American Auto Industry needs billions to survive

[Kratos]

http://www.usatoday.com/money/autos/...-request_N.htm

DETROIT — The press for a federal bailout of the auto industry increased over the weekend.
House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., said in a letter to Treasury Secretary Henry Paulson that the Bush administration should consider expanding the $700 billion financial rescue to include car companies.

"A healthy automobile manufacturing sector is essential to the restoration of financial market stability," they wrote.

The administration did not directly comment on the request to tap the TARP (Trouble Asset Relief Program). But Treasury spokeswoman Jennifer Zuccarelli says, "We continue to work on a strategy that most effectively deploys the remaining funds to strengthen the financial system and get lending going again."

Automakers already want an additional $50 billion in federal loans, and top auto company and union executives met with congressional leaders Thursday.

FIND MORE STORIES IN: Washington | George W. Bush | General Motors | Chrysler LLC | Henry Paulson | Senate Majority Leader Harry Reid | Department of Energy | D-Calif | D-Nev | Band-Aid | Michigan Gov. Jennifer Granholm | Jennifer Zuccarelli | Shelly Lombard
The letter came a day after GM (GM) painted a grim picture of its finances — one that suggests a federal bailout is its only option to stay solvent.

Ford Motor also reported earnings and, while its situation appears less dire, it also is making a case for government help.

GM said it will nearly exhaust its cash cushion by year's end, leaving barely enough for day-to-day operations through the first half of 2009. It said it has ended merger talks with Chrysler, delayed future product plans and cut benefits. But it said those measures may not be enough.

"Even with its planned actions, the company's estimated liquidity will fall significantly short of (needed cash minimums) unless economic and automotive industry conditions significantly improve," GM said at the end of its third-quarter earnings report.

President-elect Barack Obama, standing on stage with Michigan Gov. Jennifer Granholm, said at an event Friday that he favors helping the automakers, naming it his second economic priority.

GM reported a $2.5 billion loss for the third quarter, and so far this year has lost $21.3 billion. More ominously, the automaker burned through $4.8 billion in the third quarter, and has about $16.2 billion in gross cash. It needs a minimum of $11 billion to $14 billion on hand to operate.

GM CEO Rick Wagoner said bankruptcy is not an option. GM fears sales would freeze up immediately if it filed.

Bruce Josten, executive vice president of government affairs at the U.S. Chamber of Commerce, predicts that if the automakers run out of money, it would be Chapter 7 — liquidation. The impact of that scenario would be felt across the country, he says. "There are few industries with the footprint and reach."

The government has approved $25 billion in loans to help automakers develop cars and parts that improve fuel efficiency. But the loans are limited to certain types of projects.

Gimme Credit analyst Shelly Lombard says Department of Energy loans aren't enough. "That's like bringing a Band-Aid to a train wreck. GM needs a major government bailout."

Ford (F) said it lost $129 million in the third quarter, helped by a $2 billion one-time gain. It's cash supply declined rapidly, burning $7.7 billion in the quarter, and it announced job cuts and other liquidity measures. Ford has a greater cash cushion, however, because it borrowed billions in 2007 by mortgaging its factories.

[Amorphic]

the auto market is such a failing enterprise. from a business perspective its inevitably doomed. how can any company expect to produce such a mass amount of product every year for an economy and world that is heading into recession. the warning signs have been here for ages, but the greed of these corporations is catching up to them.

so now they need a bailout, in a big way? are we supposed to be responsible for their financial mistakes? its the same problem we faced with the bank bailout. when is it going to end?

[auslifta]

unless they can bring out new affordable products, ie hydrgen powered cars, they are finished. Japan's manufacturing of cars will go off shore into china, and they will dominate world sales. Buiding cars is a mugs game these days. Sure design and engineer local ie america, japan, australia, maybe germany, and then assemble in poor countries. America's days of assembling cars in Detroit are numbered.

[Kale]

They are all gonners even if they are bailed out.

[actionx]

I hope you are wrong i work for toyota.

[Kale]

I hope you are wrong i work for toyota.

No I meant the big three. Toyota will make a killing in the US when they all go you can count on that

[Panzerfaust]

Let everyone continue to live this farce, bail them out!

[Kratos]

unless they can bring out new affordable products, ie hydrgen powered cars, they are finished. Japan's manufacturing of cars will go off shore into china, and they will dominate world sales. Buiding cars is a mugs game these days. Sure design and engineer local ie america, japan, australia, maybe germany, and then assemble in poor countries. America's days of assembling cars in Detroit are numbered.

not sure I agree
hydrogen cars will never be as affordable as some other powertrains. Despite huge development costs they haven't yeilded any viable products yet.
Japan manufacturing in China? Maybe, but historically they hate each other and the transport costs are the same.
Why would Japan take over the world market? Their car companies are not doing well right now. Toyota has been loosing as much volume as anybody.
There is something to be said for making cars in the market you wish to sell them in ie exchange rate risk, political, transport costs.
Labor costs are a diminishing percentage of the cost of a new vehicle, with prices going up and increases in automation.
The big 3 makes cars all over the world although maybe Chrysler is behind in this. GM is the number 2 or 3 automaker in China. Few cars are actually made in Detroit...Canada and all over the US there is a lot of car manufaturing. The Japanese companys have many factories in the United States. Where the US companies lag behind is the huge legacy cost of the UAW workers and poor labor agreements they made in good times. Toyota won't even meet with the UAW and workers for GM getting paid $30 dollars per hour are doing the same job at Toyota for 13. Heathcare and pensions are huge. Bad news for a lot of retired workers if GM goes into chapter 11 and can shead those contracts.
North America I think is still the biggest car market in the world.
Labor costs are cheap in China but labor is a shrinking part of the equation.

[Kratos]

Let everyone continue to live this farce, bail them out!

The bank bailout has already been a flop. Lending has improved little and the banks are either hording the cash or using the liquidity to aquire smaller banks.

In other words the tax payer is financing the move to a banking monopoly.

[MuscleScience]

If The US automakers didnt have to deal with retirement and health care cost like there foreign counterparts they would be just as financially sound. For example GM spots Toyota 1500 dollar on every new car it sells to account for pension and health care. You spread 1500 dollars over 2 million cars sold and that is a big difference in profits. I think that more than anything is were they are hurting the most. GM in china is doing pretty good and has a good reputation among its buyers.

[Kratos]

but,
http://www.autoweek.com/apps/pbcs.dl...199919373/1024

look under the insturments of Japanese industrial policy
http://fraser.stlouisfed.org/publica...5/5692_ERP.pdf

This is a major industry in the US, and can we afford to let it fail?
Would Japan let it's auto industry fail?

[actionx]

We have slowed down a lot compared to a year ago but the economy is bad. I think Exxon should bail GM out hell all the profits quarter after quarter of outrageous profits. The stock market got out of hand the rich got lots richer,and energy cost destroyed a lot of economies that depend on our countries business now we are losing good paying manufacturing jobs that are the ones that help pay for the goods that we make here. We had a meeting at work and they said they have projected that we will not recover for at least 8-10 years.

[Amorphic]

lets just give the bailout money to the employees so that when these companies tank because of executives poor decisions at least the thousands of unemployed dont suffer as a result of their decisions

[auslifta]

If The US automakers didnt have to deal with retirement and health care cost like there foreign counterparts they would be just as financially sound. For example GM spots Toyota 1500 dollar on every new car it sells to account for pension and health care. You spread 1500 dollars over 2 million cars sold and that is a big difference in profits. I think that more than anything is were they are hurting the most. GM in china is doing pretty good and has a good reputation among its buyers.

The car auto industry in America need to realise they have to forfeit their benefits in order to keep their jobs. They will be the death of themselves

[Panzerfaust]

They are all gonners even if they are bailed out.

Actually they are screwed either way, this "Bailout" only delays the inevitable...same as the $700 BILLION bailout..it simply delay's the economic collapse. When it does crash....it is gonna be 10x as bad as it would be if we just took the hit now.

[auslifta]

Actually they are screwed either way, this "Bailout" only delays the inevitable...same as the $700 BILLION bailout..it simply delay's the economic collapse. When it does crash....it is gonna be 10x as bad as it would be if we just took the hit now.

This is true. Better to let it fall then spend copious amonts on rebound. It is only going to make recovery even longer

[VeraDeMilo]

The bank bailout has already been a flop. Lending has improved little and the banks are either hording the cash or using the liquidity to aquire smaller banks.

In other words the tax payer is financing the move to a banking monopoly.

Don't forget AEG, who spent their first free $500,000,000 from the bailout paying employee bonuses.

[BgMc31]

^^it was AIG not AEG and they didn't get $500 mill brotha. But I see your point. LoL!

I am just as fustrated with the government bailing out these giant corps. But the alternative is just as devastating, right? 1 in 10 jobs in this country is connected to the auto industry. Not to mention the pensions many retirees count on from the auto industry. Many of these people are too old, frail, sick to go back to work. Can we afford 10-20 million unemployed? Can you imagine the strain on the social welfare system? The already tanking housing market would completely collapse. Again, not to mention the dominoe effect it will have on other industries.

So while we bitch about the government bailing out the big 3, no one here has come up with a viable alternative. I don't have any theories either, but the question remains, do we allow these giants to fail and sacrifice millions of jobs to 'teach these guys a lesson', or do we burden an already tax strained public to make up for these guys fvck ups? One thing for sure if any bail out is to happen, the government should absolutely require the unions to renegotiate their contracts and kill the absurd $27 an hour starting salary and bring it closer to the $12-$14/hr the Asian and European carmakers pay their employees.

Just my .02!

[AdamGH]

i thought i heard some of the factory workers for the big three were getting paid 75 an hour. where as places like toyota, nissan employees were getting half that amount. thats what i heard on cnn at least.

[VeraDeMilo]

^^it was AIG not AEG and they didn't get $500 mill brotha. But I see your point. LoL!

Yes, I meant AIG, good catch. As for your comment on the 500million, you are incorrect I'm afraid. AIG received 152 BILLION dollars from the government. And of that money, yes $500 million is scheduled for employee bonuses.

November 14, 2008
CBS News

Reid unhappy with bonuses for AIG execs

Senate Majority Leader Harry Reid (D-Nev.) is not happy with reports that employees at insurance giant AIG, which has received $152 billion in federal funds to stay afloat, are slated to receive more than $500 million in bonuses.

"As ordinary families struggle to make ends meet in this dramatic economic crisis, AIG¹s management nevertheless asks that taxpayer dollars subsidize the firm¹s employee-retention plan," Reid said in a statement. "The $500 million plan would benefit the very AIG executives who led the firm to the brink of collapse. To reward executives with exorbitant paydays after poor performance, and to do so even indirectly with taxpayer dollars, strikes most Americans as fundamentally unfair and a misuse of their money."

AIG officials defend the payments, which could cover thousands of employees, are a way to prevent top talent from leaving the firm, which has lost more than $37 billion in the first nine months of 2008 alone.

But Reid wants the Treasury Department - read Treasury Secretary Henry Paulson - to "explain why this half-billion-dollar compensation plan is an appropriate use of taxpayer resources under the current circumstances."

[actionx]

1/3rd that amount , trust me i know

[Kratos]

http://www.msnbc.msn.com/id/27824057

[spywizard]

lets just give the bailout money to the employees so that when these companies tank because of executives poor decisions at least the thousands of unemployed dont suffer as a result of their decisions

Yea, those people that make $75 an hour to work a line with no education, i mean where and what will they do to support their lifestyle once they company is gone??

[AdamGH]

Yea, those people that make $75 an hour to work a line with no education, i mean where and what will they do to support their lifestyle once they company is gone??

exactly. it reminds me of the airlines going bankrupt and their unions. I had a friend of mine who was a flight attendant for a more recent airline that went under. She was making $45 an hour! I was like jfc, no wonder their tickets cost so much. Which eventually lead to their downfall obviously. Southwest airlines and others learned to adapt to the market. The rest just shot themselves in the foot. the greed of the unions put all them out of a job.

[j4ever41]

If they are giving bailout money they would have to meet certain criteria such all ceos that are there now must step down and they do not receive multi million dollar parachute packages,they need to formulate a business and product plan and the union would have to give up some things if they could not agree to that then you on your own.

[gst528i]

All those ****ing ceo's should work for free until profits return or step off.
Some of them should be investigated.

[SMCengineer]

^^it was AIG not AEG and they didn't get $500 mill brotha. But I see your point. LoL!

I am just as fustrated with the government bailing out these giant corps. But the alternative is just as devastating, right? 1 in 10 jobs in this country is connected to the auto industry. Not to mention the pensions many retirees count on from the auto industry. Many of these people are too old, frail, sick to go back to work. Can we afford 10-20 million unemployed? Can you imagine the strain on the social welfare system? The already tanking housing market would completely collapse. Again, not to mention the dominoe effect it will have on other industries.

So while we bitch about the government bailing out the big 3, no one here has come up with a viable alternative. I don't have any theories either, but the question remains, do we allow these giants to fail and sacrifice millions of jobs to 'teach these guys a lesson', or do we burden an already tax strained public to make up for these guys fvck ups? One thing for sure if any bail out is to happen, the government should absolutely require the unions to renegotiate their contracts and kill the absurd $27 an hour starting salary and bring it closer to the $12-$14/hr the Asian and European carmakers pay their employees.

Just my .02!

To understand why doing nothing is better than "doing something," you need to read about the great depression. Not just what you've read in text books, but actual accounts of what the causes were and what kept us in it for so long (hint: it wasn't free market capitalism). Herbert Hoover's 1932 acceptance speech for renomination is a decent starting point:

"We might have done nothing… Instead, we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action… No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times."

Sound familiar? Your assumption that "the alternative is just as devasting" is exactly what led to the Great depression (I put emphasis on great because it was goverment intervention that made it great). We finally came out of the depression in spite of the policies that FDR enacted not because of them.

If the auto indutries aren't bailed out they will not cease to exist even if they do go into bankruptcy. They'll have the option of either streamlining their management/fiscal policies or continue to see diminishing returns. This means they'll have to drastically reduce their size (yes, jobs will be lost, but if they aren't than capital and labor is being malinvested into inefficient companies where they could have been used in more efficient/deserving companies, thus there is no net gain in employment for the economy), freeing themselves of unions, and focusing on more desirable cars that consumers want.

As for a viable alternative, there is none short of letting them restructure their management or face failure, which is good for the economy, but bad for politics. This isn't about "teaching them a lesson" it's about inefficeint companies that are pulling down the overall ecomony. You have to remember that a government cannot give to a business without taking away from another business. Let the automobile industry thrive instead of flounder. In order for this to happen, some companies are going to need to shrink or cease to exist so that the capital and labor resources can be directed to the more efficient companies. If that means that the US car industry is temporarily beat out in order for them to come back stronger than before than that's what needs to happen. However, the path we're on will most likely lead to a stagnant automobile industry because the government will inevitably get involved.

Not many people would assert that a new technology should be held back in order that the amount of jobs involved in the production of the older technology be preserved. It would be assine to follow such policies and would greatly retard economic and scientific progress, but in saving a failing industry we are essentially doing the exact same thing.

http://www.msnbc.msn.com/id/27824057

If the auto industries come up with a decent business plan that addresses their current problems and provides a profitable outlook, a government bailout would be unnecessary because private firms/investors will eagerly risk their own capital if they saw potential for future profits. The bottom line is this: the auto industries will get money, but it's not because they need it to survive or because they need it to "save" the economy. They'll get it because of lobbyists and special interests groups who have a lot vested in them. However, congress cannot just hand out the money (as they had planned) after the ceo's came to the hearings in jet plans. They would've been derided for handing out bailouts to rich ceo's that didn't deserve it. So the hoop congress has to jump through to make it palatable to the public is to "demand" a business plan from the big three, but it's only a matter of time before they get their "share."

[BgMc31]

^^thanks for the response Blome! Its was very enlightening. I will research the great depression further. Your points are will taken but like you said above, jobs will be loss but my question still exists, if the auto industry fails and millions of jobs are loss how can our economy recover. I mean both you and I are answering in absolute terms. If I understand you correctly, you are saying if we allow the auto giants to fail the economic impact won't be as severe as people think. I'm saying if we allow them to fail the economic impact will be devastating, right? Now there is no way for us to know for sure, right. So why not err on the side of caution?

1 in 10 jobs is huge, not to mention the trickle down effect these failures would have on communities. I just find it hard to believe the alternative would be better. You feel me?

[AandF6969]

WHO CARES IF THEY FAIL

If you put out a bad product, and have shitty management practices, then why is it the taxpayer's responsibility to bail out?

Are they going to bail out Circuit City too? They just went bankrupt.

[BgMc31]

WHO CARES IF THEY FAIL

If you put out a bad product, and have shitty management practices, then why is it the taxpayer's responsibility to bail out?

Are they going to bail out Circuit City too? They just went bankrupt.

Circuit City doesn't employ 1 in 10 Americans.

[SMCengineer]

^^thanks for the response Blome! Its was very enlightening. I will research the great depression further. Your points are will taken but like you said above, jobs will be loss but my question still exists, if the auto industry fails and millions of jobs are loss how can our economy recover. I mean both you and I are answering in absolute terms. If I understand you correctly, you are saying if we allow the auto giants to fail the economic impact won't be as severe as people think. I'm saying if we allow them to fail the economic impact will be devastating, right? Now there is no way for us to know for sure, right. So why not err on the side of caution?

1 in 10 jobs is huge, not to mention the trickle down effect these failures would have on communities. I just find it hard to believe the alternative would be better. You feel me?

On the contrary, there's several ways to be very sure that doing nothing (in terms of government intervention) is better than doing something. No depressions prior to 1929 were considered “Great”; this fact is not to be overlooked. Sure, there were very severe depressions, but nothing that lasted as long or had such an impact as the Great Depression. This is precisely because every depression, prior to the great depression, government intervention was minimal (not nonexistent). More recently, in the 1990’s, Japan did the exact same thing we’re doing now and the term Zombie companies/banks was born because they propped up unsustainable companies/banks. These companies held Japan’s economy down for the past 18 years. Propping up poor or failing companies is not good for any economy, yet it’s exactly what we’re doing today.

A company’s failure in a free market generally means a few important things. Namely, that it has become uncompetitive in its particular industry, which would generally signal that another company [companies] is at it's heels willing to take over their market share. The transfer is from the incompetent to the competent under normal circumstances. Today, however, the government is trying to reverse that general law of free markets and by doing so is going to make a bad problem that much worse.

Most of economics can be summed up as studying how policies affect not one group, but several groups including those unseen. Suppose we do bailout the big three (again) and all those jobs are saved. What exactly did we save? What we saved were businesses that were too large to be managed efficiently instead of letting them shrink, be taken over, cease to exist or a combination of these. Now, companies like Toyota or any of the foreign car makers, who play by the rules, don't get help from the government and instead of reaping the benefits of a properly managed business, they get nothing. When in reality they should be acquiring mass amounts of new capital and labor from the failing companies, which would in turn make them that much stronger and be a huge asset to the economy as a whole.This would more than address the so called trickle down effect that will occur if the big three fail, although it would take time.

So we’ve established that they’ve saved jobs at the big three, but as a result potential labor was lost for Toyota and all the other successful car companies. Those are real jobs lost however unseen they may be. These are called opportunity costs. The amount of opportunity cost incurred is incalculable because if any of the three big auto industries were allowed to fail (allowing doesn’t meant they necessarily will fail) it would free up huge amounts of capital, labor, and opportunity. The opportunity might be for any of the other auto makers to snatch up the market share left behind by these big players. They could buy them out and expand business or just buy individual factories, equipment, or even ideas.

A more important question to ask is, if we did bailout these auto companies would we expect employment to remain the same or to inevitably decrease anyway? It would be ridiculous to think that there wouldn’t (couldn’t) be massive layoffs even after the big three received money. After all, unemployment rests heavily on labor costs. Therefore if they didn’t make drastic cuts in employment, they would be right back to where they started and would be asking for more money from congress. The taxpayer would essentially be subsidizing artificially high wage rates.

People are going to loose their jobs. That’s what happens in a recession/depression, but it’s only temporary. That is until Washington gets involved than unemployment will really get bad and will last until those policies are undone. The unemployment rate through the 1930-1940, during the peak of the New Deal averaged well over 15%. That means that most of Roosevelt’s actions continuously affected employment rates in negative way. All government can do is hold off the inevitable, yet at the same time make things much worse and not only in the industry that it's trying to save, but in many industries that would’ve otherwise been unharmed. So while the number may seem large when you first hear of the "devastating effects" that will occur if allow the big three to fail, the truth is the same amount if not more will loose their jobs if we do.

[Voice of Reason]

When I 1st heard of this shit all I could think of was that 80's movie "Gung Ho"...

http://video.google.com/videoplay?do...44825891073858

We can learn from this comedy movie.