What Happens If General Motors Fails? *By TOM KRISHER and KEN THOMAS*
, AP
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DETROIT (Nov. 13) - Advocates for the nation's automakers are warning that
the collapse of the Big Three — or even just General Motors — could set off
a catastrophic chain reaction in the economy, eliminating up to 3 million
jobs and depriving governments of more than $150 billion in tax revenue.
Industry supporters are offering such grim predictions as Congress weighs
whether to bail out the nation's largest automakers, which are struggling to
survive the steepest economic slide in decades.
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Who would be impacted if one of Detroit's Big Three -- General Motors, Ford
and Chrysler -- were to collapse?
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"We've got to do this because the cost of inaction is so high to
communities, to workers, to companies," said Sen. Sherrod Brown, a Democrat
from Ohio. He was among many lawmakers worried that an industry collapse
would be devastating for everything from school districts to small
businesses.
Even if just GM collapsed, the failure could bring down the other two
companies — and even the U.S. operations of foreign automakers — as parts
suppliers run out of money and shut down.
Concern about the automakers hit new heights Friday when GM and Ford
reported they spent a combined $14.6 billion more than they took in last
quarter. GM said it could run out of money by the end of the year.
Ford said it could last through 2009, but only because it arranged a hefty
credit line last year.
All this comes after tight credit and economic uncertainty in October
reduced U.S. auto sales to their lowest level in 25 years — with no rebound
in sight.
If the industry failed, among the hardest-hit communities would be
Lordstown, Ohio, a village of 3,600 people about 50 miles east of Cleveland
that has been home to a GM factory since 1966.
If the plant closed, Lordstown would lose up to 70 percent of its budget, a
scary scenario that proponents of a multibillion dollar bailout say would be
repeated across the industrial Midwest.
"If they went completely under, obviously it would financially devastate
us," said Michael Chaffee, a school teacher and Lordstown's part-time mayor.
"It would be catastrophic for our whole area."
Without GM and nearby parts factories, he said, Lordstown's $4.2 million
budget would take about a $3 million hit that would almost certainly require
layoffs of police and drastic cuts in park programs.
A study by the Center for Automotive Research in Ann Arbor estimated that
the failure of Chrysler LLC, Ford Motor Co. and General Motors Corp. would
eliminate up to 3 million jobs, including those at parts suppliers and
smaller businesses that rely on the automakers.
State, local and federal governments would lose more than $150 billion in
tax revenue over three years, the study said.
Next week, Congress plans to consider giving the auto industry part of the
$700 billion Wall Street bailout during a lame-duck session.
Opponents of the idea say government money will just delay the inevitable
demise of companies that are on death's doorstep because of years of
mismanagement and labor costs that are far higher than their global
competitors.
"How is this money going to make a positive difference in creating a new
competitiveness?" asked Sen. Jeff Sessions, an Alabama Republican.
Sessions and others also fear that opening the treasury to automakers will
invite more industries to plead for federal help.
"Once we cross the divide from financial institutions to individual
corporations, truly, where would you draw the line?" said Sessions, who also
opposed the Wall Street bailout.
Automakers say bankruptcy protection is not an option because people would
be reluctant to make long-term car and truck purchases from companies that
might not last the life of their vehicles.
But Sessions and others say Chapter 11 might be a better option than
government loans. Airlines, Sessions said, have reorganized through
bankruptcy, and the auto industry could do the same, protected from
creditors and lawsuits while companies work to become profitable.
"I would prefer they would go through a reorganization process, and sometime
in that process, if targeted aid might be effective, I would consider it,"
he said. "It seems like the larger the amount of money that's being spent,
the less attention anybody pays to how it's spent."
Automakers say they are poised to rebound because they have been
restructuring for years — shedding jobs, consolidating engineering and
design, and making plants more efficient. The Big Three have cut their
combined U.S. hourly work force more than 40 percent since 2005, from
244,000 to about 139,000.
David Cole, chairman of the Center for Automotive Research, said Detroit is
losing money now because it has too many factories making more vehicles than
the market is buying. As a result, it must discount with incentives to sell
them.
But as factory cuts take effect, automakers will see more profits — about
$2,000 per vehicle — because they won't have excess cars and trucks and
won't have to discount, Cole said. But that means consumers will probably
pay more for cars in the future.
The increased profits, coupled with about $1,000 per vehicle in savings from
a cost-cutting contract with the United Auto Workers, will allow automakers
to repay debt to existing creditors plus the government, Cole said.
"The earning potential of this industry has the potential of covering that
debt surprisingly fast," he said.
Brown, the Ohio senator, said letting the industry collapse would also be a
national security risk, eliminating companies that were essential in two
world wars.
"If we ever need that national security production for serious defense, for
any kind of significant war, it's gone," he said.
If a bailout is approved, it's likely to come with significant strings
attached. Even proponents like Brown would like to see limits on executive
pay and a ban on shareholder dividends. Others have suggested management
changes and tougher fuel economy requirements.
But back in Lordstown, people just want to the government to act.
Joellen Spletzer, owner of a convenience store about a mile from the GM
plant, can't understand how Congress could quickly bail out Wall Street but
balk at helping an industry that supports so many people.
"I'm not talking about my little store on the corner," she said. "It will
affect people in so many widespread ways it's unbelievable."
Associated Press Writer Ken Thomas reported from Washington.
--
"Usually when people are sad, they don't do anything. They just cry over
their condition. But when they get angry, they bring about a change."
- Malcolm X, Malcolm X Speaks, 1965
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