I started this diary as a comment on Muskegon Critics' diary to "STFU". There is a lot I agree with in there but that hasn’t moved the discussion forward much. I’ve approached this diary in a few different ways as my emotions have gone through the extremes while reading the comments. In the end, I decided to focus on the how saving the auto industry is good for the country or how we can’t afford to not to.
I am from Michigan and my family is heavily involved in the auto industry from the auto supplier side. My father owned an auto supply company for 45 years. It closed its doors on March 1st, 2009. Because my father’s business was so small (compared to other suppliers) they were unable to stay in business after being hit with many successive months of 50% decreases in sales and 6 weeks of no sales during the long shut-down of December and January. The margins in the auto supplier industry are quite low (below 2%) for such a capital intensive business. Overhead is high because manufacturing is costly. Upgrading to new technology can be prohibitive and those who have done so are likely to be suffering from severe credit load and will most likely perish because of it.
The auto industry has made many mistakes with some of them being obvious (not developing more cost efficient and energy efficient cars) and others not. From a supplier standpoint, I can say that inefficiencies exist but the costs are hidden. One of those costs is the monetary squeeze that the big three put on their suppliers. Suppliers are required to give the big three a 2% cost savings every year—even during the time when steel prices and transportation costs were going up exponentially.
At first glance, this sounds like a great way to save money but unfortunately it left the suppliers unable to compete. Their choices were to go to China, use old out-dated machinery, invest in new technology through heavily leveraging their companies, pay workers minimum wage and/or cut workers benefits.
In the case of my father’s company, he refused to cut health insurance until the bitter, bitter end. His refusal to do so, after being advised that it was imperative, was a contributing factor to the decline of his business. Yet, I believe he did the right thing just as I think that the big three did the right thing by paying their workers a fair wage and good benefits. It has been our farming out of our jobs to foreign countries which has left our economy unable to sustain itself as we’ve gone further and further toward become an $8/hour service economy. Personally, I think any major corporation who pays their employees $8/hour is shameful. It’s just another way to redistribute wealth from the working class to the investors. And the large bonuses that these CEO’s make in order to cowtow to stockholders and impoverish our workers is vile. (sorry for the sidetrack).
But, as I promised in the title, I should explain why we can’t afford not to subsidize the auto industry. The auto industry is capital and technogically intensive. It can’t just materialize out of no where. The suggestion by some that a "new" and "better" auto industry will emerge is absurd and naïve. If you think it is hard to keep an auto company running, think what it is like to start one from scratch.
The more likely scenario is that the market will absorb the gap and the oligopoly will become just a little bit smaller. But, before all of this happens, the 3000 suppliers in the US will disappear. There are nearly 3 million people who work for the auto industry in some capacity. If these people lose their jobs then the US will see a combined cost of 150 billion in lost tax receipts and transfer payments over the next 3 years. So get out your wallet because you will either pay now or pay later.
Perhaps we could think of the subsidies as a repayment of the auto industry sacrifice during World War II when they turned their manufacturing facilities into war time facilities or maybe we can see it as an investment in people’s future instead of their poverty. For the same price we can save the auto industry—otherwise, these unemployed people will be a drag on the economy for many, many years to come and cost far more than the $150 billion that is projected over the next three years.
If you don’t think this scenario is likely I can say from direct interaction of immediate family members with management of the big three that the state of the auto supplier industry is dire with over 300 suppliers doomed to go out of business within the next four weeks—some of these suppliers employing over 20000 people. This information was also confirmed by an article in business week which states that 500 suppliers will go out of business by the end of April.
I would like to say a little bit about the state of the auto industry, too. I do think the big three made mistakes but I don’t think that many people understand how the economy and the banking industry has affected the auto industry. Perhaps the auto companies could get their money directly from AIG since it was the tightening credit markets and the second-only-to-the-depression economy that caused auto sales to decline by 50% year-over-year. Maybe they should have seen it coming—maybe we all should have.
Please think about the effect this has on such a low margin business (probably a lot like your home) the auto industry has seen their sales decline by 50%. Now, I know that 50% isn't much of a decline (snark)—but think about what it would be like if your paycheck declined by 50%. I'm sure that you would have problems paying your bills and the people who depended on you would also have a hard time paying bills. The auto industry couldn't deal with it because--well--a decline in 50% of sales isn't the same as having your pay check cut in half--it's more like having it cut by 2/3rds because of the high overhead associated with manufacturing. For suppliers, the cut was worse because the auto companies extended their shutdown to six weeks this year--that meant six weeks were the suppliers didn't get paid.
Lastly, let’s extend our sympathies to Muskegon Critic who is I’m sure angry, upset, scared and frustrated about what has happened in Michigan. As I am, for my parents, siblings and the people who worked for my father—and especially for my eight year old nephew who’s father lost everything trying to save the family business and who is now unemployed, uninsured and has metastasized prostate cancer. (get out your wallet)
UPDATE: Diary updated to change the title from "Muskegon Critics "STFU" or why we should save the AI" to "Why should save the auto industry or "get out your wallet"