Opinions from both sides

The Center for Automotive Research published a study which says that if GM, Ford and Chrysler were to go out of business it would eliminate nearly 3 million jobs from the American economy. CAR says the U.S. government would lose $60 billion in the first year alone, and $156 billion within three years, and it recommends that Washington seriously consider helping the automakers survive.

Extend bridge loan to GM or the country will suffer
Collapse of auto industry would devastate economy
By W. CARROLL SMITH
Nov. 17, 2008, 8:07PM

 Tick...tick...tick....

So it's come down to this for General Motors. A company that last year celebrated 100 years of living, breathing, social history is on the brink of total collapse. Absent a governmental financial rescue in the next 60 days, the once proud corporate icon will disappear.

Should we taxpayers extend a loan to GM so that it can operate until the U.S. economy recovers? I say yes!

If you think a bridge loan to GM so that the lights can stay on through this economic tsunami is expensive, then think about the cost of a GM failure.

Let's be clear, the alternative for GM and the domestic industry is not a cake walk through the bankruptcy courts, resulting in a reorganization that some think would put dealers and the UAW in their place and ensure future success.

No, even if GM could get debtor-in-possession financing to keep the lights on (which is extremely unlikely in today's credit crisis environment), Chapter 11 means a collapse of sales and a downward spiral into a Chapter 7 liquidation.

Buying a ticket from an airline in bankruptcy has virtually no risk to a consumer — it has no parallel to a failure of GM. The risk to the purchaser of a ticket is risking only the price of the ticket and he knows if he gets on a plane it is going to land where it was intended. In this crisis of consumer confidence, do these experts really think America will go to the showrooms to buy a car from a bankrupt manufacturer?

Unbeknownst to those who cry "Let them go down," there are countless towns, big and small, scattered all across America, that have grown up with "The General" as their main employer and the main source of income for thousands of American families.

Do these "instant experts" who call for the implosion of the domestic industry have the faintest clue as to what it means if it were allowed to happen?

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 fail.

There are 14,000 domestic-oriented dealers in the U.S. that employ approximately 750,000 Americans with a payroll of around $35 billion. Blink — they are gone.

Take just Texas, for instance. GM builds vehicles, including Tahoes, in a plant in Arlington, just outside of Dallas. The company has a major parts distribution warehouse in Fort Worth. These 4,289 Texans would lose their jobs, the suppliers to these operations would fail, the communities would lose their tax bases, and the state would lose its tax revenues.

The effect of the collapse of the U.S. automobile industry would be devastating in ways in which these "experts" are not considering. Nearly 3 million jobs would be lost in the first year alone — with another 2.5 million to follow in the next two years. Personal income in the United States would drop by more than $150 billion in the first year. The cost to local, state and federal governments could top $156 billion over three years in lost taxes and unemployment and health care benefits. And, due to supplier bankruptcies, domestic automobile production would most likely fall to zero, even by international producers.

The United States is in an economic crisis. The entire U.S. automobile industry has been devastated and it's not just the domestic manufacturers that have been affected, as many have asserted.

In October, U.S. car and truck sales were down 31.9 percent versus 2007, with Toyota and Honda down 20.1 percent and 25.7 percent respectively. The credit crisis that is affecting us all is especially devastating to the automobile industry. Carmakers can't get loans to restructure and to produce new advanced-technology vehicles. Suppliers and dealers can't get loans for routine business in today's market.

Criticize the Detroit executives all you want. But the issue today is not whether GM should have closed Buick years ago; it's not whether they should have ever designed the Hummer; it's not whether they should have been tougher with the United Auto Workers or should have supported higher CAFE standards. And it's not whether or not a 1973 Vega is a "clunker."

Make no mistake, in the next two to four months GM will run out of cash and turn out the lights. Only a government bridge loan can prevent that. Every other alternative is a dream. Anyone who thinks this country will not be thrown into a full-blown depression if the domestic automobile industry is allowed to fail is simply kidding themselves.

We are facing a perfect storm of events that could spell disaster if we as a nation don't act and act fast. The "let the free market run its course" dialogue is over. It's far too late for that.

I agree that the taxpayer must have protection and an upside. GM's top management may have to go. There simply cannot be any excessive salaries or bonuses. Government as a shareholder must have a big voice.

But the stark reality remains: Absent a loan, GM dies, and with it much of manufacturing in America. Let's hope that what needs to get done will in fact get done, before it's too late.

That tick, tick, tick you hear? It's time running out on the manufacturing base of America and the future of many Americans.

Smith is the owner of Monument Chevrolet in Pasadena, a past chairman of the Houston Automobile Dealers Association and a director of the National Automobile Dealers Association.

New York Times
Op-Ed Contributor
Let Detroit Go Bankrupt
By MITT ROMNEY
Published: November 18, 2008

IF General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.

I love cars, American cars. I was born in Detroit, the son of an auto chief executive. In 1954, my dad, George Romney, was tapped to run American Motors when its president suddenly died. The company itself was on life support — banks were threatening to deal it a death blow. The stock collapsed. I watched Dad work to turn the company around — and years later at business school, they were still talking about it. From the lessons of that turnaround, and from my own experiences, I have several prescriptions for Detroit’s automakers.

First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota’s Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable.

Second, management as is must go. New faces should be recruited from unrelated industries — from companies widely respected for excellence in marketing, innovation, creativity and labor relations.

The new management must work with labor leaders to see that the enmity between labor and management comes to an end. This division is a holdover from the early years of the last century, when unions brought workers job security and better wages and benefits. But as Walter Reuther, the former head of the United Automobile Workers, said to my father, “Getting more and more pay for less and less work is a dead-end street.”

You don’t have to look far for industries with unions that went down that road. Companies in the 21st century cannot perpetuate the destructive labor relations of the 20th. This will mean a new direction for the U.A.W., profit sharing or stock grants to all employees and a change in Big Three management culture.

The need for collaboration will mean accepting sanity in salaries and perks. At American Motors, my dad cut his pay and that of his executive team, he bought stock in the company, and he went out to factories to talk to workers directly. Get rid of the planes, the executive dining rooms — all the symbols that breed resentment among the hundreds of thousands who will also be sacrificing to keep the companies afloat.

Investments must be made for the future. No more focus on quarterly earnings or the kind of short-term stock appreciation that means quick riches for executives with options. Manage with an eye on cash flow, balance sheets and long-term appreciation. Invest in truly competitive products and innovative technologies — especially fuel-saving designs — that may not arrive for years. Starving research and development is like eating the seed corn.

Just as important to the future of American carmakers is the sales force. When sales are down, you don’t want to lose the only people who can get them to grow. So don’t fire the best dealers, and don’t crush them with new financial or performance demands they can’t meet.

It is not wrong to ask for government help, but the automakers should come up with a win-win proposition. I believe the federal government should invest substantially more in basic research — on new energy sources, fuel-economy technology, materials science and the like — that will ultimately benefit the automotive industry, along with many others. I believe Washington should raise energy research spending to $20 billion a year, from the $4 billion that is spent today. The research could be done at universities, at research labs and even through public-private collaboration. The federal government should also rectify the imbedded tax penalties that favor foreign carmakers.

But don’t ask Washington to give shareholders and bondholders a free pass — they bet on management and they lost.

The American auto industry is vital to our national interest as an employer and as a hub for manufacturing. A managed bankruptcy may be the only path to the fundamental restructuring the industry needs. It would permit the companies to shed excess labor, pension and real estate costs. The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.

In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.

Mitt Romney is the former governor of Massachusetts.

New York Times
Op-Ed ContributorFor Detroit, Chapter 11 Would Be the Final Chapter
By SPENCER ABRAHAM
Published: November 24, 2008
Washington

MANY commentators and members of Congress have declared that the best hope for the Big Three auto companies is to declare bankruptcy. Airlines have gone through bankruptcy and adjusted, after all, so why can’t carmakers?

This comparison is appealing, but flawed. Almost every carmaker that has ever gone bankrupt has disappeared for good. And there is no reason to believe the Big Three would not do the same. Chapter 11 filing would almost surely lead to liquidation.

Just as financial institutions depend on the confidence of those with whom they do business (as Bear Stearns and Lehman Brothers discovered), automakers depend on the confidence of car buyers. To purchase a car is to make a multiyear commitment: the buyer must have confidence that the manufacturer will survive to provide parts and service under warranty. With a declaration of bankruptcy, that confidence evaporates. Eighty percent of consumers would not even consider buying a car or truck from a bankrupt manufacturer, one recent survey indicates. So once a bankruptcy proceeding got started, the company’s revenue would plummet, leading it to hemorrhage cash to cover its high fixed costs.

That would thwart any attempt at reorganization, and the case would likely move inexorably toward liquidation under Chapter 7 of the federal bankruptcy code. Debtor-in-possession financing — which is what the bankrupt need in order to pay for the continued operation of their business — would not be available in the vast amounts required, given the plunge in revenue.

A bankruptcy filing by even one of the Big Three would probably set in motion a cascade of smaller bankruptcies by suppliers of car parts, as the money the company owed them (which would be classified as an unsecured claim) could not be paid until it exited bankruptcy. And this loss of suppliers would almost certainly overwhelm the other two carmakers. There would also be a severe contraction in the availability of trade credit from suppliers, which amounts to tens of billions of dollars.

And as surely as day leads to night, bankruptcy proceedings would be followed by liquidation. In a flash, the American carmaking business, representing about 10 percent of the nation’s retail sales, would begin to disappear.

For those concerned about the potential price of a federal bailout for Detroit — and I’m one of them — the reality is that this cost would be dwarfed by the long-term spillover costs of bankruptcy and liquidation. Nearly three million jobs would be lost in the first year if all three car companies closed and their suppliers absorbed the shock, according to the Center for Automotive Research. That would mean tens of billions of dollars in pension liabilities would be transferred to the Pension Benefit Guaranty Corporation, the federal insurance fund that protects the pensions of nearly 44 million American workers but already has a $10.7 billion deficit.

We’d also see an influx of Americans who have lost their health insurance onto the rolls of Medicare and Medicaid, costing billions of dollars more. And the budgets of the so-called “auto states,” mainly in the Midwest, that depend heavily on the domestic car manufacturing industry would be wrecked, and that would likely lead to both higher taxes and depressed economic growth.

Bankruptcy would also deliver a painful shock to the country’s already damaged financial system, which draws significant revenue from, and has significant credit exposure to, auto loans. For the past decade, an average of roughly eight million vehicles made by General Motors, Ford and Chrysler have been sold annually. That translates into about $190 billion in auto financing each year. Given that the average life of an auto loan is two years, an estimated $350 billion to $400 billion worth of exposure is thrashing around our financial system. And the value of this paper would drop along with the value of the cars.

Regional and national banks, as well as credit unions and finance companies, hold these loans on their balance sheets. Banks also have exposure through investment vehicles whose value is tied to car loans. And the pain would be intensified because the banks have not hedged their exposure to auto loans.

There’s no denying the American auto companies have made major mistakes, by over-investing in S.U.V.’s, for example, and failing to quickly streamline their manufacturing. But allowing one of them to file for bankruptcy would be a disastrous course.

If we knew then what we know now about the systemic shock to our economy, would we have allowed Lehman Brothers to go bankrupt? Absolutely not. If we let any of the Big Three go bankrupt, we will set in motion a chain of events that will cause us, in six months, to ask again: How did we let this happen?

Spencer Abraham is a former United States secretary of energy under President Bush and a former United States senator from Michigan. He is the chairman and chief executive of the Abraham Group, which advises energy and investment companies, and is a board member of Occidental Petroleum.

Consumers cautious about effect of auto bankruptcy
By KIMBERLY S. JOHNSON
November 23, 2008

NEW YORK (AP) — Cash-strapped General Motors insists declaring bankruptcy would be disastrous because it would scare away customers. It's unlikely Chevrolet and Cadillac owners would be left with worthless warranties and no replacement parts, but the headlines about the Detroit Three's dire situation may already be keeping buyers away.

"If GM is under the imminent threat of bankruptcy or actually declares bankruptcy, I would not consider a GM product," said Kevin Ketels, who might replace his family's 2004 Toyota RAV4 late next year. "I just don't know if the company will be around to fulfill their warranty obligations. Will they be there for me? There are too many unknowns and a car is my second biggest investment next to my house."

The 38-year-old from Grosse Pointe Woods, Mich., would be among the 80 percent of Americans who General Motors Corp. insists wouldn't even consider a GM brand such as Buick, Saturn or Saab if the company was in bankruptcy. Chief Executive Rick Wagoner brought up the statistic from a CNW Research survey last week during his congressional plea for $25 billion in federal loans.

The concerns are intensifying as the Detroit company burns through tens of millions of dollars a day. It has warned that by year's end, it could reach the minimum amount of cash it needs to stay in business.

Chrysler CEO Bob Nardelli gave the same warning for his company, but Ford Motor Co., also suffering under the worst sales environment in 25 years, says it should have enough cash and untapped credit lines to get through 2009.

Some lawmakers, who want to see the companies' plans to become competitive and profitable before doling out aid, say bankruptcy should be on the table. A prearranged run through Chapter 11 would give GM more latitude to postpone payments to creditors, renegotiate contracts, raise capital and reorganize to stay alive. But with credit markets frozen, finding the financing to do it without government help may be impossible, and the company may be forced to liquidate.

Warranty obligations would likely be fulfilled by what remains of GM after a reorganization, although the bankruptcy court would have the final say. If there's a Chapter 7 liquidation, a third-party, like another automaker, could potentially step in and assume warranty obligations as part of a deal to acquire part of GM's assets.

And the company would still have to address safety recalls, regardless of its financial or operational status.

"Bankruptcy wouldn't discharge your obligations for recalls," said Rae Tyson, spokesman for the National Highway Traffic Safety Administration. "We would go to bankruptcy court and argue that they have a responsibility to use a portion of assets to satisfy whatever consumer issues there might be."

But obtaining certain parts would be an issue. Independent collision repair shops get 80 to 90 percent of their parts directly from original equipment sources.

"It's the area most impacted if there's disruption in the supply chain of replacement parts in the repair industry," said Ron Pyle, president of the Automotive Service Association, a Bedford, Texas-based group representing 10,000 independent facilities.

"If you can't get original equipment manufacturers parts, there could be a huge impact," said Sean McCall, owner of Hatch's Auto Body in Denver. "Aftermarket (collision) parts are definitely not of the same quality, they're not as strong, don't fit properly, and your vehicle wouldn't be considered in pre-accident condition."

A shortage of mechanical parts would take longer to bear out, Pyle said, because general repair shops often use aftermarket parts.

The fear of bankruptcy may exacerbate the loss of market share that has helped push the U.S. automakers to their weakened state to begin with. GM, which held 35 percent of U.S. market share in 1990, captured 24 percent of sales last year.