hostess Brands, Inc. last year entered bankruptcy and never came out. Yet today, its Twinkie and Wonder Bread products are back on the shelves and its non-union business model is modernized for the 21st century.

But if Hostess’s liquidation lends ammunition to free-market advocates who argued that Chapter 11 might have produced a more competitive Detroit, leading bankruptcy experts say that Hostess is a sobering lesson in how different auto-making is from other industries — and how painful Detroit’s collapse would have been. Without a government bailout, GM and Chrysler likely would have been liquidated, their brands sold to foreign competitors and the U.S. economy would have suffered a devastating blow.

“Hostess was liquidated. And I believe that, if the federal government had not intervened, that the auto companies would have been liquidated as well,” says investor Wilbur Ross, legendary CEO of WL Ross & Co., who revived once-bankrupt steel behemoths Bethlehem and LTV. “A lot of jobs would have been lost, a lot of suppliers would have gone bankrupt, and the brands that survived would still be unionized.”

Ross says Hostess, founded in 1913, is a demonstration of brand durability even in bankruptcy, but that the food-making process is fundamentally different from building a car.

After entering bankruptcy in January 2012, Hostess was unable to get agreement from its bakery union and went into liquidation nearly a year later, locking its doors on 18,000 employees. But its brands did not die. Wonder Bread was sold to Flower Foods, McKee Foods snapped up Devil Dogs and Yodels, and private equity firm Apollo and investor Metropoulos & Co. bought Twinkies and other Hostess cakes.

This summer, a revamped Hostess Brands, LLC had Twinkies back in stores, its bakeries consolidated from 11 to four, and a non-union workforce streamlined of work rules and pension overhead. Industry analyst Natalie Everett tells CNN that only 25 percent of its jobs will return.

The parallels with GM and Chrysler are irresistible. Old companies. Strong brands. Uncompetitive union work rules. Unsustainable pensions costs. Hidebound management.

“Hostess was making a bad product, then the market changed, and their structure wasn’t sustainable,” says Mark Bloch, a senior partner and veteran labor lawyer with Walter Haverfield in Cleveland.

Did the Detroit companies miss a chance to de-unionize, shedding their biggest competitive disadvantage against more flexible foreign transplants? “Toyota can change what they’re doing on a dime,” without union rules, says Bloch. But he doesn’t believe Hostess‘s labor restructuring applies to GM and Chrysler.

“With Hostess, you’re making a Twinkie,” says Bloch. “You can do that in any bakery. Auto plants are extremely complicated and getting the UAW out would probably be impossible.”

Ross says that, given the financial crisis of 2008, only Washington was able to loan GM and Chrysler debtor-in-possession financing and keep their capital-intensive, long-supply chain manufacturing process going in Chapter 11. He had discussions with Wall Street investors about buying the automakers. “It would have been the biggest private equity takeover in the history of the world,” says Ross. But none of them had the required capital.

Without a bailout, the companies would have liquidated. Brands like Jeep, Ram trucks, and Chevy would have been snapped up by other manufacturers. “Like Hostess, someone would have bought up the Detroit brands,” says veteran auto consultant and Pace University Business Professor John Alan James. Fiat, for example, was eager to get into the U.S. market.

But auto plants aren’t bakeries. The buyer of Jeep, for example, would have needed to get Toledo assembly moving quickly and so would have negotiated a tough contract with the UAW.

“When I took over Bethlehem Steel, we put in a different contract,” says Ross, who cut wages, negotiated 401ks and off-loaded pension obligations to the federal Pension Benefits Guarantee Corporation. “We could have de-unionized, but it just wasn’t practical. What would have happened to our assets?”

Given the unusual circumstances of the financial crisis, these experts agree that auto liquidation is an academic exercise. No president, Republican or Democrat, would have abandoned Detroit in bankruptcy. “The sociological implications would have been too high,” says James, who nevertheless laments President Obama’s politicized “UAW bailout.”

“Only the government” had the funding, says Ross. “And the guy who writes the checks calls the shots.”

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