How Should Governments Drive Industry Change? Lessons Learned from the Global Automotive Sector

Thursday, November 19, 2009

Speakers

Steven L. Rattner

Former Head, Auto Task Force, U.S. Department of the Treasury

Carlos Ghosn

Chairman and Chief Executive Officer, Renault-Nissan Alliance

Presider

David Braunschvig

Adjunct Senior Fellow for Business and Foreign Policy, Council on Foreign Relations

DAVID BRAUNSCHVIG: Good morning. For those of you who didn't come just for breakfast, we're about to start. I'm David Braunschvig. And welcome to the Council on Foreign Relations. This is a session of the Business and Foreign Policy Roundtable, and it's taking place thanks to the generous support of the Bernard and Irene Schwartz Foundation and the corporate program. This meeting is held on the record.

I've been told to ask you to turn off all your -- not only all your cellular phones, but all your electronic devices. But, looking at my notes, I don't see any mention of hearing aids or pacemakers, so let's assume that you can keep those on.

Now, to paraphrase a French statesman of the past century at the Council, we think that diplomacy might be too important to be left entirely to diplomats. And that's why, at the Roundtable on Business and Foreign Policy, we often have prominent representatives of the private sector with extensive government interaction. Today is no exception. We have remarkable guests to address this key business and foreign policy issue. How should governments drive industry change?

To my left is Carlos Ghosn, most famous for having turned around, dramatically and in record time, Nissan Motors, but also the architect of a different kind of multinational company; indeed, more like a multicultural entity between -- an alliance between two major global automotive companies, Renault and Nissan. He chairs both. As we speak, his alliance is present in all major geographies, including more recently in Russia, China and India. In some of these countries, he's in partnerships with the national governments, which is really at the center of today's conversation.

Then to his left -- and so far, this is geographical, but I leave it up to you -- we have Steven Rattner. Steven was a brilliant journalist, a leading financier; and after a remarkable career on Wall Street, the founder of a preeminent private-equities fund.

As most of you know, Steve spent most of this year with the daunting task of restructuring a large part of the U.S. automotive sector. And for full disclosure, I have to mention that Steve and I used to be investment banking colleagues. I hope you will not hold it against either of us.

The next half-hour will be a conversation with our panelists, and then will come the time for the really tough questions from you for another half-hour.

In America, it comes as a surprise to some when government suddenly intervenes in industry, directly and massively. In most other countries, it tends to be a fact of life; but here, first in financial services, then in the auto industry, today in health care, tomorrow perhaps in the energy sector. With this year's recession, I think it's fair to say that the boundaries between government and enterprise have been redrawn.

But even in less turbulent times, the auto business has been subject to all sorts of government actions -- subsidies to consumers or suppliers, taxation of key inputs such as gas, tariff or non-tariff barriers, regulations of fuel-economy standards, just to name a few.

But this year the U.S. government was facing a dramatic meltdown of large auto manufacturers, and it chose to act in a major way. As you know, the largest auto company quickly went in and out of bankruptcy and then was de facto nationalized. The third-largest was placed in the hands of one of its European competitors.

Now, only time will tell if these policies have been successful. But what is for sure today is that they have ripple effects on other national policies. Governments in Germany, in Spain, in the U.K., the European Commission, all have strong views on how their citizens will be affected by the restructuring of General Motors. And regional governments as well, for example, in Germany, exacerbate these tensions, much like state politicians in the U.S.

So there's then the question to us today, which is, when does the single-minded political focus on the immediate national interest become counterproductive? Shouldn't governments attempt to better coordinate their restructuring initiatives in times of crisis?

At the same time, governments around the world have been increasing their support to the auto industry. These policies are either presented as temporary, such as the scrapping incentives, known in this country as Clunkers programs, or the longer term, such as helping the development of energy-efficient vehicles.

How efficient are these policies? And again, how should national governments compete and cooperate when dealing with a highly globalized sector such as the auto industry?

I would like to start asking Steve Rattner, what were your objectives when you took on this daunting task? Particularly, was there a tradeoff or an arbitrage between saving jobs or positioning GM over the longer term as a globally competitive enterprise?

STEVEN RATTNER: Well, my principal objective was to get out alive, personally. No. Look, we were reluctant warriors in this. This was not something we volunteered for. We were drafted for it. And you've asked a lot of good questions in your opening, and we can probe into them.

By definition, a government is always exercising some form of industrial policy in almost any decision it makes regarding taxation or other kinds of programs. But in this particular instance, the intervention that occurred both in this sector, and the financial sector, for that matter, as well, was crisis-related. It was simply an effort to avoid economic collapse, nothing more, nothing less.

And so as we looked at the situation, basically, as you know, at the end of 2008, General Motors and Chrysler ran out of money. They got an emergency infusion. It came with a March 31st deadline, at which they were going to run out of money again, and more money would have to be put in. And we faced a tough decision and got a lot of conflicting advice and input as to whether -- some people said, "Let the market work. Let fate determine. This is America. Let the free market operate. Don't do anything." Other people said, "Of course you can't let these companies go bankrupt."

And ultimately, the conclusion came down to the fact that if the government had not intervened in some form or fashion -- and we can debate the merits of what we did -- GM and Chrysler would have run out of money. There was no private capital available. This was the middle of March. The markets are frozen. There's not even debt financing.

They would have shut their doors. They would have liquidated. Their suppliers would have shut their doors. And, by the way, Ford wouldn't have been able to make cars either because they wouldn't have been able to get parts, or all the parts they needed. And you would have had 3 million people out of work, many of them in the industrial Midwest, at a time when we were losing 800,000 jobs a month. And so that was a situation that was viewed as unacceptable by the administration.

So the decision to intervene was not about creating global companies or looking ahead to electric cars or anything farsighted. It was very crisis-oriented.

BRAUNSCHVIG: At one point, did you consider extending this life-support mechanism you had in place for GM in order to make sure that the best team, the best possible team, was in charge? To put it differently, as a private-equity investor, would it have been your advice to entrust the future of a troubled firm to, roughly speaking, the same team that had caused it to be in such trouble? Or would you have spent the money and the time required to get the best possible team?

RATTNER: Well, management is obviously critical. And when you look across this industry, along with any other industry, and you see winners and you see losers and you see companies like Nissan-Renault and then you see others that are much less successful, you can't come to any conclusion other than that management is a huge ingredient, a huge determiner of success.

In the case of Chrysler, we did make a decision that we wanted to have a completely fresh management team. And the principal driver -- we can debate other drivers -- the principal driver behind the decision to seek an alliance with Fiat -- we didn't quite turn over control to Fiat, a propos your opening remarks, but the alliance with Fiat was, frankly, to get new management and to get what we thought was one of the two or three best management teams in the industry in the world.

In the case of General Motors, we faced a tougher decision, because we didn't have the potential of that kind of an alliance with Fiat. We didn't feel, David, we had the luxury of time. The company had burned through $15 billion in the first quarter of 2009. It had burned through $30 billion in 2008. So it was burning an immense amount of cash.

And to basically say, "Let's just put everything on hold while we do a six-month search for a new management team" -- and, by the way, probably the only management team we would have found would have come from outside the industry, much the way Ford did, so we're really not sure this is going to work, because you can pick a really great guy or really great team, but you don't know till they get there. And meanwhile, GM will continue to burn cash and the place will be in chaos, we just didn't feel was manageable or was appropriate.

So we did make a change in management. We promoted Fritz Henderson. We can, again, debate the merits of that. But we felt that, under the circumstances that we were dealing with, that was the best decision.

BRAUNSCHVIG: A very different scenario, Carlos Ghosn, 10 years ago in Japan. Of course, Nissan in 1999 and GM in 2009 are not exactly comparable. But there you had a government, the Japanese government, and the public opinion that became pretty open to spending the time required to get the right management team to take over and to turn around Nissan. Explain that a little bit to us.

CARLOS GHOSN: Well, I think the circumstances are practically the same, but the attitudes were completely different. Nissan, in 1997, knew it was in trouble. And the management of Nissan recognized the fact that -- it's a very hard to recognize that you have problem and you're not going to fix the problem with your own forces. You're going to need some help coming from outside.

So the CEO of Nissan, Hanawa-san, that I know very well and I respect for this decision, because it requires a lot of humbleness and requires a lot of care for his company, he went out and contacted Ford and he contacted Daimler and he contacted Renault, and he tried to say, "Okay, what can I do in order to bring new forces? How can I partner with somebody who's going to help me get out of trouble?"

You know the end of the story. You know Ford decided not to go. Daimler was very interested, but under the pressure of the Chrysler part of the house -- that's what, anyway, we understood from the Japanese management at that time -- decided not to continue because they wanted to focus on the Mercedes-Chrysler relationship more than overextend themselves with a third partnership.

And, you know, at the end of the day, we made the deal, and it was a deal in which we did not try to merge or acquire or transform anything. We said, "Look, each company is going to remain independent, its own identity. We're going to work together. We're going to lock in synergies ." And you know the end of the story. Ten years later, we're still there. And we respect exactly the same thing.

Now, fast-forward. Let me go to General Motors. You all remember that, three years ago, I went to General Motors and I said, "Is there anything we can do together?"

BRAUNSCHVIG: Are you happy that, in retrospect, that it didn't work out?

GHOSN: No. Nobody's going to be happy --

BRAUNSCHVIG: But it did work out --

GHOSN: I mean, nobody's happy about -- when you see the disaster, you know, and the waste of energy and skills and balance, nobody can be happy about that.

BRAUNSCHVIG: Do you think you could have done a better job if the deal had happened?

GHOSN: Together?

BRAUNSCHVIG: Yes.

GHOSN: Without any doubt. Without any doubt. At that moment, you know, people said, "Well, you know what? We don't need it. It's not going to happen. We have our plan. We're going to do it together." Frankly, there was a possibility to create something that would be extremely not only competitive, share a lot of technology, share a lot of practices between a company which is based in Japan, not one based in Europe, and obviously the powerhouse of General Motors. It's changing its best practices, putting in common technology, putting in common approach, well-managed.

But I would say, collectively, that was not a story about, you know, "You push from here; I'm going to take your place" or "I don't want it." No, this was not about that, because we knew fundamentally that this would work only if it was collaborative effort. It requires the fact that all the companies have to agree on the fact that there is something to be done here.

Unfortunately, as you know, it did not happen. It didn't happen because I was convinced from the beginning that unless everybody was on the same track that we want to work together and there is something to be done, it would be doomed. And as you know, our feelings about this were not shared, so that's why we stopped.

RATTNER: Carlos is completely right, I think, in talking about the insular culture of GM, the lack of interest in change, the lack of interest in fresh ideas, the lack of interest in new people. And that is the largest part of the reason why the bus went off the cliff.

But I think to distinguish that from the decision that we made in March as to how to address the management issue, that was a U.S. government decision. The board, in effect, was doing our bidding at that point. And so it was a slightly different decision.

We were very open to any suggestion. Anything that anybody proposed to us for how to solve the problem of GM, we would have taken very seriously. But we were balancing a set of risks and concerns, and we made the best decision we thought we could under the circumstances.

BRAUNSCHVIG: Carlos --

GHOSN: Let me just maybe react -- add to this.

I don't think you can make an alliance in a situation of crisis where the company has you know one month in front of it, or has -- you cannot do it; because this requires some kind of planning, some kind of putting things together, work a certain level with haste, but with a certain level of serenity. But let me tell you one example. Why today, why today I'll say the U.S. industry which has been leading this industry for such a long time, you know, is finding itself in a fragile situation compared to the Japanese industry or even compared to the Korean industry or compared to any other industry.

There is one single reason for this for me, one single reason is when the U.S. was on top of the game, you know, the Japanese and the Koreans and now the Chinese and the Indians were looking at the U.S. industry and benchmarking and copying and using all the best practices coming from the U.S. industry. Okay. The U.S. industry never did the same, never did the same; but there is not single practice coming from Japan which has been implemented seriously in any one of the three makers. And I'm not giving you a secret this is something which was said with the CEO of the present companies. I mean, we discussed about it, about you know, how come that having shares in companies like Mazda or Suzuki or et cetera; you didn't transfer some of the best practices to the U.S., it didn't happen.

So when you are in a game, in a competition, when one of the competitors is copying your best practices and implementing them. And on top of this, having his own practices; but you're never looking at him because you consider that he is not worth it, you will lose. You're going to lose no matter what -- it's a question of time. And I think if there is one lesson from this crisis is we have to make sure that we are taking the Indians and the Chinese very seriously; because if not, we're going to be the victims of the same problem.

And that's why I spend a lot of time in China and in India. And I go to Bajaj and I got to Asha Motors and I spend time with each one of them looking at the product, what they're doing with it, because we have a lot of things to learn. And if we don't learn them, history is going to repeat. We're going to be the next victim of the revolution of industry.

BRAUNSCHVIG: How do you feel about governments helping those competitors that have been the weakest, the worst managed, and by helping them survive affect your competitive position?

GHOSN: Well frankly, I think we have to take into consideration that last year, what happened last year was exceptional. I mean, we've seen a crisis that we've never seen in our industry for maybe 100 years. And you have to make a difference between how government intervenes in a situation -- in a crisis like this, versus systematic intervention to support weak competitors. What happened last year is both industry was caught -- you know Toyota, Nissan, there were no General Motors. I mean, there was no exception in a situation where you know the banks stopped doing their job. We were -- we didn't have enough cash; and we were really in a situation where if there was no intervention many companies in the car industry even though very healthy and very productive would have collapsed, would have collapsed.

So I cannot say, you know what, I agree on the fact that the Japanese government gave us some facilities, and the French government gave us some facilities, but the U.S. government has done something we don't agree on, no. I understand completely that because of the exceptional circumstances, what happened has to happen; and at the end of the day, you know, government did not look at the car industry -- doesn't care about our product. Fundamentally, they don't care. They care about jobs.

And exactly, Steve has said it very clearly, but the French government exactly the same, Japanese government exactly the same. They don't care about our product because they know any way if we don't do the product somebody else is going to do it. But they don't want the prospective of seeing millions of jobs disappearing because they did not raise a finger, you know, to support the industry.

And frankly, this report -- I'm talking about, I'm not going to make comment on the U.S. because Steve would be much more qualified than me. But let's take the example of France. When Sarkozy decided to give a loan of 3 billion Euro to both car manufacturers, everybody said, you know, he's helping and this is -- he gave a loan, and at 6 percent interest rate; which at that moment was considered as a big present; because you could not, first you could not get money at less than 10 or 11 percent; and certainly not at five years time frame, okay.

One year later, today we emitted a bond of more than five years, less than 6 percent. So what government has done -- he didn't pay anything, he just said look there is something exceptional taking place. I'm going to substitute the mechanism of the market, allow jobs to be here. And fundamentally, on the long terms, aren't going to cost me anything

And it's true, because one year after, you know, I'm paying to the market less than what I'm paying to the French government. I think that's a very smart policy where apparently the day you make this report you are given a present. But six months later, one year later, there is no more present, you are practically -- you are paying the cost of a regular market. The Japanese government has done the same thing. I think it was a smart way to do. Now, if this was happening at the moment where everything was calm, the market is calm, there is no crisis; it would be considered by each one of us as you know, it's not an even gain, but it was not the case.

RATTNER: I think there's two points I would add to that. The first is that to your question David, obviously any time you aid one competitor industry, you are changing the playing field to some degree. And we certainly heard plenty from some of the competitors to GM and Chrysler; particularly from Ford about we're at a disadvantage in this way and that way. And our answer was a little flip, but pretty simple, which is do you want to go through bankruptcy, do you want to have the government come in and turn things upside down? We can give you some help too, but they obviously preferred the situation the way they had it, and it's worked out pretty well from that point of view.

The second thing which you may be coming to in your questions which Carlos touched on but I'll flag it and if you want to pursue it we can. I think there was a very fundamental difference in the way that we approached restructuring the industry in the U.S. vis-a-vis the way Europe is approaching restructuring of its industry. And Carlos is certainly more qualified to speak about the European piece. But was it about preserving jobs in the U.S. -- yes. But was it about preserving inefficient jobs that were no longer needed where there was over capacity -- no. It was about right sizing these companies and shrinking them down.

We took 40 percent of the capacity out of General Motors and Chrysler as part of this. And as a result, there is a very good chance if you believe the industry forecast, that the U.S. market will actually get to capacity in the next two or three years at about 15 million cars a year. And that will have all kinds of beneficial impacts on these companies from the standpoint of pricing and incentives and discounting. Europe has really done virtually none of that. And one of the things that I watched as we went through the Opel process is the fact, you know to steal the famous cliche, Europe is not a single country, it is a collection of countries.

We were being lobbied by ministers and ambassadors from one European country to go and beat up on the Germans to make Opel move a few more jobs in that particular country versus another country. And it is a very different exercise in Europe. It is I think much more about job preservation in its totality rather than the concept that you have to shrink down and become competitive in order to be viable in the long term.

BRAUNSCHVIG: As a reluctant shareholder you've taken a back seat in terms of the governance of GM, in that once you have a board, you let the board do its job. Yes, the government is the fiduciary of the country, and therefore jobs matter. But also, there are billions of dollars of taxpayer money that have been invested or lended to this enterprise -- General Motors. As a fiduciary, do you feel comfortable that this sort of benign neglect or "let's revisit this once a year when the directors are up for reelection" is enough?

For example, we see the company flip flopping a little bit between keeping or not keeping its European operations. Representing the 60 percent owners of this company, do you feel that you have enough control?

RATTNER: Well, this is sort of a Hobson's choice. And we spent an enormous amount of time discussing and debating this exact question of what the government's role should be in the companies. Those of us who were involved in the restructuring who had both a lot of pride of authorship and a sense that we knew what the game plan should be, perhaps might have been a little bit more interventionist than others. But when we discussed this as a group, and balanced the risks of political pressure being brought to bear, if it was perceived that the government had any influence over day-to-day decisions, or even plant-by-plant decisions.

When you balance the fact that while we felt we had a great team working on this, this year, who knew what the next team was going to be; and was it really going to be people who were focused on the business side. The decision was made, you know, right up at the president's level and it was made very, very firmly and with an absolute clear line that the government was not going to get involved in day-to-day decisions or plant-by-plant decisions or any of that. And so, there are no government representatives on the boards of these companies.

We did appoint some initial directors because somebody had to. But they are very distinguished private sector people. And the boards now govern themselves, and the government will have the right to vote its shares once year. But all going well, it would simply vote to affirm what's going on. And so, what you see happening in for example the Opel situation, which we can talk more about -- is in fact the private board of this company taking control and making a set of decisions based on what it thinks is best for the company.

And the last point is that again, much to my amazement or significantly in my amazement, even though we were proposing restructuring plans that involved the elimination of tens of thousands of jobs; we got surprisingly little push back on the concept. Sure we heard from senators and congressmen -- I don't want you to close this plant. What about this, what about that, but the broad idea that these two companies had to shrink down in order to be viable. And that this wasn't a jobs program, this was an industrial restructuring program. Everybody including the UAW accepted.

BRAUNSCHVIG: Let's shift gears a little bit and talk for a few minutes about not the crisis management aspect of government intervention; but on an ongoing basis, and particularly for the automotive sector. Carlos: In the past, there have been technological innovations that have been clearly in the public interest -- seatbelts, airbags, ABS have saved perhaps millions of lives. And that, from a human and financial standpoint, has to be in the public interest. And yet, there were not -- your industry wasn't showered with public subsidies for that.

Now with respect to energy efficiency, there seems to be a consensus generally speaking that the government should help automotive companies develop these kinds of solutions. Is there a discrepancy?

GHOSN: I don't think so. You know, our job as car manufacturers in this case, is to develop technology and see how the technology can help us bring a better product on the market. Okay. And from time to time we develop this technology; from time to time, we don't. We don't because the conditions are not united for this technology to be successful.

We have decided, you know, to -- decided to go with the hybrid. We decided to go with the electric cars. And I'm going to tell you how this thing started. We didn't go to governments and say you know we have the electric car; how about you guys showering us with money and then we're going to -- no, we didn't do that. In fact, it was the contrary. It started particularly with you know, Shimon Peres -- I remember it was in Davos three years ago -- he called me, and he said, I read from the papers that you have the technology for the electric car. We want it in Israel. Okay?

What should we do -- what should we do to make it viable for you? That's the way it started. You know, so now it's being distorted by saying you know now car makers are going asking for help. And you know why we should help them do this, et cetera; it didn't start like this. There is an interest somehow by countries or by cities or be governors or by states saying for whatever reason, I want this technology for me. What should I do in order to make it viable? Okay.

That's the way it goes. So in this case, we went to the Israelis and we negotiated for one year. And they accepted all the conditions, but they said okay, we're going to reduce sales tax on the electric car from 80 percent -- they have a sales tax of 80 percent on every single car. They reduced it from 80 percent to 10 percent. And they said okay, to encourage you to do that, we're going to give you complete monopoly for four years. Okay, that's it.

So we started to work on it. They put an order of 100,000 cars. That's the way it goes. I mean, there is an interest. And I can tell you this interest is absolutely not very difficult to understand. Today there is a problem of complete dependency on one single commodity for whole sector of transportation -- it's oil. There is not a single developed country which is self-sufficient in oil. And there is not a single developing country which is self-sufficient in oil. China depends on outside oil. India depends on outside oil. The United States you know the situation, Western Europe, et cetera.

So the first concern is can we reduce a little bit this dependency on oil, number one? Second, price of oil is going to go up, no doubt about it. We don't know how much, when, but it is going to go up. All commissions are going there. And the third one, we have a serious problem about climate change. Now, you're going to a have a lot of academicians discussing between themselves, some are going to tell you, you know, Iceberg is going to be melt. And some countries are going to be submerged. But the public wants solutions for climate change.

And the only concrete manifestation of interest from government that we're doing something about it is not so much about agreement et cetera, is bring products that for the eyes of the public are totally neutral to the environment, because the electric car has no tailpipe. There is no tank for oil. There is nothing, so you know there is absolutely no emissions, no noise, et cetera. So what's happening today is we are in a situation where in order to make it on mass scale to market it, we need some conditions to help this technology start up. And many governments are ready to do it.

France has decided to put € 5,000 for every consumer who buys zero emission car. The United States government decided to give $7,500 for every consumer who buys a zero emission car, and, you know what? States to add money. I was in California last week. We were discussing with officials of the state and they are thinking about adding to the $7,500 of federal money, money from the states because they want to concentrate electric car in California. Denmark has decided the same. Japan put 700,000 yen for electric cars.

We are not lobbying government to do that. Government is saying, how can I get your industry to go into this direction because it's my own interest.

BRAUNSCHVIG: So the question is, where is this money going to come from? So I'm going to ask both of you the same question and then we're going to turn it over to you. So, if here's a policy that would undoubtedly significantly contribute almost overnight to energy efficiency, that would be agnostic to all suppliers and that would generate huge government revenues, bringing U.S. gas taxes to OECD levels, multiplying them by two or three. Why not?

RATTNER: You know? I don't know why not. Look, I think it's obviously what we should do and, by the way, I think the likelihood of the electric car working in the U.S. is somewhat diminished, if not significantly diminished, by the fact that our gasoline is so much cheaper than it is in Western Europe because of the taxation policy.

BRAUNSCHVIG: You're aren't concerned that it would be regressive?

RATTNER: Well, look, we can -- this is -- I didn't think this was a meeting on tax policy -- (laughter) --

BRAUNSCHVIG: Sure.

RATTNER: But government -- there's lots -- there's endless ways to solve the regressive problem. The cold, hard fact is that gas taxes -- any taxes today, let alone gas taxes, are politically unpalatable.

It may make -- you know, under the, as Rahm Emanuel called it, you know, the shady tree of a think tank, it's one thing to sort of say this is a great policy, but it's another thing to actually implement it. And there is little -- there's no political will, there's no political interest in raising any tax, let alone a gas tax, at this moment. But there are better ideas. There are ideas of basically having equilibrating gas taxes so that you create this glide path on oil in a much smoother way than the oscillations that we've had, so you have it as a stabilization thing. As oil goes up, tax is smaller. When oil goes down, the tax is larger. There are lots of great ideas for how to do this, but it's not happening.

Let me just make one other point. To your earlier comment, I think that the way in the U.S. we're driving these alternative technologies is a mix of the carrot and the stick. There is the carrot that Carlos ticked off around the world, and we have the $7,500. We also have a $25 billion Section 136 loan program that companies, including Nissan, have taken advantage of. But we also have the stick of the new fuel efficiency standards, which require automakers to increase their fuel efficiency in a way where most of them are going to need -- are going to have to have a significant component of zero-emission cars in order to simply -- and very fuel-efficient cars -- in order to meet that standard. And that standard gives companies double credit for an electric car vis-a-vis a regular internal-combustion car. So we're doing it with a mix of regulatory and financial policies.

BRAUNSCHVIG: Except that there's not a fiscal answer to where the money comes from just yet.

So Carlos Ghosn, what is your view? Don't you think that the innovations you've seen in Europe, diesel engines and other things, have been driven by higher gas prices?

GHOSN: Well, I think the diesel -- Japan has high gas prices, but has no diesel. But you have many companies in the world where diesel technology is a perfect example about how government policy can make the market adopt different kind of technology because 60 percent of the cars sold in Europe are diesel. Zero percent of the cars sold in the United States or in Japan are diesel.

You have the same car manufacturer on the -- in the three continents, same technology is available. How come that 60 percent of Europe can buy a car with a diesel engine while zero percent of the Japanese, you know -- even though the price of gasoline in Japan is quite -- is quite high. I think this is where fiscal policy and the incentives are very important. They can help the consumer make a better decision by going one direction or the other.

And if the government in a particular country would like to promote zero-emission cars, for whatever reasons, well, the policy and the decision they make can make a change at the level of the -- of the consumer. But diesel is a perfect example. It costs money to promote diesel, because in fact you are creating some advantage for diesel. At the end of the day, you have to trust the fact that governments and countries are doing this for their best interest.

BRAUNSCHVIG: I'd like to open this to you. Please stand up when I recognize you and identify yourself with your name and your affiliation. And we're interested here in questions and not statements.

The gentleman.

QUESTIONER: Andrew Gundlach. Arnhold and S. Bleichroeder.

My question is whether or not the governments have done enough, in your opinion. India and China have said they're going to make cars for $5,000. Today in the Western world $20,000, at a minimum, for a car and they barely make a profit on it. So how is the Western world going to compete with that with the unionized and expensive labor forces?

RATTNER: Well, I only have one comment, and Carlos has a much more global view. One of the -- one of the things that was an eye opener for me as part of this project is the whole effect of globalization on the manufacturing base. I was not a manufacturing guy before I took this job. I read the same things everyone here has read, but it was -- it was rather eye opening to see it in front of my eyes; which is to say that if you look at the U.S. situation, the base wage for a UAW worker is about $33 an hour. I think in the South it's about $15 an hour. And in Mexico -- before you even get to China and India, in Mexico General Motors is paying $6 an hour. And if you ask Fritz Henderson, how is your productivity in Mexico, he'll say it's every bit as good as my productivity in Michigan.

So this whole problem of manufacturing in the U.S. and global competitiveness, putting aside who's got the best cars or who, you know, can come up with a clever new design for a small car, is a huge problem. And you know, we saw -- and part of -- part of the reason for the response that we made was that we saw really the evisceration of the U.S. manufacturing base as a result of the increased sophistication of global competitors. And I -- this is something everybody talks about. I don't profess to have any great solutions to it, but nobody should doubt where this road is headed at the moment.

GHOSN: Yeah. Well, you know, if we -- if we consider -- I mean the biggest mistake we could do is consider that China and India is only about cheaper products. It's not. It's not. There are products today which are done in India that we don't know how to do. I don't know how to do it in Japan. I don't know how to do it in France. I don't know. And that's why I need to partner with an Indian company to learn how to do this, because some of it is not only knowledge, but also it's a mind-set.

You know, I quoted -- I quoted in India the frugal engineering and the frugal product planning that we have completely lost. We have completely lost. I don't think it's possible today for engineers in Japan or in France to imagine the product in such a frugal way that India naturally finds because of their environment, because of their culture, because of the way they are. They are a poor country, you know, with very little resources, and they need to be much more innovative, while in many countries where the car industry is based, we lost this instinct, okay?

So when we talk about the $3,000 car, $3,000 car is not about underpaying people and -- it's not. It's about really the -- what I call the just necessity kind of engineering that the Indians have and that we don't have. And if we think that China and India is only about things cheaper because the wages are lower, et cetera -- which is part of the reality, but not all of the reality -- we're going to miss -- we're going to miss something much bigger coming and we're going to lose competitiveness.

That's why I think -- and we, as car manufacturers, we are in India, we are in China. Everything which is due to lower labor or lower benefits, et cetera, we can replicate. There is no problem. But we also have to learn about new ways of doing things coming from the culture of the country and the know-how of the country, and we shouldn't miss that.

QUESTIONER: Bernie Ferrari.

Mr. Ghosn, can you tell us how you think the General Motors story will play out over time and the implications for the industry?

GHOSN: Well, I would have a hard time telling you how Reliant's story is going to unfold over time -- (laughter) -- so it's going to be difficult for me to tell you -- to tell you something about General Motors.

I think -- I think the industry is going to continue to consolidate. I think the industry is going to continue to consolidate. And the way the industry has been consolidated in the past is not adequate anymore. It's not a question of acquiring or merging; it's a question about how can we work together in a way which is much more efficient, particularly in order to develop the new technologies in order to support our supplier network.

Steve said that, you know, when General Motors was in danger, everybody was scared. We were scared because some of our suppliers are big suppliers of General Motors. If they go down, we would not have been able to assemble any single car in the United States. So General Motors going down would have put in trouble certainly Ford and Chrysler, but Toyota -- you know, I see Inaga-san (ph) here. We would not have been able to assemble a car because we have the same suppliers. We have often the same dealers. We have the same groups having dealership. So the industry is very, very connected.

So what I think we're going to do more and more global consolidation, but in ways that are not very classical, which means we're going to have to innovate about how we can put resources together and still keep identities of companies and differentiation in terms of products different.

But there is no -- there is no way I think you're going to continue with the same number of players in the car industry. We need more scale, we need more investments, and we have newcomers coming -- China, India are going to generate new car manufacturers. So for me answering your question, nobody can tell you, you know, 10 years down the road how it's going to be looking like.

BRAUNSCHVIG: Ken.

QUESTIONER: Kenneth Bialkin with Skadden Arps.

Steve, primarily, I wonder if you could comment. In this perfect storm of events that we've confronted, we had another complication, which is an election and a change of government -- a change in leadership, a change in personnel and maybe a change in policies -- which happened January 1 but began in November '08 and at a primary and an election before then.

Could you comment on what has been the impact on this change -- of this changeover that, in the middle of falling from a high floor in a building before you hit the ground, you had to change your direction? Could you comment on what -- how you worked out transition from one administration to the other while having to handle the difficult problem?

RATTNER: Yeah, it was -- it's almost unimaginable that there could have been a worse time for the car companies to get in trouble than when they got in trouble. First, of course, you had Lehman Brothers, the whole episode on September 15th and then in November and December you had the car companies showing up in Washington. You had the election, as you mentioned, you had a lame duck president, you had the Obama people trying to grapple with the question of whether there should be one president at a time or how involved they should get in a number of issues -- the cars being one of them.

You had Congress, which was in a whole state of emotions over TARP and over a whole bunch of things. And it really worked -- unfortunately, the timing worked to the disadvantage of the American people because it meant that you could not really put in place the kind of fundamental restructuring you needed to while this was all going on. So the consequence of it was that, if you remember, Congress refused to act in December on providing money to car companies.

The Bush administration made a decision -- and I'm not here to criticize it or second-guess it -- that they simply were not going to let the two car companies go out of business, go bankrupt, which would have meant go out of business on their watch. So they gave them about $17 billion of TARP money at the end of December but without any real restructuring conditions associated with it and so it was what I call -- and again, I don't mean this critically -- "kick the can down the road" money, and it's, unfortunately, close to $20 billion of taxpayer money that was basically just squandered because we got nothing back for it.

And this gets a little bit to the difference in how companies get restructured in the U.S. versus potentially in Europe. And so when the Obama administration -- and the Obama administration had a transition team, but it was stretched very thin, as you can imagine. They had no car experts per se. I wasn't involved. I didn't get involved until after the first of the year.

And when we showed up -- and again this is not meant critically, but simply the urgency and how this all happened -- there was nothing. There were no plans. There was no staff, there was no analysis, there was no real concept of what we were going to do except for these existing loan agreements that required the car companies to present viability plans on February 17th and for a decision to be made by March 31st on what to do about them.

And at that point they were going to run out of money again anyway, so even if you didn't have these loan agreements, you were going to face another cliff, and so we literally had five weeks to kind of figure all this out and to get the president to the point of making a decision as to whether he was willing to do bankruptcy, whether he was willing to have government intervention, or what he was willing to do. And it was a very costly period of time in that sense for the country, but I'm not sure what the alternative would be. You know, we have elections, we have transitions.

BRAUNSCHVIG: Mrs. Kravis.

QUESTIONER: Marie-Josee Kravis (Off mike.) Steve, I just wanted to ask him because he mentioned the CAFE standards, and one of the ways the industry gamed the CAFE standards in the past was to produce large fleets of low-margin, fuel-efficient cars to compensate for the gas-guzzling issue, these.

And I'm wondering, today, as you look at the industry, what is the ability of the U.S. industry to produce high-margin fuel-efficient cars?

RATTNER: Carlos and I may disagree about this, and I would respect his view, but I'm happy to be as critical as anybody of the decision of the American car industry to produce high-margin gas-guzzling cars in the past. But it wasn't as completely irrational in some ways as you might think it is, because with the structural costs that the U.S. companies had, they couldn't make any money on small cars. They had a huge cost disadvantage.

And the other thing that isn't well-known -- and Carlos knows it very well -- is they also have a revenue disadvantage, that a substantially identical GM car to a Toyota car sells for a couple thousand dollars less because of the brand equity problem. And if you're selling a $20,000 car and you're losing a couple thousand on the revenue side and you've got thousands of dollars of costs on the cost side because of legacy costs, you can't make money.

So what they did was not as economically irrational as many people think it was. They made things they could make money on. The restructurings that we did we believe completely levels that playing field. We took General Motors' liabilities from $120 billion to $55 billion. We took $8 billion a year structural costs out of their North American operations. We ring-fenced all of these legacy health-care obligations that we all hear so much about.

And so I don't believe that there is any given reason why General Motors can't make a fuel-efficient, low-cost car as well as Nissan can over time. Whether they can is going to be a function of management and DNA and whether they really pull themselves together. But I think one of the real benefits of this restructuring was to give them at least a level playing field to try to do that.

QUESTIONER: Paul Steiger with Propublica. To what extent is the UAW part of the solution and to what extent is it part of the problem? And how does its position appear relative to unions in other countries?

RATTNER: Should I do the first part and you do the second part?

GHOSN: Yeah.

RATTNER: Look, on the one hand, what was interesting to us as we got into General Motors in particular is how ready they were to blame everything and everybody but themselves. They would blame the UAW, they would blame oil prices, they would blame the dollar-yen exchange rate, they would blame Carlos for being too smart. (Laughter.) They had every -- you know, they had every excuse in the book.

And there is no question that the UAW does bear a significant amount of responsibility in this situation, but one of the things that I was very worried about, and pleasantly surprised by, frankly, to find, was how constructive the UAW was when we got there, which isn't to say it wasn't a tough negotiation. But, you know, bankruptcy -- you know, nothing frightens the mind as much as the prospect of a hanging. The UAW kind of got it.

You know, General Motors had 435,000 UAW employees in 1979 and today they have 40,000 in the U.S. Now, that's not perfect math -- they spun off Delphi; there's a few things that have changed -- but the direction is about right.

So these people were really looking at -- you know, at a huge precipice, and I found them very constructive and reasonable. We had a tough negotiation but it was very professional. Some of the things that were in the UAW contract were beyond anything that I imagined. You know, General Motors -- in most companies we all get the 4th of July off. If you work at General Motors you got the whole week off.

If you worked more than eight hours in one day, you got overtime, even if you worked six hours a day for the rest of the week. There's all kinds of stuff in that contract. There were 300 job classifications in these factories, all kinds of stuff that made no sense, and most of that is now gone away.

And so the UAW did get religion. Now, the thing to worry about is so we did this for Chrysler and GM and then Ford came along and went back to UAW and said, okay, well, we want what they have.

And Ron Gettelfinger, the head of the UAW and the Ford stop steward said, okay, fine, you can have what they had. And they put it up for a vote of their membership and the membership voted it down. Ford was doing fine. They made a profit in the third quarter; why should we give up anything?

So it is a yin and a yang and it is very -- it was, on the one hand, heartening to see the UAW chip in in a very robust way, but seeing things like this Ford example do worry you a little bit down the road about what could happen.

GHOSN: Yeah, well, I agree with Steve on the fact that, you know, in Japan and France it's exactly the same. When the company is in trouble, the union usually behaves very well. I've seen it in Japan in 1999 when Nissan was in trouble and we had to come with the Nissan Revival Plan, which required a lot of sacrifice from many people.

The union of Nissan, which was known in Japan as one of the most turbulent unions existing into the country, they behaved impeccably. I mean, I must admit that in fact they recognized the situation. The understood it was serious. They asked us for commitments. We said, okay, we're going to take these commitments. We delivered, fortunately, on the commitments and they delivered their part.

In France it's exactly the same thing. Obviously you have, from time to time, the verbal things which are going here and there, because the unions also, you know, they go for election and they need to be voted so they need to, from time to time, do some noise about some position. But at the end of the day, in front of situations which require their collaboration, they never miss. They never miss. So that's -- I mean, I think it joins a little bit what Steve was saying about the UAW.

BRAUNSCHVIG: Mr. Michael Schrage.

QUESTIONER: I'm Michael Schrage with MIT. Everyone on the panel said that initially the source of the rationale for the intervention was job frustration and preventing a meltdown. As you look at consolidation and the future of the automobile industry and the supply chains, do you believe, over the next 10 to 12 years that the automobile industry and the supply chain will be a source of job creation, or will they continue to shrink and shrink?

GHOSN: Oh, I think without any doubt the jobs are going to increase. The jobs are going to increase. We're talking globally here. We're not talking about one specific country.

QUESTIONER: My apologies -- in the industrialized countries.

GHOSN: In the industrialized world, okay.

QUESTIONER: I'm not worried about Japan --

(Cross talk.)

GHOSN: Okay, let me answer this way: At the level of the planet, it's going to be much higher, much bigger, for the very simple reason there are going to be more cars. And this idea of saying, okay, we're going to fix the climate change but asking the Indians not to buy cars doesn't make sense, you know? (Laughter.)

That doesn't make sense because that's the first thing they want, you know? I'm progressing, I'm getting a better job, I'm educated; the first thing I want, a want a car because I want -- also in China it is exactly the same.

And, by the way, there are 50 cars per 1,000 inhabitants. We have 800 cars per 1,000 inhabitants in the United States, 600 in Japan and in Europe. There is no way India and China are going to stop at 50 or 60 or 100. They may not get to 600 or 800 but they're going to be somehow around 300 or 400.

And in this case, we're not going to have 600 million cars being driven on the planet every day; we're going to have more than 2 billion. And that's what explain why electric cars -- zero-emission cars are becoming a real necessity.

So, back to this. In the industrialized world, I think overall the jobs are going to be stable. They're not going to grow; they're not going to go down, and I'll tell you why: because there is new technology coming. I will give you the example of the battery technology.

For an electric car you need a battery, and the battery technology is very sophisticated. And we decided to develop batteries and build batteries. For example, in the case that Steve mentioned where we are building, in Tennessee, a new plant for electric cars, but near the new plant for electric cars, we are building a plant for batteries.

So this new technology, these new products, are going to be mainly built into developed countries, and they're going to substitute the low-cost products which are going to naturally migrate towards countries where the infrastructure is much more efficient.

RATTNER: I think you have -- just, I'll give you another -- I think you have two factors at work. I think for the U.S. and Europe, the industrialized world, as you said, Michael, in the long run I think I do worry about the global competitiveness and costs of labor and things like that.

In the shorter run, I think when you look at the U.S., I think that the massive reduction in capacity that I mentioned, as well as the massive reductions in employment across the whole supplier base -- and, as you know, productivity has been very strong during this recession, uncharacteristically strong, and that's because business has done a great job -- "great" I guess is a double-edged sword -- of holding down the number of employees in order to remain efficient.

And so we are kind of lean and mean in the U.S. in this industry, and if there is any pickup in demand -- and I personally think there will be, and we can talk about that -- I think you could have some job creation. I think Europe is still in the early days of their restructuring so I would be much less optimistic about jobs in Europe.

GHOSN: Yeah, if I can add something to Steve, I think the fact that you are, you know, giving away some jobs to other countries, this is something that management resists. You need to know that. That means -- it's not because, you know, China is cheaper that automatically you're going to be unloading plants. It's not going to happen like this because your management is going to be against it. They'll want to keep jobs in their country. And I see it everywhere, you know.

And you're going to find 50 or a hundred reasons for wage -- you know, you're going to do it here because the quality is better. It's a supply chain. It's more reliable, et cetera. But people don't want to send jobs abroad. They send them abroad only when there is absolutely no other way and all the indicators are going against keeping the job into the country.

We see it not only in manufacturing jobs but particularly engineering or support functions. We see it clearly in countries like Japan. We see it clearly in countries like France or in Western Europe.

So we need to count with this also. Management of companies don't want jobs to go away, you know? They feel they are a part of society. They know that job creation is something which is also part of their responsibility. And somehow they're going to try to find every single reason to keep the jobs on the -- you know, on your own territory.

Probably the U.S. is one of the countries -- there is still a lot of attachment to jobs in the U.S., no doubt about it, but where there is more fair, I would say, acceptance of the fact that some activities go abroad. But I can tell you, in Western Europe and in Japan, every single time you come to the conclusion you're going to need to ship a job or do a car outside, it's (disappointing ?) -- in management, what I call (disappointing ?).

I mean, everybody is going to start to say, you know, that's not a good idea, we're going to have to double invest, et cetera, et cetera, and you have the list of all the excuses not to give them that, and that's going to continue.

RATTNER: I think just a quick footnote -- and even in the U.S., General Motors has made a decision to build their new small-car plant for 160,000 cars a year in Michigan rather that in Korea because the UAW was willing to give them a different deal on that so that they could make them competitively. But all the DNA of GM was, we'd like to do this here if we can.

QUESTIONER: Byron Wien, the Blackstone Group. Steve, I would like to extrapolate the comment you made. The great triumph of America is its scientific innovative capability. If you look at the space program, the government put a lot of money into putting a man on the moon and gave birth to Silicon Valley as a result. Is there any effort in Washington to put a similar effort into an electric car or some other renewable energy vehicle, with government money sponsoring the scientific research and perhaps even the manufacturer?

RATTNER: There is the $25 billion loan program that I mentioned, Section 136, which was passed last year, which is in the process of being funded. And there is an enormous amount of discussion in Washington. We spent a lot of time looking at it. That discussion is ongoing at this moment as to whether there is something that government could do in terms of advanced power train particularly on the electric car side.

But I think for a variety of prioritization issues in terms of everything that's in front of the Congress now and everything that's on the administration's agenda, fiscal issues in terms of our budget -- David kept saying, how are you going to pay for it; how are you going to pay for it?

And I think a general -- even in a Democratic administration -- reticence to engage in too much industrial policy -- everything is industrial policy on some level, but I think to engage in too much industrial policy, too much private sector intervention as opposed to -- Carlos kind of said let the market decide; let individual countries decide what they want. I would probably be reasonably pessimistic that that would actually happen.

QUESTIONER: Ahmed Alkhunaini, Saudi Petroleum.

With the launch of the electric car just a couple months ago, I was just wondering, what's your expectation for the market share that the electric car would take? And the other thing is, why was it that Nissan picked the electric car versus the hybrid?

GHOSN: Okay, well, you know, our expectation is that in 2020, 10 percent of the global market will be made by electric cars. So it's not going to be a radical -- we're not going to take the market by storm. This is going to be a gradual transformation where the obvious users who need an electric car are going to be jumping in.

By the way, today when you make a survey in the United States you have 8 percent of the people who say, my next car is going to be electric. We opened -- last week, we opened on the web -- you know, if you're interested to buy the lease, you can already fill a document. We have more than 25,000; already people raising -- your hands going up. And we're launching really by the end of 2010. So I'm expecting the capacity to be full very quickly.

But I think that capacity constraint infrastructure -- building infrastructure is going to take some time. And we don't want it to appear as it's oil or electricity. It's not. Electricity is here to complement oil, to reduce the pressure on oil because we know that it's unsustainable.

What was the second part of the question?

QUESTIONER: Why you chose it?

GHOSN: Oh, yeah. We have hybrid and electric. Now, the hybrid leadership is already taken. It's Toyota. It's over. Everybody else trying to catch up, et cetera. They took the leadership. They invested a lot. I mean, they have been investing for years on this, you know, and it's a good return on this investment, you know. They have the leadership and everybody is following. We have our own hybrids, okay?

Now, what we want is to establish leadership in zero-emission cars, okay, which is another version because there is going to be a place for hybrid and there is going to be a place for zero emissions.

QUESTIONER: Dan Loeb with Third Point.

This is a question for Mr. Ghosn. We've been talking a lot about electric cars. One of the things being discussed by the administration is natural gas-powered cars. I was wondering where you stand on that. My understanding is there is some effort to start with the government suite of vehicles and then build the infrastructure on that and roll out natural gas cars.

GHOSN: Yeah, well, natural gas cars are an option. They will be part of the -- you know, 90 percent of the market 10 years down the road -- we say 10 percent electric car -- 90 percent are going to be made with a variety of technology. Natural gas is part of it. But obviously it's not as neutral to the environment as electric.

People usually say, yeah, but you know what? The electric car is not zero emission because if you make electricity out of coal or if you make electricity out of oil, it's not zero. But if you make electricity out of nuclear, if you have hydroelectric stations, if you go with solar, if you go with wind, you have a zero emission.

I mean, one of the reasons for which France is so bullish on electric cars is because 70 percent of electricity in France is made out of nuclear power. Now, you're going to have nuclear power for the energy and then the zero-emission cars after. You're going to have a pretty good balance in terms of emission.

Now, if even you are making electricity out of coal -- 100 percent of electricity out of coal -- the electric car from well to wheel is much more efficient than a gasoline engine today, much more efficient than diesel engine today. It loses to the most advanced hybrid, okay? Only hybrid technology is better than electric car on the condition that 100 percent of electricity is made out of coal or out of oil.

But, you know, I would be very surprised if this push on the CO2 would not promote new sources of energy like nuclear, like solar -- a lot of technology coming on solar. And I think it's going to be a very virtuous circle, where we want to bring the electric car and the power company are going to start to -- under regulation and the incentive, are going to start to look for sources of energy which are going to be much more effective in terms of CO2.

BRAUNSCHVIG: Well, I'm not sure we have all the answers to the question of how should governments drive industry, but I think you would agree with me that we have two of the most qualified people to advise governments across the world. Thank you very much. (Applause.)

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THIS IS A RUSH TRANSCRIPT.

This session was part of the Corporate Program's CEO Speaker series.