Tags: auto | bailout | billions

Big 3 Need Systemic Repairs

Wednesday, 03 Dec 2008 12:13 PM

By E. Ralph Hostetter

The Big Three automakers — GM, Ford, and Chrysler — may have made some concessions when they upped the ante from requesting a $25 billion bailout loan to $34 billion from Congress, but they need to fix a systemic problem to avoid the road to bankruptcy.

After the auto executives’ hearing on the first proposal, House Majority Leader Steny Hoyer, D-Md., said on Fox News: "What we need is to, A, show they're going to be accountable. This is a large sum of money they want and need. Secondly, to show how they're going to be viable in the long term."

Auto execs’ agreeing to nominal pay and forgoing perks won’t translate until much long term unless they address their main systemic problem: labor unions.

Using GM as an example, labor costs, including wages and benefits, have been $73.26 an hour, so a 40-hour week paid the GM worker $2,938 a week, including all benefits. Meanwhile, labor costs for Toyota, Honda, and Nissan were $48 an hour, or $1,920 a week, nearly $1,000 less than GM. These figures are from the U.S. automakers, according to the Cleveland Plain Dealer, as of Sept. 27, 2007.

It will be difficult for the carmakers to get unions back to the bargaining table for concessions to hard-fought contracts. So, if Hoyer has some sort of magic wand to make this happen, he should step forward and wave it.

When we think of the automotive industry, we have a tendency to think in terms of Detroit. But more than 4 million cars and trucks were manufactured in three other states — Ohio, Missouri, and Kentucky — in 2005.

Then there is the marketing arm, the nationwide network of dealerships where jobs also depend on the automakers. For example, Chrysler, along with nearly 3,400 dealerships selling its Chryslers, Jeeps and Dodges, employs about 140,000 people.

In addition, those dealerships are the largest local advertisers on television, radio, newspapers, and the Internet. They use numerous other local services and facilities.

At the present time, the auto companies are burning cash at the rate of a billion dollars a month.

According to analysts, General Motors Corp., Ford Motor Co., and Chrysler LLC spent nearly $18 billion in cash in just the last quarter, and GM and Chrysler could be short of cash by year’s end. GM says an immediate infusion of $4 billion is crucial.

The prospects facing the auto industry are grim, and options are few.

Face-to-face negotiations with the labor unions to restructure the companies are necessary to reduce labor costs.

If nothing is done, GM President Frederick Henderson told reporters, the company would be insolvent. “Absent support, frankly the company simply can’t fund its operations,” he said.

Insolvency for GM, no doubt, would topple the entire Big Three.

The costs of outright bankruptcy could be catastrophic not only for the Big Three but also for the entire country.

Not only the 255,000 employees combined who work for the Big Three but also those employed in all the ancillary companies that depend on the automakers would be affected. Those independent companies span the breadth of the tire, steel, glass, plastic, fabric, and electronic industries.

An estimated total of as many as 2.3 million additional jobs, nearly 2 percent of all U.S. workers, could be lost in a giant ripple effect from losing the Big Three.

In addition to the ripple effect is what could be called the “multiplier effect.” Auto workers’ spending also creates jobs, creating a trickle down to all sectors of the economy. Estimates of these multipliers are complicated by the fact that portions of the spending for goods and services occur outside the region. Multiplier effects in the auto industry range from two to 10, that is, for every individual job, another two to 10 jobs are created.

Add to this the shock to the nation's confidence that could lead to other failures.

House Speaker Nancy Pelosi said she believes some sort of rescue would be forthcoming — provided that the automakers’ new business plans meet congressional approval. “I think it’s pretty clear that bankruptcy is not an option,” she said.

In the event that the automakers fail to resolve their systemic problem, they will be back again and again, asking for even more billions.

E. Ralph Hostetter, a prominent businessman and agricultural publisher, also is a national and local award-winning columnist. He welcomes comments by e-mail sent to eralphhostetter@yahoo.com.

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