Election 2008

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Will the Big Three Automakers Survive?

November 11, 2008 09:02 AM
by Isabel Cowles
Some politicians and economists want to let GM, Ford and Chrysler sink, while others propose offering a chunk of the bank bailout to the ailing U.S. automakers.

U.S. Policymakers Debate Aid to Failing Auto Industry

October reports by GM, Ford Motor Co., and Chrysler LLC show that U.S. auto sales have fallen for 12 straight months, marking the longest streak of declining sales in 17 years.

Despite cost-cutting efforts by the companies, which include shrinking payrolls and shutting down factories nationwide, U.S. automakers are running seriously low on funds and have become increasingly aggressive in asking for aid from the U.S. government.

“The automakers are seeking access to $50 billion in borrowing, with half going for operating assistance and the rest to support spending on health-care costs,” Bloomberg.com reports.

House Speaker Nancy Pelosi of California and Senate Majority Leader Harry Reid of Nevada support aid to the big three, calling upon Treasury Secretary Henry Paulson to use part of the $700 billion dollar bank-bailout funds for ailing automakers.

President-elect Barack Obama’s chief of staff, Rahm Emanuel, called the industry an “essential” part of the U.S. economy yesterday, but did not suggest offering it federal aid.

New York Mayor and former Bloomberg CEO Michael Bloomberg opposes government aid to Detroit automakers, saying on his weekly radio address, “I don’t know where it stops. It’s hard to see how they get their act together. … They haven’t built the kinds of cars the public wants.”
Peter Schiff, president of Euro-Pacific Capital, explained why he is opposed to U.S. aid to faltering automakers: “if the government props the company up with more bailouts, it will just extend the inefficiencies and let them keep building cars no one wants to buy, at highly overpriced labor.”
Auto executives insist that bankruptcy is not an option, arguing that the far-reaching damage would cripple the U.S. economy on many levels, ranging from jobs cuts at factories, offices, suppliers and dealers, to losses in worker benefits and investments.

Shelly Lombard, an analyst with Gimme Credit, said it was highly probable that GM would go bankrupt if they don’t get government assistance. “This recession is going to be longer and deeper than we ever thought. I don’t think they can withstand that,” she explained.

Bankruptcy could boost automakers’ survival by offering relief from crippling debts, and allowing the companies to reorganize. Car manufacturers could then tackle the problems they claim are responsible for ongoing losses, including reducing the number of dealerships, writing more competitive supplier contracts and lowering health care costs for employees.

But even bankruptcy may not be enough to salvage the big three. Studies have shown that consumers are reluctant to purchase vehicles from bankrupt carmakers. And if a company cannot survive bankruptcy—which might be the case with enterprises as unwieldy as Ford, GM and Chrysler—creditors could break the companies apart, selling them piecemeal.

Related Topic: Bankruptcy and the airlines

In 2002 and 2003, the airline industry confronted a similar dilemma to the one facing automakers today. Several major airlines were forced to file for bankruptcy in order to reorganize and lower costs that were protected by unions. According to economics professor Robert Gordon, United Airlines “pioneered” a restructuring process that allowed it to “escape the noose around … [its] neck,” which included high pensions, salaries and health care costs of its workers.

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