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18 November 2008

A rant about the impending auto industry bailout. [More:]As a preface, let me say that I am not employed in an industry with any ties to the automotive industry. However, I am a blue collar factory worker at a large factory. I do not belong to a labor union.

When I read about the current situation in the American auto industry, I have conflicting feelings. I do not know what the answer is. I look at our current downturn with it's related fuel prices, and I wonder how it can hurt the American industry to such a large degree, but the foreign makers to a lesser degree. Yes, the profit margins will narrow for the foreign car makers, but they don't appear to be on the brink of bankruptcy.

Inevitably when discussing this issue there is mention of the "gold plated" benefits packages and high wages of the American auto workers. And here is where I start having my conflicts. In the nearly 15 years I've been working for my company, my raises have nowhere near kept up with inflation. I've increased my income over the years by improving my job skills, but if I was still in my original job I'd be on a backwards treadmill. When I started, I didn't have to pay anything for health benefits, but now I'm on an 80/20 plan, and my copays have gone up to 4 times what they were when I started. So that puts me even further back with regards to my pay keeping up with inflation. With most middle class people in the same situation as I am, our buying power is lessening, and things like new automobiles become harder to afford. It's our buying power that is driving this economy, and not the 5% that make more than 250,000 dollars a year. Yet we still hear stories about the lazy auto workers with their fat pay. The fact is American workers are amongst the most productive in the world. I'd think paying our workers more would be a good thing.

One of the most common results I see from the various solutions proposed from the outright bailout, to the companies filing bankruptcy, is that the workers contracts need to be renegotiated to reduce pay and benefits, and to reduce current retiree benefits. Now I'll be the first one to agree that the labor unions haven't grown with the times, and from what I've heard of the labor contracts regarding work rules etc. is that they are incredibly complex and byzantine in nature, but when you start talking about cutting pay and benefits to workers who are supposed to be buying those products, then I think we're regressing in this nation.

I know that there are suggestions that this new administration will have to put things like health care on the back burner while it wrestles with the current economic and international crises. I happen to think a health care plan has to be a part of the solution to the financial crisis, and I don't know why industry isn't begging congress for answers on that the same way they are begging for money to run their companies. Not to mention how it might help the federal budget if health care costs could be reigned in.

I can't help but think that there is huge mismanagement in the American auto companies. Companies based in Europe, even though they have factories here, remain competitive on the world market. They must have missed the boat somehow. It was the same thing in the late 70's and early 80's when the Japanese auto makers got their foothold on our market.

In the end, even if the companies go completely out of business, I can't see that having such a huge effect on jobs in this country. The "big three" auto makers sell a lot of cars, and the demand will still be there for them. Various parts of the companies have value, and could be purchased and operated by someone else. I don't see where the production will come from to fill the void if they all shut their doors. It's a big complicated confusing mess. This nowhere near touches on everything I think about this mess, but it's nice to get it off my mind just the same.
If car sales have been in steep decline for 12 months I don't understand why these companies didn't, y'know, slow down or stop production.

Ultimately the manufacture and sale of 12+ million cars per year in just one country is an unsustainable way of life, and I hope someone somewhere learns a god damn thing from this debacle, no matter what your government decides to do.

"Guy, I was just thinking: maybe we don't need this many cars" would be a good place to start.
posted by loiseau 18 November | 22:15
I think I generally agree with Brad DeLong that the auto companies should go into bankruptcy with the promise of federal government debtor-in-possession financing. The massive debt-to-equity conversion will give them a real chance to survive and operations won't be interrupted.

A bankruptcy w/ gov't DIP is the easiest solution by far, which is why I think it'll happen (though perhaps they won't call it bankruptcy). A straight bailout that doesn't cram down bondholders doesn't seem viable to me.

Various parts of the companies have value, and could be purchased and operated by someone else.

I'd like to see a break up as well. Or something more creative than a huge bankruptcy or bailout. I tried to think through a process, but it gets really complicated really fast. The best I could come up with is a government-sponsored reorganization where the companies go bankrupt and liquidate. New buyers would be invited to submit business plans/purchase offers and the most viable/attractive plans would qualify for government-sponsored loans and/or loan guarantees. Since operations will cease for some time, the government would also provide direct aid to displaced workers, over and above normal unemployment benefits. The various pension plans (and the funding that goes along with them) would probably be taken over by the PBGC, perhaps with special oversight.

Their are a ton of problems, of course. The most likely new buyers in this environment are going to be private equity funds. The unions would hate that. Foreign automakers are tied up with their own problems, I think, and I doubt the US gov't would be keen to facilitate a sale to foreigners anyway. That also rules out the sovereign wealth funds. There just isn't a lot of money out there seeking risky assets at the moment.

And it'd be massively expensive for taxpayers, of course. But if we're going to be spending tons of government money to support green industry, this might be a way to start that in a massive way.
posted by mullacc 18 November | 22:21
I agree with you loiseau. You'd think it would be easy to just turn off the tap of cars coming out, but then they have to worry about what that looks like as far as confidence of shareholders, and of people's confidence in the economy. The sad part is that the whole American economy is based on consumption, with people taking their cuts all along the way. I do wonder what a sustainable economy looks like in the future.

mullac, my own thinking on the matter is that smaller companies can be more agile, and the loss of one or two doesn't tank the whole shebang. The big 3 might have to become the medium 8 or something. Large companies will talk of economies of scale, but eventually that has to have diminishing returns, or be overshadowed by something else. You'd think that more competition would be better, but the strong competition from the Japanese makers hasn't seemed to help. Perhaps you're right and the government can leverage this into the investment of a green future economy. Good thoughts.
posted by eekacat 18 November | 22:49
Why did the automakers assume that gas would always be $1.20 a gallon? I can understand thinking that the credit would always flow freely; the crisis we're experiencing now is highly atypical. But if they're old enough to be managers, they lived through the gas problems of the 1970s, through the rationing and the embargo. The political situation in the Middle East hasn't improved since then; in fact, it's gotten much worse.

So the sales of your product depend to some extent on a fuel which is drawn from a volatile area of the world and has experienced radical price spikes in the past. You know this. But you don't do anything about it.

I feel terrible about the UAW workers and, like eekacat, have no use for their being scapegoated in the media, but I don't have any sympathy for the management. They've had three decades to respond to their competitors and to plan for a future that might not feature gasoline that's cheaper than milk. They failed at both tasks.

posted by jason's_planet 18 November | 22:56
"and the loss of one or two doesn't tank the whole shebang" Actually that is the real fear out here in Motown. Numerous companies of more than 50,000 employees serve the just in time stock on the automakers. Shut down GM for a few weeks to restructure and these companies would have to lay off huge numbers of people and they would be stuck carrying useless stock.

But that is minor compared to the problems with the tier two and tertiary suppliers. Draw a ten mile circle around where I sit and there are dozens of companies that employee 100-300 people who make auto parts and then there are dozens more that employ a few 10's of people who support the auto parts makers.

The small firms don't have the cash to ride out much of a stoppage and with already tight credit conditions I doubt they could raise new cash. If those small firms go down people lose jobs but the industry also loses suppliers.

I know a guy who works for a firm that builds the roof panels that line the inside of minivans. Their biggest client is Chrysler but they also supply Honda and VW. If Chrysler goes down then Honda and VW will feel the pain within as little as 6 hours.

And the thousands of truckers who move the parts and the cars are often "owner operators". They finance their own trucks.

Something needs to happen but a big bang could really tip the economy into deep recession.
posted by arse_hat 18 November | 23:44
arse_hat, you're taking my comment completely out of context. As it is now, yes one or two disappearing would be disastrous. However I was alluding to the big three breaking up into smaller companies. If it was 8 or 10 companies, then one or two disappearing wouldn't have the same effect. As it is now all these suppliers providing parts for cars that the car companies can't sell is completely unsustainable.

Naturally it's because the auto workers have too good benefits and are paid too much.
posted by eekacat 19 November | 00:09
loiseau, I live in Janesville, one place that's been in the news as having its GM plant shut down. It was running three shifts around 2006, but most of 2007 just two, and this year -- following the last round of employee buyouts, which reduced the workforce by about 1/5 or so -- just one shift. So GM has been trying to ratchet down the inventory.

The trouble is you have a lot of fixed and sunk costs, like debt service on the $175 million revamp of the plant they did for the newest GMC truck chassis. They can't just unload that tomorrow.

Of course they should never have gotten to this point in the first place. I thought it was hilarious that Krauthammer's column repeated the canard that Americans prefer big, honking SUVs to smaller cars. Oh, is that why Toyota now outsells GM?

Anyways. My city is screwed no matter what happens, because there's no way we'll end up with an open auto plant after the truck line shuts down two days before Christmas. But there are a lot of other towns out there I hope don't get screwed.

I don't think a bailout that preserves the status quo is really the best idea, but I find the "Let 'em fail" economic Darwinism commentary appalling. You're not just talking fat cat investors, you're talking families, and not all of the people dependent on the auto industry are making UAW-level wages and bennies.

We expect to lose 1200 GM jobs, but close to 9000 jobs in the county as suppliers and other businesses close.
posted by stilicho 19 November | 00:19
I liked this article in CNN money - quite close to my impression.

If car sales have been in steep decline for 12 months I don't understand why these companies didn't, y'know, slow down or stop production.

Except, you know, the union won't let them reduce workload OR layoff workers. So they have to keep busy. Might as well keep up production...

Anyway, it's not that hard to move 12 million cars. Toyota + Honda can probably move way more than that, worldwide. The hard part is in moving 12 million cars that suck. Now make them BIG, HUGE cars that suck. BIG HUGE cars that suck that only Americans (due to an odd combination of strong rural cultural influence, lots of [credit bubble originated] money and subsidized cheap gas) are interested in.

And presto, the best way to solve the problem - instead of actually researching how to make cars that don't suck, or at least smaller cars that suck but at least can sell somewhere else, put all the money in prime time TV ads showing rednecks in pick-ups to the tune of "this is oooooour countryyyy" (Yeah, you're American! you like trucks, it's in your blood, don't fight it! Now go grow a mullet!)

No doubt administrative incompetence is the main player here. I do feel a slight pity for Ford, though - they were starting to get their act together, but if the other two go under, they will probably be collateral damage.

As for the UAW workers being scapegoated - The union certainly helped drive these companies down - not much on the salaries/benefits (the estimated "benefits" is about 1.5k per vehicle I'd bet Japanese/European spend comparably to that in payroll taxes, and the salaries aren't really different), but on the restrictions they impose (like the example I gave above), and all the politics (mandating increases by seniority instead of merit, for example).

However, that is the union (which is generally run by a small cabal of angry slogan-shouting proto-politicians), not the workers (who generally don't care about any of this politics and just want to go on with their jobs). Painting eventual 2 million laid off employees as "payback" for the union policies is just like a terrorist excusing schoolbus bombings on the attacked country's politics.

If any money goes into this mess, I'd rather see it going as severance/unemployment packages directly to the employees (not through the union), but I don't mind letting the "big 3" (or 2) be liquidated. Or some quick bankrupt->liquidate->clearup->shotgun-wedding to some big Japanese conglomerate (like was done b/w WaMu and JPMorgan).
posted by qvantamon 19 November | 00:42
ack, bad analogy/wording with the terrorist thingy (somehow implies I am assigning someone as actor here, I was trying to make the analogy on the "recipients deserving" part only). My bad.

Just another correction, that Ford and GM do actually make half-decent cars for the international market (see Ford's european compacts or Opel's). They just don't make or market these cars here.
posted by qvantamon 19 November | 01:25
"However I was alluding to the big three breaking up into smaller companies." I read that a different way eekacat, sorry.
posted by arse_hat 19 November | 01:33
All of those congressional committee members, both House and Senate, who are now excoriating the auto execs; What are they driving, and what have they been driving since the late 70's (when Carter tried to steer the country towards better use of energy and was ridiculed out of office by the Republicans)?

Just curious.
posted by danf 19 November | 10:43
A funny thing happened on the way to city hall || Late night snack!