http://www.latimes.com/business/la-fi-autos28-2008oct28,0,1118586.story
The end of the road for U.S. carmakers?
Some analysts suggest failure may not be such a bad thing for Detroit's
Big Three. Others, especially Michigan politicians, warn of calamity.
By Ken Bensinger
October 28, 2008
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."
Bensinger is a Times staff writer.
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