Questions about an automotive bailout

November 20, 2008

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How crazy is the automotive sector in this country? I talked with a co-worker who just purchased a Ford F-150® for about $16,000 after a $14,400 rebate from the automaker. Additionally, he said he heard a Northern Illinois automotive dealer was selling a Chrysler PT Cruiser® for $1 with the purchase of a full-priced vehicle or truck.



These are not the actions of an industry sitting in an advantageous position. Of course, you knew that already.


The Battle for the Bailout has been going nonstop seemingly all week. I"ve read numerous articles on the subject and listened to some of the talking heads on television.



It"s a debate that"s really fascinating because everyone has an informed opinion. Who doesn"t own a car today? That
really underscores the impact of the Detroit Three—Chrysler, Ford, and GM—on the U.S. economy.



Despite all of the opinions, I have some questions that I think many others probably have pondered. Here are some of
the answers that I think make the most sense:



Just how many people would be affected by the demise of the industry? If you believe a report from the Center for

Automotive Research in Ann Arbor, Mich., you are talking about one out of every 10 jobs being affected. I guess if I
worked in automotive research and the automotive industry was going down the tubes, I might be prone to hyperbole as
well.



I like this number that came from CNNMoney: 1.6 million jobs. GM has about 120,000 U.S. employees, Ford 80,000, and
Chrysler 66,000. The Detroit Three"s U.S. dealerships employ another 740,000 workers. Plus, another 610,000
employees work for suppliers that are in the Detroit Three"s supply chain. Sure, some sandwich shops and aftermarket parts dealers might be in jeopardy, but we have to stop counting somewhere.



Would the bankruptcies of the Detroit Three destroy the economy? Some pundits out there seem perfectly OK
with the idea of letting it happen. I wish I had that confidence everything would be OK.



Dr. Chris Kuehl, the Fabricators & Manufacturers Association"s resident economist and author of the Fabrinomics e-newsletter, pointed out recently that the U.S. industrial production numbers for September were revised to show how the Texas hurricanes and the strike at Boeing were more of a negative influence than originally thought. He added that an all-out collapse of the auto industry would be devastating to the economy as a whole, especially during these crazy days.



Who"s to blame for this mess? I"ll let this gentleman answer this question. He"s got some pretty good points.



Some want to point the finger at U.S. consumers and their love affair with the gas-guzzling sports utility vehicle
as a reason the Detroit Three were unprepared for the shift in interest to smaller, fuel-efficient vehicles. Blaming
customers is never a good plan of attack and really doesn"t make much sense in this argument.




So what should happen? Changes need to take place to ensure that any bailout is not just throwing money down
the well. Recent changes in union contracts that allow automakers to put health care into a separately funded trust and hire new workers at drastically lower wages than veteran employees are good for future viability, but they do little to address the hundreds of workers in job banks that continue to be paid even if they are laid off from
their automotive jobs. The Detroit Three also have too many brands. For example, out of GM"s many brands, only
one—Chevrolet—has any significant marketshare (13 percent); the rest of the brands—Cadillac,
Pontiac, GMC, Hummer, and Saturn—are small blips on the radar that suck engineering and manufacturing focus
away from GM"s flagship brand.



Change will not come easily. The United Auto Workers union isn"t interested in giving up any more than its members
already have, and the Detroit Three"s relationships with its dealers are marked by contractual obligations not
easily undone without the assistance of the courts.



I fear the change that needs to take place can occur only under the auspices of Chapter 11. That"s the only way the
Detroit Three can rid themselves of obligations that will continue to drag them down even when demand for new
vehicles returns in 2010.



If that"s not the option, perhaps a selective approach to the bailout makes sense. The U.S. wouldn"t be
alone in shoring up domestic auto manufacturing
, but perhaps it would be unique in choosing one or two companies
to bet on. Bet on the horse that has the best chance of winning.



In short, simply cutting a $25 billion check to Chrysler, Ford, and GM doesn"t make much sense for them to simply survive. A prognosis for a healthy future is needed before anyone agrees not to turn off the life support on these sick patients.



FMA Communications Inc.

Eric Lundin

Editor
FMA Communications Inc.
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Rockford, IL 61107
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