No more blank checks! The U.S. Congress recently declined to bailout the Big 3 U.S. automobile makers (Ford, Chrysler, and General Motors) because they had no plan to show how the funds would have been used. While many feel that these companies are too big to fail, others believe that bankruptcy is exactly what these companies need to enact change that will make a difference.
What globalization factors contributed to the failure of these companies and will contribute to their redemption? How does the rest of the world view the bailout of the Big Three, as a subsidy? a necessity? This news analysis will examine the Detroit bailout in light of the impacts of labor, the environment, and the credit crisis, and will look at international response to the bailout.
About the U.S. auto industry
The U.S. automakers have 105 US assembly and component plants with approximately 240,000 employees, provide healthcare benefits to two million Americans, and provide pensions for nearly three-quarters of a million people. The Big Three have 13,000 affiliated dealerships in the U.S. alone. Additionally, there are nearly 1.7 million Americans whose jobs are directly connected the automakers, such as manufacturers, parts suppliers and dealers.1 All of these people would be significantly affected by a bailout.
Globalization has put pressure on companies around the world to compete; many U.S. corporations feel burdened by union contracts that make their products more expensive, thus making it difficult to compete against foreign corporations that do not have these same burdens. Already U.S. carmakers have already lost 150,000 in the past five years, with announcements of more production cutbacks, including plant closures and shift reductions for the coming year. 2
Michael Mortiz venture capitalist with Sequoia Capital, blames the current crisis on the distance between management and the employees, as well as the lack of vision and entrepreneurial spirit of the present-day leaders of the U.S. automakers. Mortiz notes that there are adversarial labor relations within these companies; there is also no sense of decency amongst the unions who are entrenched and have a sense of entitlement.3
The Big Three and the United Autoworkers (UAW) have long been trying to find a way to compensate employees, with reasonable pay, access to health care and retirements funds. Recently UAW workers agreed to a two-tier wage system, in which new assembly workers are paid about half ($14/hour) of the existing workers wages ($26/hour) and receive less benefits as well. New workers will have 401k retirement benefits, instead of life-long pensions.4 The health care savings benefits are only expected to be seen in the companies’ bottom lines in 2010;5 similar savings from retirements are expected in 2010 and 2011.
Paul Ingrassia, former Dow Jones executive and Detroit bureau chief of the Wall Street Journal notes: “The companies remain saddled with cumbersome contracts with the UAW that make work rules and plant procedures a constant challenge. A bankruptcy trustee or receiver could cut through all this quickly and give the companies a fresh start.”6 He believes that union contracts are the root of the current crisis, and that decreasing executive pay and requiring companies to build fuel-efficient cars will not lead these companies to prosperity.
Jonathan Tasini of the Huffington Post disagrees: “People who want to blame the UAW for the problems of the auto industry are off-base. Would I have liked the union to be more aggressive about pushing the auto companies a decade ago to move towards more fuel efficient cars? Sure. But, respectfully, the union does not control those kinds of decisions–it doesn’t control the board and, as recent history has shown, has struggled mightily to just preserve its wage base.”7 Instead Tasini recommends the bailout includes government equity stake in the companies, resignation of top management, limits on executive pay (no more than ten times the average worker’s pay), restructure of boards to include two-thirds new members, and commitment by these companies to support a single-payer health system.8
Detroit Bailout and the Credit Crisis
Some believe that the price for not bailing out the Big Three would be further deepening of the credit crisis and financial turmoil. One major connection between the two is the billions of dollars of car industry debt owned by U.S. banks. If the Big Three go bankrupt, they may still be able to survive by cutting salaries, firing workers, closing some plants. However, in this scenario, banks and creditors will have a hard time recovering their principle costs, as they may be saddled with debt which will not be able to be paid back by the carmakers.9
Global Warmingthe worldwide rise in temperatures that has been blamed for severe weather in many parts of the world. and the Environment
“The future of Detroit, the battle for the future of the US economy, the effort to wean ourselves from the teat of foreign oil and the attempt to clean up our air are all irrevocably linked.”10
Many view the crisis of U.S. automakers in light of declining sales due to high oil prices and the desire for fuel efficient cars, such as Honda and Toyota hybrids. During the 1990’s, the Big Three focused more on building SUV’s, which were and still relatively are in high demand. Coupled with demand for bigger cars, is the small U.S. fuel tax (or carbon tax) which did little to curb consumption or make alternative energies financially feasible. Many are calling for a bailout to be conditional upon greening the industry, with more fuel efficient cars, including electric hybrids. One of the challenges though will be re-tooling the factories which will be expensive and hard to accomplish during the credit crisis.
International Responses and Comparisons
One interesting comparison the Detroit automakers is the case of the former British automakers. Great Britain used to have a thriving auto industry, with companies such as Rover, Austin, Morris, M.G., Hillman, Jaguar, Sunbeam, Humber and Aston-Martin. However, all of these companies and brands are no longer built by British companies; some have disappeared and others were taken over by foreign companies. The United Kingdom gave MG Rover millions of pounds in bailout funds, but it still failed in 2005, costing the British taxpayer £870m. Eventually, China’s Shanghai Automotive bought remnants of M.G.’s business.11
Unlike the British example, the collapse of the U.S. auto industry will have major international ramifications. European carmakers, such as France’s Peugot, fear a collapse of automakers world-wide (Peugot is also asking for a bailout from the French government).
Japanese and Korean governments and automakers support a U.S. bailout because the failure of the U.S. auto industry would negatively impact their U.S. growth because of the potential wide-spread impact on suppliers that service U.S. and international automobile makers and because of the potential decrease in demand for new cars that would be associated with an economic downturn. Japanese and Korean car makers would rather compete against the inefficient U.S. automakers than against themselves because it would be much less cutthroat.12
U.S. carmakers also are closely aligned with Japanese and Korean automakers. For example, Ford used to own 33 percent of Mazda; now it only owns 13 percent. Ford and Mazda share production plants and work closely together on new vehicle development. Korea’s Daewoo has similar relations with GM; GM houses its small-car design and production facilities in South Korea. In 2007, GM Daewoo Auto and Technology made one million cars, 25 percent of all the cars made in Korea during that year.13
Given the current dire financial situation and the support of President –elect Obama, a bailout of some sort will most likely occur, with caveats to retool the plants and to provide a blueprint for future economic viability. Detroit will have to make painful changes needed to make it more competitive. Will it be enough?
Many are skeptical and feel that a bailout will only provide a facelift. Fixing Detroit will mean facing some of the long-standing entitlement problems facing the U.S. manufacturing; finding a solution to those problems will not occur overnight. With the current credit crisis, it will be a race to address many competing issues within a short period of time. With promises for tax-cuts for most Americans, finding the funds to address these issues will be quite a challenge.
1 Reed, John and Bernard Simon. “Detroit Spinners.” Financial Times. November 18, 2008.
2 Simon, Bernard. “Detroit prepares to swallow bitter medicine.” Financial Times. November 21, 2008.
3 Mortiz, Michael. “Detroit bail-out: a nation in denial.” Financial Times. November 20, 2008.
4 “For UAW, Aid Likely to Come With Strings.” Wall Street Journal. November 20, 2008.
5 Reed, John and Bernard Simon. “Detroit Spinners.” Financial Times. November 18, 2008.
6 Ingrassia, Paul. “The Auto Makers Are Already Bankrupt..Admitting the obvious is their best chance to restructure.” Wall Street Journal. November 21, 2008.
7 Tasini, Jonathan. “The Right Way To Bailout The Auto Industry.” Huffington Post. November 12, 2008.
9 Altman, Daniel. “Do banks win in an auto bailout?” International Herald Tribune. November 24, 2008.
10 Mortiz, Michael. “Detroit bail-out: a nation in denial.” Financial Times. November 20, 2008.
11 Reed, John and Bernard Simon. “Detroit Spinners.” Financial Times. November 18, 2008.
12 Rowley, Ian and Moon Ihlwan. “Surprise: Japanese, Korean Carmakers Want a Detroit Bailout.” Business Week. November 19, 2008.