To Bail or not to Bail – What Future for the US Auto Industry?
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Contents at a Glance
What happened to the BIG THREE?
Ford, GM and Chrysler are known as the Big Three in the US Auto industry - big because:
- More than one in ten US jobs is directly related to them (around 3 million in total)
- More than 1 ½ million cars in the US are manufactured by them each year
- They represent 4% of annual GDP
Since 2007 the US auto industry has been struggling to keep its head above water thanks to declining overall car sales and increased competition from Asia, particularly Japan. Then when the oil prices reached an all-time high of $147 a barrel in July 2008, the entire landscape of car buying in the US began to shift much earlier than expected. The Asian car manufacturers who were specialized in smaller and more fuel efficient cars and had already made inroads into hybrid technology were perfectly positioned to reap the benefits of the massive shift away from the big SUV culture that still continues. However the Big Three's key growth had been in this SUV culture, and hence a good number of their eggs were firmly in this basket. They have been caught unprepared by this shift and, as Charles Krome wrote for Autotropolis,
"The Big 3 are trying to drum up support for some $50 billion in low-interest government loans. They need the money, they say, to finance a quick switch to producing more fuel-efficient vehicles ... they've got all this great technology, etc., they just need some help getting it to market. "
Most of the business these days is done through credit, and likewise, the Big 3 run their business on bank loans. However with their precarious economic condition, banks have been reluctant to lend money to an industry in decline. Not only that, but the credit crunch has meant that the banks don't even have the money to lend anymore - they themselves are collapsing and are being propped up by the US government. Hence the Big 3 and indeed the whole US auto industry has been brought to its knees. Ford and Chrysler claim to have cash reserves to keep them afloat for a few months. GM is not so optimistic, with only a few more weeks left. Hence the government bailout is not only important, but it is urgent.
Failure of the US auto industry will be equivalent to a tsunami of joblessness and economic collapse for the US. Not only the million jobs at Ford, GM and Chrysler are at stake, but the millions of related industries supplying spare parts and fittings are also directly threatened. The auto industry is the backbone of the labor class in the US and its collapse will trigger far-reaching repercussions.
Senator Debbie Stabenow said recently,
"With one in ten American jobs directly related to the auto industry and vehicle sales having reached a 25-year low, the need for the federal government to support American auto manufacturing has never been greater for the future of our middle class."
GM, Chrysler face bankruptcy as auto bailout collapses
The collapse of the auto aid plan for three biggest US automakers has raised concerns of an imminent bankruptcy filing by General Motors and Chrysler before Christmas. However, the Ford management said it is not facing a solvency issue.
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What was the Bailout?
At the Senate hearing sat GM CEO Righard Wagoner, Ford CEO Alan Mulally and Chrysler CEO Robert Nardelli, who made the following statements:
"What exposes us to failure now is the global financial crisis, which has severely restricted credit availability, and reduced industry sales to the lowest per-capita level since World War II," said Wagoner in a prepared statement at the hearing.
"This is not just a case of the domestic auto industry failing to anticipate changing economic conditions," said Mulally in a similar statement. "Very few in any industry, of course, predicted the kind of economic headwinds we face today."
"We are asking for assistance for one reason," said Nardelli in his statement. "To address the devastating automotive industry recession caused by our nations' financial meltdown, and the current lack of consumer credit, which has resulted in the critical lack of liquidity within our industry."
"Restoring liquidity to all realms of the U.S. auto industry, particularly for car buyers and dealers, is critical to our nation's economic recovery, said Congressman Fred Upton.
The consequences of not bailing the Big 3 out, and them consequently going bankrupt, is the loss of something like 3 million US jobs (Center for Automotive Research). The auto industry is responsible for 4% of the GDP each year. The result on individual lives and the already depressed economy as a whole is a cost that the US simply cannot bear.
In her excellent Lens "Auto Industry Disaster", Michelle Corteggiano says: "If the Big 3 collapse, the job loss in the US will create a loss to the government of $60.1 billion dollars in taxes in 2009 alone. The prediction for 3 years is a staggering $156.4 billion dollar loss to the government!"
There have been a number of bailout proposals - initially $50billion was requested, then a $25billion bailout proposal was rejected by Congress, and finally a $14billion proposal that was to be a stop-gap measure was also rejected by Congress in the first week of December.
President Obama On Detroit Auto Bailout
President-elect Barack Obama, asked on NBCs Meet the Press, whether the management of the automaker should be allowed to stay, said it may not be the same for all the companies. Press Conference Later, at a press conference in Chicago, Obama said that if the management team thats currently in place doesnt understand the urgency of the situation and is not willing to make the tough choices and adapt to these new circumstances, then they should go. If, on the other hand, they are willing, able and show themselves committed to making those important changes, then that raises a different situation, Obama said.
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Why wasn't it Passed?
Critics of the bailout, coming from both the Republican and Democratic camps, claim that the automakers themselves have brought the situation to this critical level by ignoring the movement towards more efficient technologies. They have continued to produce gas-guzzling SUVs and trucks without taking heed of the warning signs. Some also claim that the only way for the industry to survive is by allowing the bankruptcy of at least one of the Big 3 to make the industry more sustainable.
Another key issue preventing the success of the bailout bill has been disputes about the wage concessions on domestic auto workers. The United Auto Workers Union continues to refuse to bring their employees' wages in line with non-unionized workers working in foreign automakers plants, and the Republicans in particular are adamant that the bailout not be used for supplementing union workers' pay.
On November 24, 2008, Congressman Ron Paul wrote:
"In bailing out failing companies, they are confiscating money from productive members of the economy and giving it to failing ones. By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market, is that both success and failure must be permitted to happen when they are earned. But instead with a bailout, the rewards are reversed - the proceeds from successful entities are given to failing ones. How this is supposed to be good for our economy is beyond me.... It won't work. It can't work... It is obvious to most Americans that we need to reject corporate cronyism, and allow the natural regulations and incentives of the free market to pick the winners and losers in our economy, not the whims of bureaucrats and politicians."
Now time is running out for the Bush Administration to take affirmative action on this issue, and it seems likely that Barack Obama will have the first issue on his agenda as what to do about the Big 3 and the millions of American jobs that are on the line.
"We will leave here tonight and go home for the holiday recesses," said Sen. Chris Dodd, D-Conn., shortly before the closure vote. "But for the literally hundreds of thousands of people whose jobs depend upon this industry, this will not be a joyous season wondering whether or not their jobs, their livelihoods, their homes, their children's futures are at risk because we were incapable of coming up with an answer."
And the Good News is..........
On Friday 19th December it was announced that GM and Chrysler would receive a total of $17.4 billion to avoid bankruptcy with Ford saying they don't need it just yet.
President Bush announced that,
"Under ordinary economic circumstances, I would say [bankruptcy] is the price that failed companies must pay, and I would not favour intervening to prevent the automakers from going out of business. But these are not ordinary circumstances."
As it turns out, the loan package mirrors the Senate bill that was defeated, stipulating a deadline of March 31 for the automakers to demonstrate viability. It also sets a ceiling on executive salaries and enforces pay that is competitive with foreign auto manufacturers.
See the Autotropolis article by Christopher Smith for the full analysis:
Automakers Get $17.4 Billion Federal Loan
What the Polls Show
Results of the Rasmussen Report conducted on 15 December were as follows:
- 53% said they opposed taxpayer-funded loans
- 28% are in favour of the loans
- 19% are undecided about the loans
- 67% said the domestic car industry will not run better if the federal govt has a say in
how they spend their money
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I worked in the Auto Industry for 18 years as a finance manager. It made a great lifestyle for me and my son and I must say...I really enjoyed it. During my career in the Auto Industry it was a great place to be, the Big 3 were heros. Shortly after 9...
Reader Feedback
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Reply
- KBC KBC Feb 13, 2009 @ 9:29 am
- This is a complicated issue affecting more Americans than we probably realize. One wonders if, however, these companies shot themselves in the foot by designing cars that were inappropriate for the current economic and enviornmental concerns of Americans.
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Reply
- mrmuckluck mrmuckluck Feb 10, 2009 @ 4:23 pm
- those too weak to survive shouldnt get a dime
