The Detroit Three automakers (General Motors, Chrysler, Ford) are begging Congress for an emergency government rescue, claiming that either the Federal Government needs to loan $25 billion now, or lose $156 billion later.
In what has been a precarious time for all segments of the American economy, the auto industry has arguably bared the brunt of the financial crisis. After posting $15.5B losses in the second fiscal quarter, General Motors Corporation (GM) posted 3rd quarter losses of $2.5B and announced its cash situation had become more dire. Ford Motors Inc posted $8.7B 2nd quarter losses and a $129M 3rd quarter losses. To put this into perspective, the combined worth of GM and Ford is less than that of Auto Zone, a car parts retailer.
The faltering of the American automotive industry bears deep and potentially insurmountable economic ramifications for not just the state of Michigan, but the entire nation as well. Currently, 355,000 U.S. workers are directly employed by the auto industry, and 4.5 million work in related industries. An additional one million retirees, spouses and dependents rely on the firms directly for retirement and health care benefits. Recently, GM released a website in order to drum up support for the bailout. In it the company claims that if the Detroit Three were to declare bankruptcy, personal income in the United States would drop by more than $150.7 billion in the first year alone, domestic automobile production would fall to zero, and the cost to federal, state and local governments would be upwards of $156.4 billion in unemployment, healthcare assistance, and lost tax revenues.
The state of Michigan would be hit the hardest. Auto manufacturers and suppliers are the largest economic segment in Michigan and no other state relies on the auto industry as much. In Western Michigan alone there are 106 companies that supply automakers with parts, over two thousand corporate employees, as well as innumerable amounts of small business and car dealership owners who depend exclusively on the Big Three for their livelihood.
Some residents, however, are skeptical as to whether the bailout will deliver economic salvation. Muskegon resident Lonnie Sagala claims that, "it might help the higher-ups but I don't think it's going to help the workers." On the other hand, Rick Borns, general manager of Casting Technologies Co. of Fruitport, Michigan feels that, "automotive manufacturing is a critical industry not only for Michigan but for the entire country. [The bailout] would improve the viability of the classic American Big Three automakers."
Whether or not such a bailout would actually sustain the automotive industry in the long-term has been the subject of much debate in the corridors of Capitol Hill.
Senator Richard Shelby of Alabama recently likened the failing industry to a "dinosaur," adding that "companies fail everyday and others take their place [and] I think this is a road we should not go down." Senator Shelby continued, "They're not building the right products." Senator Jon Kyl of Arizona added that, ""just giving them $25 billion doesn't change anything. It just puts off for six months or so the day of reckoning."
Many within the Senate feel that a bailout is not conducive to a restructuring of the American auto industry, an industry that for the past ten years has spent over $95 million on lobbying against legislation calling for higher fuel standards, and has been hemorrhaging cash.
Proponents of the automotive bailout claim that although the recent losses may have been caused by faults within the companies themselves, the risk of a failure of the automotive industry is too great to ignore. President-elect Barack Obama has come out in support of a bailout in some form, however he has said, "it can not be a blank check." Senate Majority Leader Harry Reid has come out strongly and has been pushing a plan in Congress that would allow the auto companies access to the $700 billion government pool originally dedicated to the bailout of the financial sector. According to this legislation, any loan would be subject to heavy oversight, in order to ensure that the auto companies are on the road to sound economic footing. The bill also calls for the creation of an oversight board that would scrutinize any investment made by the Big Three. The bill makes provisions that allow the board the authority to "review and prohibit any asset sale, investment, contract, or commitment proposed."
The Bush White House has called instead for the $25 billion in loans originally appropriated to help the auto industry retool for higher environmental standards to be redistributed to support the immediate financial needs of the auto industry in light of the unraveling crisis
Former GM president Charles E. Wilson once claimed that, "what is good for GM is good for America." As the debate over whether to respond to the crippling Detroit automotive industry in the Senate rages on, the substance of this rhetoric may finally be put to the test.
UPDATE: On December 2nd, 2008, the Big Three returned to Washington, hoping to make a successful second bid for $25 billion in funding, and are presenting Congress with plans to restructure their ailing companies.
Ford has asked Congress for a $9 billion bridge loan, however, in a statement to Congress said "it hopes to complete its transformation without accessing the loan should Congress agree to make the funds available." Such a transformation would, according to Ford, require a $14 billion investment in new technologies over the next seven years. In order to cut costs, Ford has said that it would sell five corporate jets, as well as have its CEO, Alan Mulally, work for $1 per year.
Meanwhile, GM, a conglomerate of eight separate car brands, has begun to discuss efforts to sell brands that are underperforming. Pontiac, Saturn or Saab, may be at risk according to people briefed on the plan. GM spokespeople have commented that although GM shed its Oldsmobile brand in 2004, it lacks the funds to do so today and must sell them.
Chrysler is expected to offer changes that include a swap of debt for equity stakes and reductions in some vehicle models.
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