U.S. AUTO INDUSTRY HAS PLAYED A CRITICAL ROLE IN OUR NATIONAL ECONOMY SINCE THE DAYS OF THE FORD MODEL T. IS IT WORTH SAVING ?
Robert Scott makes the case for preserving the American automobile industry in a Economic Policy Institute memorandum.
http://www.epi.org/content.cfm/pm134
An investment, not a bailout
The $25 billion rescue loan being considered for automakers would help maintain an essential industry, along with 3 million critically-needed jobs
By Robert Scott
With the U.S. Senate prepared to take up the question of a $25 billion rescue package for automakers as early as Monday (Nov. 17), partisans are loudly debating the merits of another bailout. But given current economic conditions, the answer should be clear. Government intervention in the form of a bridge loan will allow the industry to survive until the economy stabilizes, new fuel efficient models are introduced, and recently negotiated changes to United Auto Worker (UAW) contracts kick in. That means saving millions jobs—not only in auto factories, but also at component suppliers, dealers, and elsewhere—when employment is desperately needed.
Other circumstances strengthen the argument for this loan:
Although domestic automakers made strategic blunders in the past, they have recently made tremendous strides in restructuring. But many of those changes won’t kick in until 2010, when new models such as GM’s plug-in hybrid, the Chevy Volt, and a new model getting 45 mpg are introduced. New union contracts will also take effect in 2010, which will greatly reduce automakers’ many legacy costs.
The current industry collapse is a direct result of the financial crisis rather than past industry decisions. Nervous consumers are delaying large purchases, sending vehicle sales in the United States to their lowest level in decades. More than 16 million light vehicles were sold in 2006 and 2007. Sales fell to 10.6 million units in October, a 35% decline from 2007 and the lowest absolute level since February
1983.
The collapse in light vehicle sales has hit both import and domestic companies. GM sales fell 47% in October, but Suzuki (-48%) and Isuzu (-49%) were equally hard hit. While Chrysler sales fell 38%, Kia’s fell 40%. Ford’s sales were off 33%, but Nissan’s fell 36%. Overall, domestic sales fell 41%, and Asian producers dropped
29%. Every company experienced a sharp drop in sales last month. These declines are particularly troubling because the auto industry is one of the most capital-intensive sectors of the U.S. economy.
Unionized U.S. automakers are highly productive. The top two most productive auto assembly plants in the United States in 2005 were UAW plants (in terms of hours per vehicle assembled). In fact, six of the top 10 plants were UAW shops (Harbour 2006, as cited by Shaiken 2007). Product reliability for U.S. manufacturers is now approaching that of Japanese producers in some cases (Cohn 2008). This high productivity has allowed domestic manufacturers to compete with foreign companies that benefit from government subsidies, including manipulated currencies in Korea and Japan that reduce costs by 10% to 20%, and national health insurance systems in most competitive countries that remove the burden of covering costs for existing workers and retirees. Such high-productivity industries are exactly what is needed to ensure future economic growth.
Union auto workers have already taken substantial hits on pay and benefits. For example, contracts negotiated in 2007 slashed wages for new workers by 50%. In addition, new workers will not be guaranteed any retiree health care benefits, and will not participate in the traditional defined-benefit pension plan. On top of that, the UAW agreed that the responsibility for health care benefits for existing retirees would be transferred from the auto companies to an independent trust, called a Voluntary Employee Benefits Association. Analysts now believe that the labor cost gap between the Detroit-based auto companies and the foreign transplants will be largely or completely eliminated by the end of the current contracts.
A collapse of the Detroit-based auto manufacturers would result in the loss of 2.5 to 3 million jobs, according to a 2008 study by the Center for Automotive Research (CAR). There would also be a ripple effect throughout the local economies of auto communities across the United States. Furthermore, liquidation of the auto companies would put at risk the pension and health benefits of 1 million retirees and dependents, and could saddle the federal pension guarantee program with enormous liabilities. Under current law, the federal government would also be required to pay for part of the retiree health care costs for pre-65 retirees from the auto companies.
The automotive industry represents almost 4% of U.S. gross domestic product and 10% of U.S. industrial production by value. The failure of the Detroit-based auto companies would severely aggravate the current economic downturn, compounding the difficulties facing working families and businesses. Revenues to the federal, state, and local governments would drop, forcing cuts in vital social services at a time when they are most needed.
An airline-style (Chapter 11) bankruptcy re-organization is not an option for U.S.-based automakers. They have already extensively restructured product lines and labor contracts. They would be unable to get debtor-in-possession refinancing to continue operations, and consumers would be unwilling to buy cars from bankrupt companies. Hence, a Chapter 7 bankruptcy liquidation is the only alternative for domestic automakers. The bankruptcy of one or more of the “Big-3” automakers would endanger thousands of large and small parts and services suppliers. Massive job loss and community disruption would result. Increased government payments and tax losses alone would exceed $150 billion in the first three years following bankruptcy of all three domestic auto companies, according to the CAR report. The $25 billion rescue plan is a bargain by comparison.
References
Cohn, Jonathan. 2008. “Panic in Detroit.” The New Republic.
http://www.tnr.com/politics/story.html?id=a4893b49-36df-4784-9859-2dfa3a3211bf
Cole, David, Sean McAlinden, et al. 2008. “CAR Research Memorandum: The Impact on the U.S. Economy of a Major Contraction of the Detroit Three Automakers.” Center for Automotive Research, An Arbor, MI. http://www.cargroup.org/documents/FINALDetroitThreeContractionImpact_3__000.pdf
Shaiken, Harley. 2007. “Unions, the Economy, and Employee Free Choice”. Washington, D.C.: Economic Policy Institute. EPI Briefing Paper #181. February 22. http://www.sharedprosperity.org/bp181.html
5 comments:
In the case of the auto-makers' bailout, it's a relief to have a national issue that is so straightforward: American cars tend to break down and fall apart therefore people have stopped buying them. If GM and Ford don't want to go out of business, they should start making decent cars. To bail them out would be to reward their terrible manufacturing standards.
I have always driven made in the USA vehicles and they seldom break down with proper maintenance. Auto industry managers do deserve a large part of the blame for the current failure. CEO's have made some very poor decisions. In hindsight, the auto executives were short-sighted to avoid making more fuel efficient cars and offering better warranties.
If we allow these companies to fail, millions of Americans will lose their jobs. I am for helping to keep these auto companies going, not for the CEO's, but for Main Street.
Of course, we need to have strong oversight to make sure that any loans are used to make improvements resulting in a more competitive domestic auto industry.
Once you quote any data from industry shill the Center for Automotive Research, you've lost the argument. Its so-called "research" is tainted, not so much by the fact that it is funded essentially by the manufacturers, suppliers and unions, but it is flat out incorrect, particularly insofar as the scare tactic of 3 million lost jobs is concerned. The fact that the industry is on death's door can't be attributed to factors stemming from the credit crisis; rather, poor management, a history of lousy cars, union overreaching and miscellaneous other factors have led to this. Don't use the last 18 months as an excuse. Let the industry die....and let more efficient foreign manufacturers who maintain sizable plant and workforce capabilities in the US take their place.
Obama for Prime Minister of Britain?
After all, he is the man who is going to save (or who is at least trying to save) five thousand British jobs.
Since he is the man who believes that if Wall Street deserves a bailout, then so does General Motors.
It certainly is puzzling to see the automaker CEO's state that higher gas mileage standards will be too difficult to reach when in fact such standards are being reached now by the EU and Japan. Ford and GM both produce high mileage cars for the European market. Diesel engines often produce higher mileage than hybrid cars without the fancy technology, yet why aren't they here? Yes, higher mileage cars are often a little smaller, yet they don't have to lack power or luxury to do so. Ford has said it will introduce the Fiesta into the American market by 2010 - too late in the game for that high mileage car. The wrong questions are being asked by the lawmakers to these CEO's. They need to be asked if they can produce high mileage cars for the European market, then why can't they do it for the American market?
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