Wednesday, December 03, 2008

The Auto Bailout: $34 Billion December Edition

WE'VE MOVED! Democratic Convention Watch is now at

Some time today, the Big Three auto executives will arrive in DC for the Thursday meetings on the Hill. They're arriving today because they drove. Actual cars. SNL did a nice video on them trying to come by car, but travel appeared to be trouble free. Mulally is driving a Ford Escape hybrid, Wagoner a Chevrolet Malibu hybrid. No word on Nardeli's vehicle.

The last time we polled on bailing out the auto industry, about 60% of you said yes, but we know some things now that we didn't a few days ago, so perhaps you've changed your mind.

First, auto sales numbers for November are out. Ford sales fell by 31%, GM fell by 41%, and Chrysler fell by 47%. Overall US auto sales fell 37% across all brands. Eek! The automakers will likely contend that this shows pent-up demand, and therefore, if they can muddle through, once the credit markets "un-seize" the buyers will be back. HHHMMMNNN.

  • Ford says that they need $9 billion, but may not use it, as they believe they are solvent through the end of CY 2009, and will reach profitability by 2011. You can read their submission to the Senate Banking Committee here.
  • GM is asking for $18 billion, and says it may not have enough cash to make it until the end of the year.
  • Chrysler says it need $7 billion or it also may collapse this month. Their proposal.
Some things to consider in terms of whether you personally support a bailout. First, while the base salary paid to Big Three (union) auto workers is only slightly higher than that paid to non-union workers at auto plants in the US but owned by Toyota, Honda, etc., the total cost per hour are substantially higher. Average hourly wage is about $26 compared to $24, but total is about $70/hour to slightly under $45/hour. You may feel that decreasing this discrepancy must be a function of the bailout, or you may feel that the union negotiations were accomplished in a different time, and therefore must be honoured.

Consider this: the jobs bank. It was created in the early 80's for workers displaced by robots. They would be offered jobs elsewhere within their automaker's facilities, but if none was available, they'd get almost full wages UNTIL A JOB WAS FOUND. There are currently 3000 auto workers in the jobs bank, although the program was scaled back so that people can only be paid for two solid years, instead of indefinitely. Should shedding the jobs bank be a requirement for bailout?

Another thing to consider is the dealerships.
You know they are already in trouble. There are way too many of them for the Big Three to support with auto sales (especially at current levels). More dealers mean fewer sales per dealer. For example, Toyota has fewer than 2000 dealers in the US, and on average, sold about 1600 cars/trucks per dealer in 2007. Ford, on the other hand has almost 4000 dealers, and averaged about 235 units each in 2007.

However, due to state franchise laws, the Big Three cannot quite "shed" their dealers without buying them out. And if the dealer does not want to be bought out, the auto maker cannot make them close. Allowing the Big Three to shed their dealers is bad for the dealers, but potentially important as part of necessary corporate restructuring.

Remember one other thing when you watch the hearings: the Senators asking questions have certain vested interests in the outcome. Not NATIONAL concerns, LOCAL concerns. Southern members of Congress may have a vested interest in supporting the non-union car manufacturers in their states, many brought there with tax incentives.

So what do you think? You can check multiple selections.