The end of the road for U.S. carmakers?
Are the Big Three worth saving?
The U.S. auto industry’s downward spiral has accelerated dramatically in recent weeks. In a desperate bid for solvency, General Motors Corp. is seeking a merger with Chrysler. Chrysler has talked with Renault and Nissan about partnerships. And now Ford Motor Co., GM and Chrysler -- backed by Michigan lawmakers -- are lobbying Washington to give them cash, implying that failure to provide a bailout could doom the industry to bankruptcy.
Congress last month approved $25 billion in loan guarantees for automakers, and rules for those loans are being drafted. But the companies say they need more -- now. GM, Ford and Chrysler are burning through cash far more quickly than they’re bringing it in, sales have fallen off a cliff, and none of them has been able to borrow money in months because of the credit crisis.
White House spokeswoman Dana Perino said Monday that officials at the Treasury, Energy and Commerce departments were discussing aid to automakers. Options may include buying equity stakes in the companies, providing more loans, guaranteeing their borrowing or buying troubled auto loans. Bush administration officials, she added, were “working as quickly as we possibly can” to speed disbursement of the loans.
A Ford Credit spokeswoman said Monday that the company had applied for new short-term loans offered by the Federal Reserve to businesses having trouble borrowing. Recent news reports indicate that GM and Chrysler are seeking about $10 billion in government funds to support their merger.
Meanwhile, the drumbeat of bad news continued. Rating firm Moody’s downgraded Chrysler and GM debt Monday for the second time in three months, as well as the debt of Ford’s lending arm, citing “the pace and severity of erosion in the U.S. automotive sector” and suggesting that the companies may have difficulty remaining solvent through 2009.
With about 200,000 U.S. employees, hundreds of thousands more abroad and $400 billion in annual revenue among the Big Three, the prospect of failure by any of them is worrisome. Yet there is considerable debate about what might happen if they did fail.
Some analysts, economists and industry insiders predict a financial cataclysm, while others foresee little more than a shift of the industry to foreign companies such as Toyota Motor Corp. and Honda Motor Co. Some argue that, in the long term, the U.S. economy would be better off moving past automobile making.
“A failure from the Big Three would be a huge, huge hit,” said Donald Grimes, a research specialist at the University of Michigan. “But there’s a real question about whether there’s room for all of them.”
Others posit that the failure of just one of the Big Three would send shock waves through the entire manufacturing sector that could devastate suppliers and freeze up the other two carmakers. Hundreds of thousands of jobs would be lost.
“If Ford or GM goes down, you take a 2-million-job hit” that would also dump hundreds of thousands of retirees on the federal Pension Benefit Guaranty Corp., said David Cole, chairman of the Center for Automotive Research. Chrysler and GM will be responsible for an estimated $90 billion in pension and health insurance benefits by 2017.
This month, the center began running what it calls catastrophe studies to predict the consequences of an automaker’s failure. The studies project a toll of up to 2% of gross domestic product. “The hit to the economy is $200 [billion] to $300 billion,” Cole said.
The Big Three’s slow loss of market share to foreign brands sped up in the 1990s. In the 1970s, GM controlled more than 40% of the U.S. market; today, foreign carmakers account for 51% of U.S. sales.
What’s more, most foreign automakers have plants in the U.S. So far this year, 27% of the cars bought in the United States were built in U.S. plants owned by foreign carmakers.
That, says David Gregory, law professor at St. John’s University and a former labor representative for Ford, clearly indicates where the industry is headed. Because companies such as Nissan Motor Co., with a huge operation in Tennessee, and BMW, which builds vehicles in South Carolina, have erected plants in areas where labor is inexpensive and local laws make it difficult to establish unions, they have a huge cost advantage over Detroit.
Last fall the Big Three renegotiated their contracts with the United Auto Workers union, imposing a two-tier wage structure that is more competitive with foreign automakers. But they won’t see most of the benefits until 2010.
“The reality is that Japanese and European automakers are already in the U.S. in a big way,” Gregory said. “They can more than make up the capacity lost by the closure of the Big Three. I’d say they could do it in five years or less.”
He and others contend that companies such as Toyota would quickly fill the void for supplier giants such as Lear Corp. and Johnson Controls Inc., particularly if the economy recovers enough to boost sales to pre-2008 levels. For laid-off autoworkers willing to relocate, they might even offer employment. Essentially, the theory goes, the net effect on employment would be nil.
“After a period of adjustment, it would basically be a wash,” said the University of Michigan’s Grimes.
Romain Wacziarg, economics professor at UCLA’s Anderson School of Management, takes the premise a big step further. He suggests that building any cars -- be they Toyotas or Chevys -- in the U.S. no longer makes sense because they can be built more efficiently in semi-skilled labor markets such as Mexico.
He compares automaking to shipbuilding and steelmaking, which were huge in the U.S. decades ago but ultimately moved overseas, forcing development of new industries or specialized remnants of the departed industries.
“You have very severe short-term effects on communities,” Wacziarg said. “But in the long run, the economy learns to specialize in new activities that have a higher value. Pittsburgh reinvented itself after steel. Detroit may have to do the same.”
As U.S. bulk steelmaking ceded to specialty steels, so could U.S. automaking focus on cutting-edge vehicles such as hybrids and electric cars.
“I think carmaking in the U.S. will continue to exist in some form,” said Elon Musk, chairman and chief executive of San Carlos-based electric carmaker Tesla Motors. “There’s some fundamental restructuring to be done though.”
For those who work in the auto business, such a transition is unthinkable. “If you’re looking at identifying an essential part of the economy, we would insist that this industry still plays a huge role,” said Greg Martin, a GM spokesman. “Any plan to stabilize the economy would have to encompass the U.S. auto industry.”
That’s very much on the mind of Rep. Dale Kildee (D-Mich.). He joined seven other members of Michigan’s congressional delegation in sending a letter last week to Treasury Secretary Henry M. Paulson and Federal Reserve Chairman Ben S. Bernanke urging the two to “use their broad regulatory authority” to “promote liquidity” for U.S. carmakers.
“There’s hardly a congressional district in the nation that isn’t affected by the Big Three,” said Kildee, the son of a UAW member who helped pass the $1.5-billion bailout of Chrysler in 1979. He said he’d push Congress to fast-track disbursement of the $25 billion in guaranteed loans and ask for $25 billion more. “It’s not just the auto industry we’re helping; it’s the entire industry of this country.”
Michigan would be the epicenter of an automaker collapse. The state already has the second-highest unemployment rate in the country, 8.7%, compared with 6.1% nationwide. After years of job losses, much of the workforce has migrated elsewhere: Detroit’s population is now barely 900,000, down from 1.8 million in 1950. Recent estimates suggest the state could lose 60,000 more jobs should one of the Big Three fall.
In the wake of the federal bailouts of Wall Street and insurer American International Group Inc., experts feel little doubt that some sort of government aid to carmakers will be forthcoming. With GM and Ford spending cash at a rate of $1 billion a month, it remains to be seen whether an infusion of taxpayer dollars will stop the bleeding. Economist Gregory said any bailout might be pouring money down a hole.
“The damage to the public psyche of losing GM, Ford or Chrysler is incalculable, and the effect on whatever is left of the Rust Belt will be even worse,” he said.
“But the truth is, our economy doesn’t depend on cars, not anymore. The only question is how painful the transition will be.”