Jeff Polhill

Excerpt form the East Valley Tribune newspaper December 3, 2008.  The Associated Press

Auto sales in the U.S, has plunged to a 26-year low.  According to Autodata Corp auto sales fell to 746,789 in November, and on a seasonally adjusted basis, automakers reported an annual sales rate of 10.2 million units, which puts it at its lowest level since October 1982.  Mike DiGiovanni, GM’s executive director of global market and industry analysis noted that “Our industry is in a much more severe situation than the rest of the economy.”  DiGiovanni went on to say, “We cannot continue at these levels or else the entire industry is going to go down.”

GM’s US auto sales fell 41 percent and Chrysler LLC’s dropped even further at 47%.  Some of their international rivals didn’t fare much better: Honda, 32 percent; Toyota, 34 percent; and Nissan, 42 percent.  “Consumers (are) not showing up at the dealerships - regardless of the deals they’re being offered and regardless of how low the gas prices to,” said Jesse Toprak, executive director of industry analysis for the automotive Web site Edmunds.com.  This has to be disturbing news to automakers, who anticipated lower gas prices combined with big incentives would bring consumers into their showrooms in a buying mode.

While Toyota and Honda appear to be able to handle the sales drop off, it has become apparent, especially for GM and Chrysler, that without a large cash bailout by year end, they will be out of business.  Ford Motor Co said previously that they had enough cash to sustain operations throughout 2009.

Excerpt from East Valley Tribune newspaper article from the Associate Press December 4, 2008.   No writer noted.

United Auto Workers President Ron Gettelfinger held a news conference in Detroit Wednesday during a break in a meeting with union officials.  “We’re going to sit down and work out the mechanics,” Gettelfinger said.  He then added, “We’re a little unclear on some of the issues.”  Gettelfinger indicated that the union is open to suspending the jobs bank where there are currently 3500 laid-off workers getting up to 95 percent of their pay until the current contract period ends, and he also said the union is willing to accept delayed payments of billions of dollars to the union-run health care trust.  Gettelfinger did not say the union would reopen contract talks with the GM, Ford and Chrysler, but is willing to get back to the bargaining table.  Talks will begin immediately with General Motors, according to the article.  Of course, anything that is agreed to at the bargaining table must be ratified by the union members.  There is no time-table on any of this.

Jim Press, vice chairman of Chrysler, was sounding a desperate message to Congress that the automakers were “down to months left” (meaning cash?).  In an attempt at lobbying Congress to approve the requested $34 billion bailout, Press pleaded, “If we have a catastrophic failure of one of these car companies, in this tender environment for the economy, it’s a huge blow.  It could trigger a depression.”  In my post December 3, 2009, Automaker bailout could top $34 Billion! it was disclosed by Ford Motor Co that they had sufficient cash to make it throughout 2009.  GM and Chrysler claimed they will be out of cash at this December’s end.  In my Road Block the Bailout post dated November 25, 2008, Dan Ikenson, an economist and the associate director of the Cato Institute’s Center for Trade Policy Studies, disputes the graveness of losing one or two of the US automakers.  See the post for his reasons.

Senator Harry Reid, Democrat-Nevada in an Associated Press interview indicated that the money for a bailout was unlikely to come from the Wall Street $700 billion rescue fund.  And further stated, “I don’t think we have the votes to do that now.”  The White House called the timing of his comments “interesting” what with the congressional hearings due to start Thursday.

What does that mean for GM, Chrysler, and Ford?  Well, we should find out more come end of day Friday.  But it must send an ominous message to the automakers that Congress may not be willing to part with the Wall Street funds for the automakers’ benefit.  Or will Harry Reid and other congressional leaders divert funds from current programs to aid the automakers.  My hope for the taxpayers’ benefit is that Congress just says NO!  You make products that just don’t sell and compete with Honda and Toyota, the cost to make your vehicles is reported to be about $1500 more to make than Honda and Toyota, you pay your workers including benefits almost twice as much as Honda and Toyota pay their American workers.  And this is a free enterprise economy.  Figure out a way to compete or go bye-bye.  That is the way it works, fellas.

Jeff Polhill

Excerpt from article in the East Valley Tribune newspaper by Julie Hirschfeld Davis and Tom Krisher of the Associated Press, December 3, 2008

Chrysler LLC  and General Motors reported that they need $7 billion and $4 billion cash infusions respectively by year end just to stay afloat.  GM needs the $4 billion as a first installment of what may be as much as $18 billion to weather what may be worsening economic storms.  GM Chief Operating Officer Fritz Henderson put it this way, “Absent support, frankly, the company just can’t fund its operations.”  Ford Motor Co, bless its heart, said that they have enough cash to make it through 2009, but it, too,  is still coming to Congress Thursday with Chrysler and GM asking for a handout.

OK, taxpayers, here is what we will be bailing out with what now appears to be a $34 billion bill: “U.S. light vehicle sales at General Motors and Chrysler plunged more than 40 percent in November, while Ford’s sales dropped 31 percent.”  And both GM and Chrysler say they will be out of cash by year end!  That looks like bankruptcy to me, maybe a full bankruptcy filing or a reorganization at the very least.

Here’s what the automakers pledge to do if they get a federal lifeline: layoff workers, get rid of some of their car lines (presumably those lines that are money losers), cut executive pay and/or cut or cancel executive bonuses. Chrysler’s Bob Nardelli and GM’s Rick Wagoner both said they would work for $1 a year - Nardelli already is - and along with Ford’s Alan Mulally are driving to Washington D.C. for Thursday and Friday meetings with Congress in fuel-efficient hybrid cars.  Ford and GM also disclosed they would sell their corporate aircraft.

What will Congress do?  Democratic leaders have said that they might be inclined to call Congress back in session next week to pass a bailout - but only if the automakers can produce reasonable plans to stay viable.  My thought is what is viable and how long will it take.  The “Big Three” have been losing money and depleting cash in record numbers for many quarters, and sales continue to not only stagnate but drop each quarter despite lots of incentives to induce new buyers.  Take into account that all auto sales are down, the recession (as of Monday declared a recession since 12/07 - is that a suprise to anyone?), loss of personal income, jobs and homes, can we really believe that the “Big Three”, especially Chrysler and General Motors, will be able to make it back with $34 billion?  Maybe Ford can slow the cash deficits for a time with a cash infusion, but Chrysler and GM are basically bankrupt and out of business now.  All three automakers have counted on SUV and truck sales for way too long, and have failed to trim their lines and retool and make vehicles that people will buy in good times.  A bailout, in my opinion, and hopefully I am wrong, is just prolonging the problem and $34 billion more down the drain, and a taxpayer burden that we just don’t need.

And potentially what do the taxpayers get out of this: according to the “Big Three’s” plans the government gets a stake in the companies that might allow us to share in future profits if they recover.

Save me the future profits, we already have a stake in too many companies and more to come from the $700 billion bailout Congress approved.

In Sunday’s 11/23 Mesa Tribune Newspaper,  Bill Steigerwald had an excellent commentary on whether the “Big 3″ US automakers deserve to be bailed out.  He did an interview with Dan Ikenson, the associate director of the Cato Institute’s Center for Trade Policy Studies.  The following is an excerpt of the article.

Does the auto industry deserve a bailout?  Ikenson answered with an emphatic “no.”  “They definitely do not deserve a bailout.  Taxpayers, first of all, should never be on the hook to bail out private companies that have made terrible decisions time and again.  And that’s what describes the Big Three: They’ve made bad decisions with respect to the products and they’ve made bad decisions with respect to their labor relations and the capitulations to the unions over the years that have really landed them with an uneconomic cost structure that makes it virtually impossible for them to compete going forward.”

As far as what is the worst thing the auto industry has done to put itself in the fix they are in, Ikenson replied, “Well, I don’t know how to rank them, in particular.  But two things strike me as particularly problematic.  On the product side, management demonstrated an egregious failure of leadership by never envisioning the day when SUVS and big trucks would fall out of favor. … The other problem is they agreed to these ridiculous work rules.  At GM, you can’t really lay off a worker and therefore reduce costs commensurately.  Ikenson went on to say that a laid-off worker still receives 90-95% of their pay not to work throughout the contract period.  Doesn’t this sound like farmers being paid by the government not to farm their land.

When asked if there was anything the “Big 3″ could do to right the ship, Ikenson replied, “I don’t know if there is anything they can do in the short run.  If they are going to ask the government to do anything, they should ask it to make sure that the unions don’t get violent when the Big Three tell them they are severing their contracts. … You can’t pay people not to work.  The average compensation at GM is $75 an hour; at Toyota it’s $47 an hour.  If that fundamental issue is not addressed, there’s no point in thinking much further into the future.  There’s just no way they are going to compete.”  Ikenson thinks the $25 billion bailout would be “a complete waste of money” that doesn’t cure the problems.

Ikenson also answered the question of why it’s OK to bailout Wall Street but not GM or Ford Motor Co.  He stated, “My easy answer to that is that it wasn’t OK to bail out the insurance giant (AIG) and the financial firms and the banks.  I was opposed to that, as were my colleagues.   Even though Ikenson was not in favor of the Wall Street bailout he did put a distinction on why it would be more important to bail out financial institutions than the auto industry.  He feels the country could get along without the auto industry, but he thinks “… we need access to credit and I think that we need banks.  So in that regard I think that industry is more important to us than the auto industry.”

Of course we are reading and hearing daily about if the “Big 3″ go, there would be an economic catastrophe: millions of jobs lost, not only with the automakers but with the suppliers and related jobs.  Ikenson answers this argument, which he calls “massive hyperbole.”  He disagrees that if one of the “BigThree” goes, all will go.  This takes me back to my Viet Nam days and our Government’s assertion that if South Viet Nam goes then all of Southeast Asia will fall to Communism, which simply didn’t happen.  Ikenson asserts that “If one of them goes down, yes, some of the parts suppliers that supply one of them exclusively, GM for example, will be in trouble if GM goes down.  But the parts suppliers that supply Ford and Chrysler will suddenly see their orders increase.  So I don’t buy the linkage that lands us in this situation where we lose 3 million jobs.”  Ikenson concedes there will be some job loss and economic pain, but … “this is an economic recession that we’re entering.  That’s what happens when economies recede.  Congress, the president, can not insulate every American from every form of pain. … If the government stays out, this will be sorted out.  There will be some pain but the pain will be more short-lived and the solutions will be determined more quickly.”

Asked what Ikenson thought the government would do, he ventured, “They’re going to want to do something, and in my view there will likely be a bailout.  But I wouldn’t call it a bailout.  It’s not a bailout. It’s simply tossing money down a pit.  The beneficiaries of that will be Nancy Pelosi, Harry Reid, the Michigan congressional delegation, Gov. Granholm.  They’ll be able to say, ‘Look, we went to bat for you.  Now do what you can with it.’  Ikenson feels that in a few months the auto industry will be back for another handout, and his hope is that then President Barack Obama will not … ‘capitulate to these left-wing labor politics and say, ‘No, we’re not doing this.  You were here four or five months ago.  We gave you $25 billion.  You just used it for operating expenses and prospects aren’t good.  Let’s introduce you to the bankruptcy process.’