It’s been a Friday in the US, which is traditionally when many of the big statements are made so as to give a weekend for things to cool off. Today’s been no exception.
In case you missed stuff:
–> The bailout legislation being drafted by Barney Frank of the House Services Finance Committee looks set to be topredoed by a lack of bipartisan support. It seems they should have drafted it before the election, when bipartisan support seemed like a fait accompli. From the New York Times:
Despite hardening opposition at the White House and among Republicans on Capitol Hill, the Democrats said they would press ahead with efforts to provide $25 billion in emergency aid for the automakers. But they said the bill would need to be approved first in the Senate, which some Democrats said was highly unlikely.
Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, said he did not believe there would be enough Republican support to get the 60 votes needed to move a bill forward. “Right now, I don’t think there are the votes,” he said, adding that he personally favored aid for the automakers.
As the outlook for an auto industry bailout dimmed, President Bush traveled to Wall Street, where he gave a robust defense of capitalism and seemed to warn world leaders — and the incoming Obama administration — not to draw the wrong lessons from the global economic crisis by over-regulating markets and hindering free trade.
The White House, in resisting calls for aiding the automakers, has also warned repeatedly against throwing taxpayer money at companies that may not be salvageable.
I’m sorry to be seen to be taking a side here, but over-regulating markets isn’t the problem here. It’s the under-regulation of markets that’s caused much of this melt-down. What the markets need is some rightsizing of regulation. How very Saaby.
Lobbyists for the car companies are in Washington doing their best to cry poor, so this whole thing seems like a giant game of Chicken, with several million jobs (and a couple of website hobbyists) in the balance. This whole things seems to be about appearances: carmakers want to appear to be broke. Lawmakers want to appear to be responsible.
In terms of making the car companies accountable for any funds that might be received, one lawmaker has suggested they get out the Chrysler playbook from the 1980s and then build on it. From Automotive News:
Next week is crucial to the cash-starved Detroit 3. Rick Wagoner of General Motors, Alan Mulally of Ford Motor Co. and Bob Nardelli of Chrysler LLC will make public cases to Congress for $25 billion in loans to keep the companies safely afloat.
When they appear with Gettelfinger on Tuesday before the Senate Banking Committee and on Wednesday before the House Financial Services Committee, they will cite a Center for Automotive Research study contending that one in 10 U.S. jobs are tied to the auto industry.
But that alone probably will not sell enough recalcitrant Republicans and holdout Democrats on the merits of a loan package, McCotter said.
They need to convince Congress that they wouldn’t be seeking a rescue if a collapsed credit market hadn’t cratered car sales, he said. In October, the annualized rate of North American sales was about 10.6 million, the slowest pace in 25 years.
McCotter says that the Detroit 3 have been hurt by the $700 billion federal bank bailout that failed to unfreeze credit…..
….They also must be willing to make additional sacrifices, said Sage Eastman, communications director for Rep. Dave Camp, R-Mich.
A good template would be the $1.5 billion federal bailout of Chrysler in 1980, Eastman said.
He said then-Chrysler CEO Lee Iacocca won respect by taking only $1 in salary until the company’s fortunes improved. What’s more, the government required and received restricted equity in Chrysler that it redeemed at a huge profit three years later when the company returned to profitability. The UAW also made wage and benefit concessions that members recouped when Chrysler became profitable.
Automotive News have also produced an editorial that claims the stakes are much bigger than what most people think. First, they cover what they see will be the immediate consequences:
If Congress thinks a bailout of General Motors is expensive, it should consider the cost of a GM failure.
Let’s be clear. The alternative to government cash for GM is not a dreamy Chapter 11 filing, a reorganization that puts dealers and the UAW in their place, ensuring future success.
No, even if GM could get debtor-in-possession financing to keep the lights on (which it can’t), Chapter 11 means a collapse of sales and a spiral into a Chapter 7 liquidation.
GM’s 100,000 American jobs will die. Health care for a million Americans will be lost or at risk. Hundreds of GM’s 1,300 suppliers will die. Their collapse could take down Ford Motor Co. and Chrysler LLC, perhaps even North American transplants. Dealers in every county of America will close.
The government will face greater unemployment, more Americans without health insurance and greater pension liabilities.
May have assumed that the collapse of GM would be an orderly affair. Farago’s built his whole Deathwatch series on this theory. I’ll side with AN on this one. In a frozen credit market, with bankers and insurers installing locks on the doors, the collapse of an operation the size of GM would be total.
People might point to airlines, etc, who have traded their way out of bankruptcy under Chapter 11 but I’d wager those stories were set in a rosier macroeconomic background.
Some also argue that the $25billion already approved by the US congress is enough, but please remember that that money is securely tied to R&D that improves fuel economy. Automotive News have a great line in bold print for this one: Dead automakers do not invest in technology.
GM need what they need just keep the lights on. And if the lights go out, they’ll likely take suppliers with them. By default, that means Ford and Chrysler will find life to be very, very difficult.
The ending from AN:
The collapse of the global financial system has crushed the American car market, dried up revenues for the Detroit 3 and highlighted their weaknesses.
Each of the Detroit 3 is in crisis. But Ford, which borrowed big two years ago and thus has more cash today, may skip a bailout and the strings attached. Cerberus, which bought Chrysler last year, doesn’t deserve money. Government cash might help sell Chrysler to a strategic owner.
Some Detroit critics want their pound of flesh: Throw the bums out and install a government czar. Treasury Secretary Henry Paulson won’t use any of his $700 billion bank bailout money to help manufacturers. In any case, he’d need a guarantee that a bailout would make Detroit “viable.”
Well, nobody — not even AIG — is insuring guarantees for viability.
The taxpayer needs protection and an upside. GM’s top management may need to go. Government-as-shareholder deserves a big voice. Those details can be worked out.
The Detroit 3 CEOs and UAW President Ron Gettelfinger had better tell two critical congressional hearings next week what sacrifices they are prepared to make.
But the stark fact remains: Absent a bailout, GM dies, and with it much of manufacturing in America. Congress needs to do the right thing — now.
You can crow all you like about the fact that GM didn’t plan well enough for the future. They didn’t – it’s a fact and it’s probably going to cost GM’s board their jobs.
But saying the whole US automotive sector should be tossed right along with them – because of principle – is throwing the baby out with the bathwater.
We’ll keep watching while the key players keep posturing. Hopefully a few people of substance will step up to the plate and pose some real, practical and do-able solutions.
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I guess the UAW and Teamsters pension funds could be used to pay for the bailout…
Look on the bright side. If GM goes under, maybe that’ll give us a chance to one day see Alfa in the U.S. again.
Just to add some perspective that is unlikely to be covered in the press, here is an opinion piece for consideration.
Washington, D.C. –In a recent speech on the financial crisis, President Bush said, “If you seek economic growth, if you seek opportunity, if you seek social justice and human dignity, the free market system is the way to go.”
According to Yaron Brook, executive director of the Ayn Rand Center for Individual Rights, “It’s true that free markets are the source of economic prosperity and individual liberty–but President Bush, while he may pay lip service to free markets, has been a consistent opponent of them.
“Did Bush abolish the countless regulations and controls strangling businessmen? No. But he did sign into law Sarbanes-Oxley–the largest expansion of business regulation in decades. Did Bush consistently push for free trade? No. But he did give us a new steel tariff. Did Bush attempt to roll back America’s massive welfare state? No. But he did pass the prescription drug benefit, the largest new entitlement program since Lyndon Johnson’s Great Society. Did Bush curtail government spending? Far from it. Bush presided over an unprecedented increase in the federal budget: from $1 trillion at the time he took office to more than $3 trillion today. This is to say nothing of Bush’s response to the financial crisis. He has completely evaded his administration’s responsibility for the Fed and housing policies that created the housing bubble. Instead, he has led the chorus blaming the market and calling for unprecedented handouts, bailouts, and nationalizations as the cure.
“If Bush is a friend of the free market, who needs enemies? By praising the free market while systematically undermining it, Bush has done more to discredit capitalism than any open critic could. Like a con artist who undercuts the reputation of Mercedes by selling lemon look-alikes, Bush has now led people to associate his failed policies with capitalism. That association needs to be erased. We must make it clear: Bush is no friend of free markets.”
The pols see only those solutions that strengthen government’s hold on the economy and run up the national debt. The car companies need to sell cars. The rest is superfluous. Why not offer LARGE tax credits for purchasing a car, any car, so long as it is purchased NOW? No taxpayer expenditures required. No inflated currency. The tax base would expand and result in greater revenue, maybe even enough to offset the effect of the credits. While we’re at it, why not adopt a single EU/NA (hell, maybe even global) set of auto safety and environmental standards. The current system is a de-facto tariff that limits competition and drives up prices. Unfortunately, these solutions cost next to nothing and leave the final decisions in the hands of consumers, so don’t expect to see them enacted anytime soon.
The Ayn Rand center can go and sit on it…
If anything, this crisis is the direct result of removing “old-fashioned” restraint put in place after the great depression 70 years ago. The restraints were said to be out of fashion, out of date, obsolete and not necessary. A few years later… BAM!
Idiots.
Greed.
More restraints are needed. Not less. This much is obvious. This is what history has been trying to teach us.
Before you make a decision about is the bailout is good or bad, think about this:
GM and the UAW have depleted their reserves because of bad decisions about future trends and outrageous salaries.
Local cities and states don’t have the funds to pay their cops, teachers, and other city workers. So what are town’s doing? Cutting and laying people off. In a local town near me the Board of Ed. has been asked to cut 4 million to help the city.
These are not businesses out to make money. These are town services that are needed, and more importantly, tax payers depend on (and pay for).
Why isn’t the federal government helping out these cities? We are not talking about 25 billion either, but a few million here and there. Take care of these people first. Then worry about greedy companies, if you must.
Down with GM and everyone else who can’t turn a profit.
Having lived and worked in Michigan alongside many UAW employees, and coming from a family with GM – UAW employees, it is painful to admit that the labor cost structure at GM is far removed from reality. You cannot operate a succesful maufacturing company when factory workers make $100,000 to $150,000 (USD) a year plus benefits, while the factory workers at competitors earn half that amount.
Further, you cannot pay multi-million dollar bonuses to senior management, and exhorbitant salaries to board members when the company is being run into the ground.
One final point, besides a few Saab models, would anyone on this Board actually consider another GM car? Would anyone here actually buy a Buick or Chevrolet? Probably not, the end product is crap.
GM is rotten from top to bottom. $25 billion will not save the organization. In a year it will need another cash infusion. GM needs to be restrtctured or terminated. Banruptcy reorganization is the only shot for the survival of GM, and hopefully, Saab
I couldn’t have said it better. EnG
First of all, the current crisis is not related to labour cost. Yes, GM could probably cut costs. If it is true that a freshly hired factory worker earns $100,000 annually before overtime, then that seems a tad high. (but I somehow doubt that is the case and with my Norwegian eyes it actually seems a bit cheap unless employment tax is as high as here)
The crisis is the direct result of banks lending too much money to people and organisations who do not have the necessary funds to repay their loans. As I understand it, most banks take security in property, so the customer is then able to forfeit the loan by simply handing over the property to the bank (no more strings attached). I hope this isn’t true, because in that case we are just at the very start of a huge avalanche.
You can always find countries where labour is cheaper. But… The way to go is automation, there shouldn’t be that many workers on the floor these days. If you go wrong there, then the Japanese will rule your butt no matter how much you cut wages. The question of wages is derailing the discussion.
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Rune
Spelling would have helped my commentary. I would also add that I would like to see GM (and Saab) succeed, but major changes are necessary. It is not clear that GM will change anything after its cash infusion from the U.S. taxpayer, which is very troubling, and very sad.
I tend to think Farago is correct in his analysis that bankruptcy restructuring is required.
And I was really looking forward to the new 9-5. . .
All I know is that its making me have second thoughts about buying out my lease next year. If the local dealers disappear who would service the car? I would still consider a GM car next time around if Saab wasn’t here, but it would have to be an outstanding vehicle to replace it. The Malibu isn’t bad but its not the same thing. The Vue is too heavy, so I’d have to consider a Tiguan or Golf GTi instead.
Rune (the other one): You are mixing your crises. The credit issues are as you state. The issues with General Motors pre-date the credit issues by years. I believe that it’s been about 2.5 years since GM has turned a profit.
GM has been losing money and market share. That is directly related to labor costs and labor concessions (that is, keeping workers on the payroll even though plants are idle, controlling which plants get volume, etc.). GM’s burn rate right now is US$2.3 Billion per month.
GM’s issues are directly related to labor costs, especially “legacy” labor costs.
The fact that $100k per year sounds OK to you in Norway is directly related to the fact that there are no major automakers there.;-)
EnG: No, I don’t buy that analysis.
Wikipedia states 266K employees. I doubt you’ll find the majority of them on the factory floor. The avg salary is around $150000 (assuming 40 hour weeks, 48 work weeks per year), but new hires get roughly one third that. Again, I doubt the factor workers receive the larger end of the stick.
Whether a factory worker earns 50K or 100K is largely irrelevant.
What isn’t irrelevant is that in a time of depression, few people are going to buy cars. And even though the prices of gas are finally plummeting, most people still remember how it felt to have to pay substantially more, and GM do not have the products that most people now want.
When producing the wrong type of cars, _then_ the salary expenses matters. OK, maybe half the expenditure on salary would buy GM more time, but… That gives their competitors more time to fill whatever holes exists in the market now. They are giving away the few car sales there are, to their competitors.
And FWIW: http://www.think.no/ I am sure they will bite the grass, but that won’t be because of salary expenditures. Those cars look like crap. Few would want to buy them, even if they only cost a dime.
But even so: Their product is more relevant than most of what GM can put on the table… GM cutting their salaries by half or two thirds is not going to change that! (if anything, the highly educated workers you find in R&D will go look elsewhere, and where would that leave GM?)
The House appears to be moving towards approving the bailout (November 15):
http://money.cnn.com/2008/11/15/news/companies/automakers_bailout_congress.ap/index.htm?postversion=2008111521
but could still be veto’d by Bush.
USD$100-150K/year ?!? Sh**, I’m in the WRONG line of work ………………
Ken: Don’t fret. I have yet to see anyone comment about overtime and experience. As I said, new hires get one third that.
The tools available to the management is overtime and layoffs. Small wages means spending more resources on educating new employees (because the more experienced staff will realise they get paid too little and find better paid job elsewhere). Atleast that was the situation a year ago. Now people will be more willing to work for less…
I suspect the high average hourly pay is a direct result of making people work more than 40 hours per week.
That in itself isn’t such a huge mistake, except that most of those workers were probably busy making SUVs that the market is now fed up with.
Rune (the other one): You see, this is where you have to think about the chronic pain of high costs. GM has been losing money for months, even years. They have not been able to develop cars that will compete with Honda, Toyota and the like because their cost structure simply will not allow them to build a small car and make money. Therefore, they have retreated into the genres that they own, i.e. SUV, Pickups, large cars to avoid competing with them head-to-head AND to reduce R&D costs with badge engineering. Finally, they also have to cust corners on certain materials and designs to be cost competitive.
Leaving employee costs out of the crisis is like saying that the alcoholic died of liver disease. Sure the liver disease finally may kill them, but really the alcoholism was the true cause of death. Same here — GM has the wrong cars on the market because they cannot profitably build the right cars due to out-of-control labor costs.
I’m not privy to the actual pay, but I know this: while GM re-configured the Spring Hill, Tennessee plant, all of the workers got 95% of their 40-hour-per-week pay for 18 months for NOT WORKING, and a woman that we know complained about that saying that was a 30% cut in pay. They were NOT WORKING. Something is wrong!
If being paid 95% of their normal salary is a 30% cut in pay, that translates into them working quite a bit of overtime… If you’ve based your personal economy on being able to work a certain amount of overtime, and if the job situation is such that it is hard to find alternative work during the down period — heck… I’d complain too. If OTOH it is easy to find some odd jobs around the place, then such an arrangement would be the proverbial gravy train. (assuming their contracts let them seek employment elsewhere)
So far I have seen many generalisation on the topic of unions and those workers belonging to a union. I see very few hard facts on the table. You almost imply that if the owner wants to retool his factory for two years, all his employees should find jobs elsewhere in the mean time. That would be a bit cold, don’t you think? (and on the flip side of the coin: How do you expect to get skilled workers to return once the retooling is complete?)
Building a smaller car should require smaller tools, and fewer people. If GM can’t cut their staff, then yes, that would pose a problem. But I still somehow doubt this was what kept them from buildling smaller cars. The lack of experience in that area must’ve been worse. The automotive history of the US is filled with stories about various projects been put to sleep by the big manufacturers. Now some of those ideas from the past is appearing in competitor’s products. (Wasn’t there a small manufacturer in the fifties who had a car where the head lamp pointed in the direction of where the car was going? Much like the most advanced xenon lights do now…?)
Besides… SAAB could build a small car. They’ve done so in the past. GM could have let SAAB do their thing. That is why we’re here complaining, is it not? GM’s management stopped SAAB from doing their thing. (or “delayed”, which will soon amount to the same thing) That is hardly related to the labour unions?
GM survived the Great Depression by downsizing. Today, that is hard to do because idling plants and workers does not result in equivalent reductions in costs (for reasons described by EnG above.) GM is caught between a rock and hard place. All along, GM has had to deal with the fact that it costs them more to build a car (any car) than many of their competitors. With this in mind, what are they to do? Sell cars for higher prices? Sell cars with less costly content? In the econo-car market, that is suicide, but in the large truck and SUV market, they actually could do both. Faced with that kind of choice, there was no choice. This was not short-sightedness, but rather realism in the face of crippling constraints.
Consider the Saturn Astra. A fine feature-rich car that sells like hotcakes in Europe, but which has fizzled in the USA. Why? Because GM could not afford to offer the same engine and transmission choices available to Europeans. Why not? Because Americans already felt the car cost too much!! Companies with lower overhead simply have more latitude to package things better. They can have fatter margins and/or offer more content at lower price points. All the while, they are serenaded as being visionary car builders when in fact the cars may be the least critical part of the equation.