Will The Automotive Deadlock Be Broken Next Week?

Over $7 trillion dollars have been made available by the US government to rescue the financial sector and the economy. That’s about $23,000 for every American, and more than half of US GDP. However, not much has been allocated to the beleaguered auto industry and Detroit’s Big Three yearns for a larger piece of the pie to save their hides.

From the initial $25 billion last month, officials are now contending with a $34 billion bailout. These auto companies are losing money hand over fist and it is worrying that their cash requirements ballooned in the space of a month. I believe a turnaround for this industry without consolidation and painful reforms is unthinkable. Charity from taxpayers will result in more of the hat-in-hand circus.

Detroit's Big Three Bailout

Contrary to the CEOs’ defense, the auto industry was struggling under its weight well before this financial crisis. A bankruptcy filing would be a good way for the companies to become competitive. In good years, the automakers became victims of their own success as they negotiated overly generous settlements with the United Auto workers (UAW) on wages, pensions, and health benefits.

Becoming bankrupt will allow the auto industry to effect changes on the cumbersome contracts as well as overhaul the existing management which have lost the plot. If foreign automakers are making money while Detroit’s Big Three survive on taxpayers’ money, something is not right.

Look at the dire straits the three jokers got themselves into. GM needs $4 billion immediately and another $6 billion in the first quarter 2009 as part of its $16 billion “loan” to survive until 2010. Chrysler is also hanging on the ropes with a request of $7 billion. As for Ford, it has more cash but wants a standby loan of $9 billion.

I am inclined towards bankruptcy. Bailing out the industry is counter-productive if the automakers make it a habit of coming back for more money and they continue to make products which are no longer coveted by consumers. There is also a danger of opening the floodgates for more bailouts of other industry players.

However, despite all these arguments, the death knell may not be sounded after all. One could not have asked for money at a better time – on the back of rising unemployment (the loss of 533,000 jobs in November is the biggest in nearly 34 years), politicians are increasingly reluctant to deal the killer blow.

Coupled with the huge “personal sacrifices” of the CEOs, we are seeing less of the hardline stance. The bigwigs forgo their private planes and arriving in Washington on fuel efficient hybrid cards. They also promised to work for $1 a year and brought an open attitude to mergers. UAW chief also agreed to help Detroit which enhances long term prospects.

There are also respected voices in favor of a bailout, one of which is Jeffrey Sachs. In his article, he states that: “Washington should seize the opportunity to begin a new era of U.S. technological leadership in the global auto industry, starting with an immediate loan.”

“We face an unprecedented financial calamity, energy crisis and environmental threat. A vibrant, growing U.S. automobile industry should play an essential role in solving all three.”

His overall tone is optimistic and why not, an “all is well ends well” outcome benefits everybody. The fallout from the failed auto industry affects not only the direct employees but also spare part suppliers and dealers throughout America.

If the auto industry collapse and and the US economy deteriorates further, efforts to contain the recession so far may not yield the desired results. Last but not least, Americans are innovative people and if they put their mind to the task, they could easily emerge as the leader in fuel efficient cars on a wave of technological breakthroughs.

In the proposed public-private partnership, the US Government will provide short-term assistance while the automobile industry undergoes major restructuring. At the moment, any money will come from approved programs like the $700 billion for ailing financial institutions or from the $25 billion to help automakers shift to more fuel efficient cars.

To ensure that taxpayer’s interest are protected and money is not frittered away on excessive workers’ compensation and benefits, it may be necessary to put in place an oversight board including the Treasury secretary. The funds should also be disbursed progressively instead of granting whatever amount which is being asked for.

The tug of war between advocates of bankruptcy and bailout have reached the tipping point. It is a tough decision to make because we can only determine on hindsight which camp is right or wrong. Fact is, none of the experts can gauge accurately the cost of the auto industry failure to the economy.

However, inaction is not an option. Will the automotive deadlock be broken next week? Stay tuned for more updates.

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1 Comment

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One Response to Will The Automotive Deadlock Be Broken Next Week?

  1. I realize that many people are employed by the auto industry here in America, but what about the other industries, the ones we see in the news now laying people off and going bankrupt. The auto industry ranks up there with the government in paying people way more than the job they do is worth. If there is a bailout, something has to be done with the unions to bring the wages to a logical level.

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