The "Big Three," U.S.-based automobile manufacturers, General Motors (GM), Ford Motor (F) and Chrysler (C), are all failed companies - in the United States that is.
With the past year's spike in gasoline prices, the lucrative market for gas-guzzling SUVs, pick-up trucks, Hummers, luxury cars, and the myriad of other inefficient products has collapsed. The Big Three are now left with a mix of uncompetitive products that few people want, let alone can afford.
GM promises better times ahead - maybe in 2010 - with their electric Chevrolet Volt. Sounds promising. But GM, in their infinite wisdom, thinks that Americans will be willing, not to mention able, to shell out perhaps $40,000 for a Chevy Volt, rationalizing it because they will have to spend that much less for fuel. Here's the problem with GM's lack of thought: who is going to finance $40,000 automobiles for the middle-class? Banks? GMAC?
The "Big Three," U.S.-based automobile manufacturers, General Motors (GM), Ford Motor (F) and Chrysler (C), are all failed companies - in the United States that is.
With the past year's spike in gasoline prices, the lucrative market for gas-guzzling SUVs, pick-up trucks, Hummers, luxury cars, and the myriad of other inefficient products has collapsed. The Big Three are now left with a mix of uncompetitive products that few people want, let alone can afford.
GM promises better times ahead - maybe in 2010 - with their electric Chevrolet Volt. Sounds promising. But GM, in their infinite wisdom, thinks that Americans will be willing, not to mention able, to shell out perhaps $40,000 for a Chevy Volt, rationalizing it because they will have to spend that much less for fuel. Here's the problem with GM's lack of thought: who is going to finance $40,000 automobiles for the middle-class? Banks? GMAC?
With the U.S. in the midst - well just in the early stages - of a major recession, people losing jobs by the hundreds of thousands, consumers slamming the breaks on discretionary expenditures (like new cars), and lenders tightening their standards, who will be left standing to buy the ill-priced Chevy Volt?
The U.S. auto industry has been mismanaged for decades. Of that, there is no doubt. The market generally allows most mismanaged companies to fail, to file for Chapter 11 bankruptcy protection, to hopefully reorganize - or liquidate and go out of business. However, given the state of the U.S. economy, thanks in every large part to an unregulated mortgage securities industry, "too big to fail" is the anthem of the day.
Treasury Secretary Henry Paulson and his crew are so perplexed as to what to do to stop the hemorrhaging, they seem to have given up on the $700 billion plan to buy "toxic" securities - mortgage-backed securities - from banks and other financial institutions. Taxpayer money is being used to make direct investments in banks - oh, and the insurance giant and world's worst speculator, AIG - hoping that the banks will actually lend it out. But now the banks have a problem, an increasingly huge problem. To whom can they lend these tens of billions? Consumers? With job losses mounting and no daylight in sight, fat chance. Businesses? Capital spending is dropping like a dead weight in industry after industry. Retail giants are slashing spending on inventories, new retail outlets, closing less profitable ones, even closing up shop entirely - think Circuit City and Linens n Things, etc. Auto dealers? Surely you jest.
But back to automobiles. This is what we need to know:
According to the Center for Automotive Research (CAR), as of September 2008, the Big Three employed 239,341 hourly and salaried workers, the motor vehicle and parts industries directly employed 732,800 workers in the U.S. That's a total of more than 771,000 employees. Spinoff employment, defined by CAR as expenditure-induced jobs, or jobs associated with restaurants, dry cleaners, banks and other retailers and services used by those employees, as well as suppliers to the motor vehicle and parts manufacturers, totaled 1,427,663 employees. That is a total of about 2.4 million jobs.
CAR recently prepared a flawed report titled "The Impact on the U.S. Economy of a Major Contraction of the Detroit Three Automakers." Dated November 4, 2008, I say flawed because while they diligently used two scenarios for their analysis, one reviewing the effects of a 100 percent shutdown of Big Three auto manufacturing in the U.S., the other - and more plausible - a 50 percent reduction, oddly enough they assumed that all of the direct Big Three employees would be out of work in the first year. I have to assume that this was simply an error, badly proof-read by two PhDs. If I take the liberty of focusing on their 50 percent reduction scenario - which would be closer to the mark if we witnessed GM halting substantial production and Ford and/or Chrysler contracting - and reducing their projection of nearly 2.5 million immediate job losses by reducing their estimate by some 150,000. This leaves job losses at "only" about 2.3 million.
At the Big Three, these are classic middle-class jobs. In 2007, production workers earned an average of $67,480, skilled workers $81,940 (U.S. Dept. of Labor, Bureau of Labor Statistics data). While anyway you evaluate this data, we are talking about an enormous amount of human pain. 2.3 million of our friends, family and neighbors losing good-paying jobs, dignity and their ability to pay their mortgages, credit cards, college tuition, property, sales and income taxes, even WalMart bills.
In fact, the flawed version of CAR's analysis estimates that personal income would decline in the first year by some $150 billion, personal income taxes by some $24 billion, and Social Security receipts by $21 billion.
The analysis did not address the potential impact on the ongoing housing price decline spiral, something that is absolutely critical to stop.
Can we, as a nation, really afford to allow any of the Big Three to fail, to substantially contract or even close? This is both an economic question and a moral question. Regardless of how we feel about the historically incompetent management of the auto industry in the U.S., the potential cost of a federal bailout is dwarfed by the potential tsunami cost to the economy. While we can readily estimate the immediate effects of a catastrophic failure of a critical manufacturing industry, it is far more difficult to measure the longer-term effects. CAR makes an attempt to do this. However, in their analysis, they seem to assume that many of these folks will fairly rapidly find themselves back at work, within a year or two. I'm not sure how plausible that is, are you?
While a lot of discussion has been fixated on the high production costs of the Big Three in the U.S. - high salaries and benefits, skyrocketing health care costs, pension costs - and these certainly are a competitive reality, less often is it mentioned that the root cause of the Big Three's predicament is their failure to produce desirable, fuel-efficient cars in the U.S.
Let's look at who produces what, based on federal government fuel economy measures of the 2008 model year. This list includes ONLY passenger cars manufactured in the U.S. Also, these measures are based on highway mileage, not city driving (which I believe to be a better measure of fuel economy).
Chrysler 29.3 mpg
Ford 29.5 mpg
General Motors 29.4 mpg
Honda 35.2 mpg
Nissan 33.5 mpg
Toyota 34.7 mpg
The difference between the foreign manufacturers' U.S. production and the Big Three is glaring.
But following is what really stands out as almost criminal:
The Civil Society Institute (CSI) is a not-for-profit think tank that focuses on energy and ecological issues. They illustrate what they call a startling "fuel-efficient car gap" between autos manufactured and sold in the U.S. versus Europe.
CSI found that the number of vehicle models sold in the United States that achieve combined gas mileage of at least 40 miles per gallon actually has dropped from five in 2005 to just two in 2007 — the Honda Civic hybrid and the Toyota Prius hybrid.
CSI states that "Overseas, primarily in Europe, there are 113 vehicles for sale that get a combined 40 mpg, up from 86 in 2005. Combined gas mileage is the average of a vehicle’s city and highway mpg numbers.
CSI further states that nearly two-thirds of the 113 highly fuel-efficient models that are unavailable to American consumers are either made by U.S.-based automobile manufacturers or by foreign manufacturers with substantial U.S. sales operations, such as Nissan and Toyota.
"These cars sold in Europe meet or exceed U.S. safety standards, so there is no reason why they shouldn’t be made available to U.S. consumers," said CSI President Pam Solo.
In fact, the bottom line is that, based on the same "combined gas mileage" standard, automobiles sold in Europe are about twice as fuel efficient as autos sold in the U.S.
So what's wrong with this picture? For years, it has been speculated and/or observed that the Big Three actually know how to produce more fuel efficient automobiles. They have fought increased federal and state (California) standards for decades - successfully, whining that they either did not have the technology of it might bankrupt them.
Certainly, if the Big Three began manufacturing many of the cars here that they do so overseas, we would not solve the energy crisis overnight. There are well over 250 million automobiles on the road in the U.S. It would likely take more than 20 years to replace all of them with more fuel efficient vehicles. But as we built and sold them, we would so a solid, incremental decline in the need for importing crude oil and gasoline from volatile foreign nations, eventually eliminating the need. No amount of new oil drilling in the U.S. would come close to having that impact - ever.
So how do we proceed? The Big Three are suggesting bailout packages ranging from $25 billion to $50 billion. Seems like pocket change compared with the well over $1 trillion the federal government has already committed to saving the U.S. economy. These "bailout" estimates are dwarfed by the financial impact of sitting back and allowing GM or Ford or Chrysler to slip down the drain. remember, CAR estimates the financial impact of a 50 percent contraction of the industry in the first year alone at nearly $200 billion, with lasting effects for years to follow.
Financially, the argument for a bailout is obvious and compelling, the argument against a bailout riddled with political and economic inconsistency.
But can we trust current management of any of the Big Three with the task of rebuilding the U.S. auto industry? Look at their track records. Their companies are where they are largely because of their decisions to produce what they produced, to go for the huge profits from selling fuel-guzzling behemoths. Now many academics and so-called experts argue that their role is to produce and sell what their customers tell them they want. But tell me: which customers haven't wanted more fuel efficient vehicles? At any time? To a product end-user, lower operating costs is lower operating costs. Families and businesses, alike, benefit from lower operating costs.
Now the Big Three have argued for decades that producing fuel efficient vehicles, "even if it were possible," would add to their costs and deter buyers. Really?
The Big Three and others are selling cars - granted, small cars - for under $10,000 outside of the U.S. True, the average price of a car in Europe is much closer to U.S. prices. In some countries, they are much higher, some about the same, some lower, depending on a bizarre array of tax policies.
But surely, the Big Three have the technology and capability to transfer their foreign expertise to the U.S. Any bailout of the Big Three MUST require a wholesale transformation of vehicle production here and preserve jobs. It must emphasize the scale of fuel economy they produce routinely in Europe and have deliberately failed to offer here at home.
Strong political will is required for this. Congress must hear from its constituents on this. Do we really want to see 2.3 million of our neighbors lose their jobs, more homes plummet into foreclosure, further dragging our home values down? How about all of you in retail and other businesses that rely on stable employment?
It is time to be heard on this issue. Do it.
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