2008–2010 automotive industry crisis

The U.S.-centric automotive industry crisis of 2008 is a global financial crisis in the auto industry during the latter half of 2008. The crisis is primarily felt in the United States' automobile manufacturing industry but other automobile manufacturers, particularly those in Europe and Japan, are also suffering from the crisis. The automotive sector was first weakened by the substantially more expensive automobile fuels linked to the 2003-2008 oil crisis which, in particular, caused customers to turn away from large sport utility vehicles (SUVs), the main market of the "Big Three" (General Motors, Ford, and Chrysler). In 2008, the situation became critical because of the global financial crisis and the related credit crunch, pricing pressures on raw materials. In certain countries, particularly the United States, the Big Three have been under heavy criticism since they continously based their respective market attacks on fuel inefficient SUVs, despite the increase in the price of oil. Accordingly, they suffered both from relatively cheap models available from abroad, particularly from Japan and to some extent from Europe, and from so-called transplants, i.e. foreign cars manufactured or assembled in the United States.

General background

Claims have been made that the crisis has occurred mainly as a result of the bad policies of the Big Three U.S. automakers, since Asian companies that manufacture automobiles in the U.S. are not experiencing similar problems. A December 22, 2008 New York Times article stated, "For the most part, the so-called auto transplants — foreign-owned car companies with major operations in the United States — have deep pockets and ample credit, and they are not facing potential bankruptcy like General Motors and Chrysler." In 2006, Consumer Reports reported that all 10 of the cars that it considered to be the 10 best were built by Japanese companies. While Michigan lost 83,000 Big Three auto manufacturing jobs between 1993 and 2008, more than 91,000 new auto manufacturing jobs were created in Alabama, Tennessee, Kentucky, Georgia, North Carolina, South Carolina, Virginia and Texas during that same time period. A "Jobs Bank" was negotiated with the UAW union in 1984, and in 2005 it paid 12,000 workers to show up daily and stay for their full shift, even though there was no work for them to do.

History and context

The "Big Three" market share has declined from 70% in 1998 to 53% in 2008. They have lost market share to imports and "transplants" (cars made in U.S. factories owned by foreign makers).

Facing steady financial losses, the Big Three have closed many factories and drastically cut employment, especially in Michigan. GM spun off many of its employees in certain divisions into independent companies, including American Axle in 1994 and Delphi in 1999. Ford spun off Visteon in 2000. The spin-offs and other parts makers have shared Detroit's downturns, as have the U.S.-owned plants in Canada. Altogether the parts makers employ 416,000 people in the U.S. and Canada. General Motors alone is estimated to have lost $51 billion in the three years before the 2008 financial crisis began.

The Big Three are distinguished not just by their size and geography, but also by their business model. The majority of their operations are unionized (United Auto Workers and Canadian Auto Workers), resulting in higher labor costs than other multinational automakers, including those with plants in North America. The 2005 Harbour Report estimated that Toyota's lead in labor productivity amounted to a cost advantage of $350 US to $500 US per vehicle over North American manufacturers. The UAW agreed to a two-tier wage in recent 2007 negotiations, something which the CAW has so far refused. Delphi, which was spun off from GM in 1999, filed for Chapter 11 bankruptcy after the UAW refused to cut their wages and GM is expected to be liable for a $7 billion shortfall.

In order to improve profits, the Detroit automakers made deals with unions to reduce wages while making pension and health care commitments. GM, for instance, at one time picked up the entire cost of funding health insurance premiums of its employees, their survivors and GM retirees, as the US did not have a universal health care system. With most of these plans chronically underfunded in the late 1990s, the companies have tried to provide retirement packages to older workers, and made agreements with the UAW to transfer pension obligations to an independent trust. Nonetheless, non-unionized Japanese automakers, with their younger American workforces (and far fewer American retirees) will continue to enjoy a cost advantage.

Despite the history of their marques, many long running cars have been discontinued or relegated to fleet sales, as the Big Three shifted away resources from midsize and compact cars to lead the "SUV Craze". Since the late 1990s, over half of their profits have come from light trucks and SUVs, while they often could not break even on compact cars unless the buyer chose options. Ron Harbour, in releasing the Oliver Wyman’s 2008 Harbour Report, stated that many small “econoboxes” of the past acted as loss leaders, but were designed to bring customers to the brand in the hopes they would stay loyal and move up to more profitable models. The report estimated that an automaker needed to sell ten small cars to make the same profit as one big vehicle, and that they had to produce small and mid-size cars profitably to succeed, something that the Detroit three have not yet done. SUV sales peaked in 1999 but have not returned to that level ever since, due to high gas prices. The Big Three have suffered from perceived inferior initial quality and reliability compared to their Japanese counterparts, which has been difficult to overcome. They have also been slow to bring new vehicles to the market, while the Japanese are also considered the leader at producing smaller, fuel-efficient cars.

Falling sales and market share have resulted in the Big Three's plants operating below capacity (GM's plants were at 85% in November 2005, well below the plants of its Asian competitors), leading to production cuts, plant closures and layoffs. They have been relying heavily on considerable incentives and subsidized leases to sell vehicles. which was crucial to keeping the plants running, which in turn drove a significant portion of the Michigan economy. These promotional strategies, including rebates, employee pricing and 0% financing, have boosted sales but have also cut into profits. More importantly such promotions drain the automaker's cash reserves in the near term while in the long run the company suffers the stigma of selling vehicles because of low price instead of technical merit. Automakers have since been trying to scale back on incentives and raise prices, while cutting production. The subprime mortgage crisis and high oil prices in 2008 resulting in the plummeting popularity of best-selling trucks and SUVs, perhaps forcing automakers to continue offering heavy incentives to help clear excess inventory.

In 2008, with high oil prices and a declining US economy due to the subprime mortgage crisis, the Big Three are rethinking their strategy, idling or converting light truck plants to make small cars. Due to the declining residual value of their vehicles, Chrysler and GM have stopped offering leases on the majority of their vehicles.

On September 30, 2008, the first automaker loan package, for $25 billion, was signed into law. The bill sets aside $7.5 billion in taxpayer funds needed to guarantee $25 billion in low-interest loans to help US automakers produce more fuel-efficient cars and trucks.

The crisis has led to warnings of massive unemployment and economic recession if not contained, and Democrats in Congress, supported by President-Elect Barack Obama have called for a "bridge loan" to assist the Big Three. On October 13, 2008, Obama said that he wanted Congress to double its guaranteed loans to the U.S. automobile industry from $25 billion to $50 billion.

Effects of environmental expectations and changing product demand

Global warming and related concerns regarding carbon emissions have heightened sensitivity to gas mileage standards and environmental protection world-wide. In a 2007 edition of his book An Inconvenient Truth, Al Gore criticized the Big Three. "They keep trying to sell large, inefficient gas-guzzlers even though fewer and fewer people are buying them." For example, Japan requires autos to achieve 45 miles per US gallon (5.2 L/100 km; 54 mpg_‑imp) of gasoline and China requires 35 mpg_‑US (6.7 L/100 km; 42 mpg_‑imp). The European Union requires 52 mpg_‑US (4.5 L/100 km; 62 mpg_‑imp) by 2012. By comparison, U.S. autos are required to achieve only 25 mpg_‑US (9.4 L/100 km; 30 mpg_‑imp) presently. Other nations have adopted standards that are increasing mpg requirements in the future. When California raised its own standards, the auto companies sued.

The Big Three received funding for a $25 billion government loan during October 2008 to help them re-tool their factories to meet new fuel-efficiency standards of at least 35 mpg_‑US (6.7 L/100 km; 42 mpg_‑imp) by 2020. The $25 billion in loans from the Department of Energy to the auto manufacturers were actually authorized by Congress early this year but not funded. Automakers could use these loans to "equip or establish facilities to produce ‘advanced technology vehicles’ that would meet certain emissions and fuel economy standards; component suppliers could borrow funds to retool or build facilities to produce parts for such vehicles."

Effect of 2008 oil price shock and economic crisis

In 2008 a series of damaging blows drove the Big Three to the verge of bankruptcy. Part of the cause was very high labor costs (much higher than the foreign plants in the U.S.). The Big Three had in recent years manufactured SUVs and large pickups, which were much more profitable than smaller, fuel-efficient cars. Manufacturers made 15% to 20% profit margin on an SUV, compared to 3% or less on a car. When gasoline prices rose above $4 per gallon in 2008, Americans stopped buying the big vehicles and Big Three sales and profitability plummeted. Robert Samuelson has advocated a more consistent energy policy, arguing "wild swings between low and high fuel prices have crippled the U.S. industry by erratically shifting buyer preferences -- to and from SUVs."

The financial crisis played a role, as GM was unable to obtain credit to buy Chrysler. Sales fell further as consumer credit tightened and it became much harder for people with average or poor credit to obtain a bank loan to buy a car. During 2007, nearly 2 million new U.S. cars were purchased with funds from home equity loans. Such funding was considerably less available in 2008. In addition, stock prices fell as shareholders worried about bankruptcy; GM's shares fell below 1946 levels.

The annual capacity of the industry is 17 million cars; sales in 2008 dropped to an annual rate of only 10 million vehicles made in the U.S. and Canada. All the automakers and their vast supplier network account for 2.3% of the U.S. economic output, down from 3.1% in 2006 and as much as 5% in the 1990s. Some 20% of the entire national manufacturing sector is still tied to the automobile industry. The transplants can make a profit when sales are at least 12 million; the Big Three when sales are at least 15 million.

The crisis has affected auto companies around the world, with large sales decreases experienced by all.

As of December 19, 2008, oil prices had fallen to $33.87 per barrel, but the automobile crisis was still going on.

Causes

There are numerous causes for the automotive industry crisis. Prior to the crisis, automakers have been losing market share to asian companies because of poor design, high costs, and image problems. Also, all three carmakers sport many more brands than their competitiors and have a more extensive dealer network, all of which added to the industry's costs. The big three also had much better benefits than their competitors; counting benefits, a UAW worker made $74/hour while a worker at Toyota made only $44/hour. In addition, the automakers made many large SUV's, which were greatly impacted by the 2000s energy crisis.

Crisis in United States of America

There has been intense debate regarding the content and approach to a massive industry bailout and restructuring. Such a bailout may involve financial and other concessions from a variety of stakeholders, such as management, employees, dealers, suppliers, stockholders and bondholders. A substantive part of the debate centers on structural differences between the Big Three and the "transplants" that drive major cost differences.

Political demands

Democratic party leaders Nancy Pelosi and Harry Reid sent a letter to the CEO's of the Big Three automakers calling on these leaders to present by December 2 a "credible restructuring plan" involving "significant sacrifices and major changes to [the] way of doing business," to qualify for further government assistance. The letter includes a variety of principles and requirements, including a situation assessment, forecasts under various assumptions, taxpayer protection, transparent reporting to an oversight body, dividend and executive pay restrictions, and approach to covering healthcare and pension obligations.

Industry labor statistics

The total number of Big Three employees, parts-supplier employees and car-dealer employees totals approximately 1.6 million, according to the Alliance for American Manufacturing. All auto-related industries and after-market service businesses employ approximately 3.1 million people in the United States. The U.S. Bureau of Labor Statistics breaks down the workers into the following segments, as of September 2008: Parts manufacturing-504,000; Repair operations-864,000; Wholesale operations-340,000; Dealer operations-1.2 million; and Manufacturing-114,000. GM directly employs 123,000 in all of North America. An estimated two million people rely on the industry for health care and 775,000 retirees collect auto-industry pensions.

Hourly wages and benefits

Gary Burtless of the Brookings Institution argued that hourly wages are similar between the Big Three and the transplants. "The basic hourly wage received by a UAW worker in a Big Three plant is close to that received by a Toyota or Honda worker in a U.S. plant. The UAW-negotiated wage was roughly $28 an hour in 2007. For new workers, the hourly wage was lower at $14 an hour; senior workers made more money. The major cost difference between UAW members and employees in foreign-nameplate factories in the U.S. comes in fringe benefits. The UAW has been one of the more successful American unions in fighting for generous pensions and health benefits for its members."

Dan Ikenson of the Cato Institute argued that "total compensation is the cost of labor to the companies, and for GM it is about $73 per hour and for Toyota about $48. The average cost differential between the Big Three and all the foreign nameplate companies is about $30 per hour. That's huge." His computation includes all labor-related costs (e.g.., wages, healthcare, and pension--for both current workers and retirees.)

Andrew Sorkin of the New York Times indicated that GM and Chrysler pay $10-20 more per hour than transplants; this was vigorously disputed by David Cole of the Center for Automotive Research.

A NY Times article states that G.M. workers "are paid about $10 to $20 an hour more than people who do the same job building cars in the United States for foreign makers like Toyota. At G.M., as of 2007, the average worker was paid about $70 an hour, including health care and pension costs."

Average annual wages for production workers at the Big Three were $67,480 in 2007, and $81,940 for skilled workers. In Canada, GM’s 2008 average labor costs (including both wages and benefits) were $69 per hour, and Toyota's at $48 per hour, with similar productivity.

According to the Heritage Foundation, the ratio of retirees to workers varies across the Big Three. For each active worker at GM, there were 3.8 retirees or dependents in 2006. At Chrysler, there were 2.0 and at Ford there were 1.6. This means the legacy labor cost burden for GM is significantly greater than its competitors.

Former Massachusetts Governor Mitt Romney wrote that the burden of a large retiree population receiving pension and healthcare benefits adds an average of $2,000 to the cost of each Big Three automobile. This places the Big Three at a significant competitive disadvantage relative to the transplants.

The Asian-owned companies' U.S. employees are mainly non-unionized; the Big Three are bound by contracts with the United Auto Workers union (UAW).

According to the UAW, labor cost represented 8.4% of the total cost of manufacturing and selling an automobile in 2006. "The vast majority of the costs of producing a vehicle and transporting it to a dealership and preparing it for sale – including design, engineering, marketing, raw materials, executive compensation and other costs – are not related to direct or indirect manufacturing labor."

Jobs bank costs

The Detroit News published a story in 2005 on how the Big Three U.S. automakers paid more than 12,000 employees (who were idled as a result of their jobs being unnecessary due to technological progress or plant restructurings) their full salary and benefits in "jobs bank" programs, created to protect workers' salaries and discourage layoffs, as part of the automakers' contracts with the UAW. The program was established in the 1984 UAW labor contracts with the Big Three. The union's intent was to protect jobs via a plan to guarantee pay and benefits for union members whose jobs were extinguished by technological progress or plant restructurings. In most cases, workers are paid via the jobs bank only after exhausting government and company unemployment benefits. Some of those workers were placed in retraining where they were taught bicycle repair, home wiring, poker, and silk-flower arranging. Others were enrolled in community service initiatives. Others did not work.

Number of brands

GM has eight brands, while Toyota has only three. More brands require additional marketing and product development expenditures, which drives incremental costs relative to the competition. One analyst estimated that reducing GM brands from 8 to 3 would save $5 billion annually.

However, reducing the number of brands requires closing or consolidation of dealerships, which due to state franchise laws is very expensive. For example, GM's retirement of the Oldsmobile brand cost nearly $2 billion.

Number and control of dealerships

GM and Chrysler have nearly 10,000 dealerships between them, employing an estimated 500,000 people. GM has many more, smaller dealerships spread across its eight brands than Toyota. Dealerships are protected by state laws that make them difficult to close without paying large fees. This makes dealership reform challenging without bankruptcy protection.

Changes to management and board

Critics have argued for the removal of General Motors' senior management. Such removal is typical in a bailout.

Mergers

One or more of the Big Three could merge, enabling cost savings and focusing on the most profitable brands. However, the UAW and CAW have opposed this move, as it would certainly involve layoffs.

Recapitalization

GM is carrying a $43 billion debt burden, with nearly $3 billion per year in interest costs. If bond holders have their stakes swapped for common stock (equity) which pays no interest, GM's debt and interest burden would be substantially reduced. This would further dilute the value of existing common stock shares, which have declined significantly already. Such recapitalization is typically addressed through bankruptcy.

Claims that failure would be harmful to economy

The auto industry is a key component of the U.S. economy. Economists used 2007-2008 data to build econometric estimates of what a shutdown would cost in summer 2008. Their goal was to set benchmarks to help policy makers understand the impact of bankruptcies. Their estimates were indeed being widely discussed among policy makers in late 2008. Closing the Big Three would mean loss of 240,000 very highly-paid jobs at the Big Three, a loss of 980,000 highly-paid jobs at the suppliers and local dealers, plus the loss of 1.7 million additional jobs throughout the economy—a total loss of 3 million jobs.

Estimates are that a Big Three shutdown would cause a decline in personal income of $151 billion the first year, and $398 billion over three years. The federal, state and local governments would lose tax revenue, and instead spend on welfare programs a total of $156 billion over three years.

Economist David Wyss of S&P has argued that if GM and Chrysler disappear, there could also be an increase of about 1 million imported cars every year, which would remove about $25 billion from the U.S. economy. That would reduce GDP by 0.2 percentage points annually--excluding the impact of lost jobs and wages. In other words, U.S. demand for autos would be met by cars manufactured by foreign workers.

Claims that failure would not be harmful to economy

In a November 19, 2008 CNBC article, Jordan Kimmel, a fund manager at Magnet Investing in Randolph, New Jersey, said that if the Big Three automakers were liquidated or completely shut down, foreign companies such as Honda and Toyota would open up new manufacturing plants in the U.S., and there would be no long term loss in employment or damage to the economy. Michael Schuman states in Time Magazine that although a giant corporation failing would be ugly, it is better than artificially keeping it alive without a prospect of improvement. He compares the possible collapse of the US automakers to the 1999 dismantling of the Daewoo Group.

Restructuring process alternatives

Industry experts, academics, and media outlets have made a variety of recommendations regarding reforming or restructuring the Big Three. Many of these include bankruptcy, a court-supervised method of reorganizing or shutting-down a company.

Bankruptcy background information

Corporations ideally improve their operations in an ongoing manner. However, if unable to pay their obligations, they may be forced into one of two types of bankruptcy:

• Chapter 11 bankruptcy - This form of bankruptcy (called restructuring) is commonly used to provide a window of opportunity for a corporation to renegotiate contracts, sell assets or component businesses for cash, obtain debt forgiveness, or otherwise reform itself as a viable business enterprise. If the stakeholders agree to terms in advance (called a pre-packaged bankruptcy), uncertainty and the period of time under bankruptcy court supervision is reduced.
• Chapter 7 bankruptcy - This form of bankruptcy is used to liquidate an enterprise and sell off the pieces, with the proceeds going to the debt holders.

Under both types of bankruptcy, the shareholders typically lose their investment and debt holders obtain control of the corporation. During November 2008, the debate involved whether a Chapter 11 filing would be beneficial or feasible.

Arguments in favor of Chapter 11 bankruptcy

In a November 19, 2008, editorial in Forbes, Blythe McGarvie said that bankruptcy would allow the automobile industry to become more competitive and sustainable, and cited the airline industry bankruptcy as an example.

Wharton finance professor Jeremy Siegel, author of the book "The Future for Investors," asserts that Chapter 11 bankruptcy would allow Detroit to reorganize but not cause the massive job losses feared by some. "Any bailout of the auto industry is really a bailout for the health benefits of the UAW. That's all it is."

Opponents of a bailout believe that the automakers' problems could be more efficiently resolved by a bankruptcy court with legal power to dissolve existing contracts, shedding costs, and debts that it can no longer afford. They suggested that a government "car czar" would be ineffective since their actions could be swayed by Washington politics.

Former Massachusetts Governor Mitt Romney, whose father George Romney was chairman of American Motors Corporation, has said that a bailout would only delay the inevitable bankruptcy filing. He suggested, however, that the government provide post-bankruptcy financing and guarantee vehicle warrantees.

Arguments against Chapter 11 bankruptcy

Critics of a Chapter 11 Bankruptcy as a restructuring process have argued that consumers would be unwilling to purchase a car from a bankrupt automaker, as the ability of the automaker to support the warranty is key to the purchase decision. Advocates have argued that the government or private lenders could establish a fund to enable warranty coverage.

GM argues that a bankruptcy would threaten jobs and the solvency of the U.S. federal governments Pension Benefit Guaranty Corporation (PBGC). PBGC Director has said: "GM has not been able to give us a straight answer about the funded status of their pension plan. We can't successfully monitor the situation if they are not responsive." GM's pension fund has enough money for current obligations, but a report issued by the a Deutsche Bank estimates that the pension may be $18 billion under-funded by the end of 2008.

Feasibility of a pre-packaged Chapter 11 bankruptcy

A "pre-packaged" Chapter 11 bankruptcy means that the key stakeholders have agreed in advance what will happen during the bankruptcy proceedings, which enables greater certainty regarding the outcome and less time spent in bankruptcy protection. Advocates have indicated this is preferable, while critics argue it is unlikely that all of the stakeholders could agree on terms while outside of bankruptcy.

Government facilitated sale of assets

The Brookings Institution advocated a government-facilitated solution in which Big Three assets are transferred or sold to other firms better able to deploy the plant and employee resources. "[The] most constructive role the government can play at this point is to provide a short-term infusion of capital with strict repayment rules that will essentially require the auto makers to sell off their assets to other, successful companies." The authors argued that the Big Three make automobiles that not enough Americans want to buy, which cannot be solved by a bankruptcy restructuring focused initially on cost-side considerations like wages and benefits.

Government facilitated restructuring

Economist and author Jeffrey Sachs has advocated a government and private industry partnership to transform the automotive industry, creating a "high mileage vehicle economy" based on hybrid and fuel cell cars. Loans would be provided immediately, with conditions. He advocates a U.S. strategy of automotive technological leadership, which would "dramatically improve energy and national security, climate security, and U.S. global competitiveness."

Arguments against government intervention

On November 24, 2008, libertarian Congressman Ron Paul (R-TX) wrote, "In bailing out failing companies, they are confiscating money from productive members of the economy and giving it to failing ones. By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market, is that both success and failure must be permitted to happen when they are earned. But instead with a bailout, the rewards are reversed – the proceeds from successful entities are given to failing ones. How this is supposed to be good for our economy is beyond me.... It won’t work. It can’t work... It is obvious to most Americans that we need to reject corporate cronyism, and allow the natural regulations and incentives of the free market to pick the winners and losers in our economy, not the whims of bureaucrats and politicians."

In a December 17, 2008 opinion column, economist Thomas Sowell said that there was no bailout for the horse and buggy industry 100 years ago when it was replaced by the automobile, and that the overall standard of living is higher when winners and losers are determined by customers instead of by politicians. He also blamed the decline of the Big Three on the economic policies of the "rust belt" states, and said that Japanese car companies preferred to build factories in other U.S. states that were not so hostile to businesses.

Federal Government bailout process and timeline

On November 19, 2008, there was a United States Senate hearing on the automotive crisis in the presence of the heads of Chrysler, Ford and General Motors. The auto manufacturers explained that they would need financial aid of $25 billion if they were to avoid bankruptcy. The Senate was divided on the issue. The Republican senators were unwilling to provide aid, some even suggesting that bankruptcy might be the best option as it would free manufacturers from the employment deals agreed with the unions. The Democrats, however, continued to insist that action needed to be taken quickly, in line with President Elect Obama's stance on the matter. Rick Wagoner, head of General Motors, estimated that there could be a loss of 3 million jobs within the first year if the auto industry failed. "This is all about a lot more than just Detroit. It's about saving the U.S. economy from a catastrophic collapse," he said.

At the November 19, 2008 hearing, Gary Ackerman (D-NY) said, "Maybe you can tell us what you're actually going to do to sell cars people want," and Michael Capuano (D-Mass) said, "My fear is you're going to take this money and continue the same stupid decisions you've made for 25 years."

On November 20, General Motors shares fell to the lowest price since the Great Depression as the chances of a bail-out diminished. Ford shares also fell drastically. The shares later recovered as there were rumors of bipartisan progress on some kind of a bailout.

A November 20, 2008 Detroit Free Press article said that the UAW was considering ending its jobs bank program as a condition for a federal bailout.

On December 2, 2008, the Big Three submitted revised plans to Congress which apparently included more drastic measures such as the lowering of executive pay, reducing the number of brands and refinancing company debt. It emerged that the total amount of the bailout requested had now risen to $34 billion. Painting an even more dramatic picture of what would happen if Congress did not respond quickly, Chrysler said it would need $7 billion by the end of the month just to keep running while GM asked for $4 billion immediately.

In an interview that was broadcast on NBC's Meet The Press on Sunday, December 7, 2008, President-elect Barack Obama said, "The last thing I want to see happen is for the auto industry to disappear, but I'm also concerned that we don't put $10 billion or $20 billion or $30 billion or whatever billion dollars into an industry, and then, six months to a year later, they come back hat in hand and say, `Give me more.'"

Congressional bailout bill

On December 9, 2008, negotiators who had been working into the early hours revealed the terms of an emerging deal between the White House and Congress under which a short-term $15 billion bailout for the Big Three would be overseen by a federal "car czar" or trustee. By December 10, it appeared the deal had been accepted in principle with only a few details to be ironed out. But it was still not clear whether the Senate would agree to this arrangement.

On December 10, 2008, the House Financial Services Committee released a copy of the proposed financial bailout package for GM, Ford, and Chrysler. The bill proposes the appointment of a 'car czar' to oversee automakers' restructuring efforts, and restricts executive bonuses. It prohibits executive golden parachute packages and requires automakers to sell or divest themselves of any privately owned or leased aircraft.

Congressional Democrats and the White House appeared to be inching toward agreement on about $15 billion in emergency loans for the embattled U.S. auto industry. Sources in both parties said the breakthrough on the long-stalled bailout came after House Speaker Nancy Pelosi bowed to President George Bush's demand that the aid come from a fund set aside for the production of plug-in hybrids. The CEOs of General Motors, Ford and Chrysler had sought $34 billion in loans. The lesser amount reportedly was meant to tide them over until Barack Obama assumes the presidency.

Senate rejects bailout

On December 11, the bill failed to pass, losing 52-35 on a Senate procedural vote. A statement from GM expressed its deep disappointment with the failure and said, "We will assess all of our options to continue our restructuring and to obtain the means to weather the current economic crisis." Chrysler said that it "is obviously disappointed in what transpired in the Senate and will continue to pursue a workable solution to help ensure the future viability of the company."

Executive Branch approves bailout

On December 19, George W. Bush announced that he had approved the bailout plan, which would give loans of $17.4 billion to U.S. automakers GM and Chrysler, stating that under present economic conditions, "allowing the U.S. auto industry to collapse is not a responsible course of action." Bush provided $13.4 billion now, with another $4 billion available in February 2009. Funds would be made available from the Emergency Economic Stabilization Act of 2008. General Motors will get $9.4 billion and Chrysler $4 billion. The federal loan would prevent General Motors from going into immediate bankruptcy. The bailout requires both companies to dramatically restructure their operations to demonstrate long-term viability. In February 2009, the Obama administration will be determining the automakers' progress in meeting the conditions of the loans, and then decide whether to supply more government aid or to force automakers to repay the loans and face bankruptcy. The loans would carry an interest rate of 5 percent but may rise to 10 percent if the auto manufacturers default on them.

Image issues

GM says it "disappointed" and "betrayed" American consumers

On December 8, 2008, General Motors unveiled a new advertisement where the company admitted that it had "disappointed" and "betrayed" American consumers. However, despite this admittal, GM was still continuing to lobby for a bailout.

Luxury jet use

According to ABC News and other media outlets, the Big Three CEOs (Rick Wagoner of GM, Alan Mulally of Ford and Robert Nardelli of Chrysler) who attended the November 19, 2008, meeting in Washington D.C. to request a bailout traveled to the meeting in private luxury jet aircraft.

A November 19, 2008, CNN article quoted Thomas Schatz, president of Citizens Against Government Waste, as saying, "They're coming to Washington to beg the taxpayers to help them. It's unseemly to be running around on a $20,000 flight versus a $500 round trip." According to the same CNN article, although the Big Three did not cite how much the private flights cost, analyst Richard Aboulafia of the Teal Group said that $20,000 was indeed a reasonable estimation.

A different November 19, 2008, CNN article stated, "Gary Ackerman, D-NY... and several other representatives suggested that it was difficult to give money to the automakers when the CEOs had all flown to Washington on corporate jets. 'Those types of symbolic things matter and set a tone,' said Peter Roskam, R-Ill."

On December 2, 2008, it was reported that General Motors and Ford were planning to sell their fleets of corporate luxury jets.

Hybrid electric vehicle use

Wagoner, Mulally and Nardelli each drove separately to Washington for a December 2 Congressional hearing (detailed below) in hybrid electric vehicles after the above-noted criticism for arriving to Washington for the November hearing in private jets. Wagoner rode in a Chevrolet Malibu hybrid accompanied by Beth Lowery, the company's top environmental and safety official. Mulally travelled in a Ford Escape Hybrid.

Non-ecological past practices

From the energy-conservation point of view the Big Three already have a negative image earned by past policies that were perceived as reflecting their greed in order to expand auto sales. There are ecology-minded sections of the American public that don't view with sympathy the big automakers background of maximizing profits by deliberately destroying mass-transport systems and privately-owned railways between the 1920s and 60s. The big three are held as guilty of contributing to build a fuel-inefficient nation of commuters living in increasingly more distant suburbs. Facing a saturated car market in the US in the early 1920s GM engaged in a controversial policy along with road-builders that triggered the massive shift from the mass transportation of the previous century to the 'one-person-one-car' trip of today.

Credit ratings get downgraded

On December 19, 2008, it was reported that Fitch Ratings downgraded the Issuer Default Rating of General Motors and Chrysler to "C," which it says means "default is imminent."

A December 22, 2008, article from Bloomberg stated, "General Motors Corp. and Ford Motor Co., the two largest U.S. automakers, had their debt cut further below investment status by Standard & Poor’s and Moody’s Investors Service. GM’s unsecured debt was trimmed one level to C, or 11 grades below investment quality, by S&P. Moody’s lowered its rating on $26 billion in Ford debt by two grades to Caa3, or nine below investment quality."

Lobbying and other financial ties between Big Three and Congress

The Big Three spent almost $50 million to lobby Congress during the first nine months of 2008. Senator Carl Levin (D-Michigan) received $438,304, House member Joe Knollenberg (R-Michigan) received $879,327, and House member John Dingell (D-Michigan) received nearly $1 million. In addition, Dingell's wife Debbie used to work as a lobbyist for General Motors, and after she married Dingell, she became a senior GM executive at an undisclosed salary. As of May 2008, Dingell owned GM stock worth up to $350,000, GM stock options worth up to $1 million more, and a GM pension fund. In 2000, the Dingells owned GM stock options worth up to $5 million. In 1998, Dingell sold GM stock options worth up to $1 million.

GM has sent tens of thousands letters to dealers, supplier executives, employees and union members, asking recipients to call and write Congress with several "talking points" about the potential effects of a GM bankruptcy.

Corporate turnaround proposals & strategies

Products: electric and hybrid vehicles

Detroit's "Big Three" automakers went to Washington, D.C., on December 2 (arriving in Washington in hybrid automobiles after being criticized for traveling to the earlier November Senate hearing in private jets) to present their long-term viability plans to the United States Congress, and those plans included significant commitments to fuel-saving and electric vehicle technologies.

Ford Motor Company unveiled an aggressive plan to electrify its fleet of vehicles, including plans to offer an all-electric van-type vehicle in 2010 for use in commercial fleets, complemented by a battery-powered sedan in 2011. By 2012, the company will bring a family of regular hybrids, plug-in hybrids, and battery electric vehicles to market. Ford intends to invest about $14 billion on fuel-efficient technologies over the next seven years and aims to achieve a 36% improvement in fuel economy for its entire fleet by the 2015 model year. The company has applied to DOE's Advanced Technology Vehicles Manufacturing Loan Program for $5 billion to support these efforts, but the company is also asking for access to up to $9 billion in bridge loans. However, Ford expects to remain viable through 2009 and hopes to avoid drawing on the loan.

GM unveiled the production version of the Chevy Volt in September. The vehicle will be able to travel up to 40 miles in all-electric mode. General Motors Corporation (GM) is involved in a well-publicized effort to launch its plug-in hybrid model, the Chevy Volt, in 2010, and the company also intends to employ the Volt drivetrain in other vehicles. GM plans to launch predominately fuel-efficient cars and crossovers over the next four years, investing $2.9 billion in fuel-efficient technologies and alternative fuels during that time period. By 2012, GM will offer 15 hybrid models, and more than half of its fleet will be flex-fuel vehicles, able to run on either gasoline or ethanol-rich E85. GM is seeking $12 billion in bridge loans through 2009 and is also asking for revolving credit of $6 billion that it could draw on if its sales forecast falls short. The company ended the third quarter of the year with cash reserves of $16 billion, but it estimates that it should have at least $11 billion on hand to maintain its operations. Without a federal loan, GM expects its cash reserves to fall to $10.1 billion by year's end and to fall to $3.6 billion by February.

Chrysler LLC notes that for the 2009 model year, 73% of its vehicles will be more fuel efficient than their 2008 models, and the company plans to launch more small, fuel-efficient vehicles in the future. The company's plan also calls for the introduction of the Dodge Ram Hybrid in 2010, along with the company's first electric-drive vehicle. Chrysler also plans to offer three additional electric-drive vehicles by 2013. And like GM, Chrysler plans to make half of its fleet flex-fuel capable by 2012. The company is seeking a bridge loan of $7 billion. Chrysler ended the first half of the year with $9.4 billion in cash, but expects to end the year with only $2.5 billion in cash, and it might not make it through the first quarter of 2009 without the loan.

Automakers have already submitted applications for more than $20 billion in retooling loans to pay for fuel efficient vehicle projects.

Production capacity: factory closings

On December 12, 2008, General Motors announced that it was "temporarily" closing 20 factories in North America. On December 17, Chrysler announced it would idle all 30 of its plants for at least one month.

European industry

In Europe where car sales had also drastically decreased, consideration was being given to financial support for the automotive industry, particularly in France, Germany and Italy. German Foreign Minister Frank-Walter Steinmeier and Jean-Claude Juncker, Luxembourg's Prime Minister and head of the Eurogroup of single currency nations, discussed the possibilty of a common rescue package to be agreed by all the EU member states.

On November 20, 2008, French automobile manufacturer Peugeot Citroen predicted sales volumes would fall by at least 10% in 2009, following a 17% drop in the current quarter. As a result, it planned to cut 2,700 jobs.

On November 24, French President Nicolas Sarkozy and German Chancellor Angela Merkel agreed to support the crisis-stricken automobile industry in France and Germany. Detailed plans would be announced shortly. In the U.K., Jaguar Land Rover, now owned by Tata Motors, was seeking a $1.5 billion loan from the government to cope with the credit crisis.

On December 11, the Swedish government provided its troubled automakers, Volvo and Saab, with support amounting to SEK 28 billion ($3.5 billion). The two companies had requested assistance, faced with the financial difficulties of their U.S. owners Ford and General Motors. The plan consists of a maximum of SEK 20 billion in credit guarantees, and up to SEK 5 billion in rescue loans.

On December 22, 2008, Tata motors declared that it would inject "tens of millions" of pounds for Jaguar Land Rover company it had acquired from Ford Motor Corporation in early 2008. British Prime Minister Gordon Brown also stated the intention to help out car industry in U.K.

Canadian industry

The Canadian auto industry is closely linked to the U.S. and is in similar trouble. Canada's 3,500 car dealers, who employ 140,000 people, told the federal and Ontario governments in mid-November they are at risk from the financial crisis; they are asking the national government to help out despite a record year of sales. Ottawa is considering providing financial aid to the Canadian subsidiaries of the Big Three, and possibly auto parts companies as well. The auto industry argued that loan guarantees and other help would try to save tens of thousands of Canadian jobs threatened by the sudden drop in North American car sales. Chrysler Canada has asked for $1-billion in aid, making it the only Canadian arm of the Big Three to make a specific dollar request.

Industry analyst Anthony Faria has criticized the labor contracts that Canadian Auto Workers then-president Buzz Hargrove negotiated with the Big Three US automobile manufacturers in 2007, predicting that the subprime mortgage crisis and currency would hit Canadian auto production especially hard. Faria noted that UAW president Ron Gettelfinger agreed to have the UAW's "all-in" wage, benefit and pension costs drop from a high of $75.86 per hour in 2007 to an average of about $51 per hour starting in 2010. By comparison, the CAW's cost per hour was $77 in 2007 and will rise to over $80 per hour by the end of the new contract. Faria said that Gettelfinger went into negotiations "with the right intention...Save jobs. The CAW strategy was to squeeze every dime out of them."

Current union president Ken Lewenza has argued that labor is not responsible for the bankruptcy crisis facing the Big Three automakers, saying that his members would not make concessions part of any taxpayer-funded bailout. "We don't see this as us being the problem", Lewenza said, adding he would "absolutely not" accept any further cuts after losing tens of thousands of jobs in recent years. "We've suffered our share of pain." Lawenza argued that the CAW agreed in 2007 to make concessions that will save the Big Three $900 million over three years.

A spokesman for the Canadian Taxpayers Federation has criticized the CAW's "no-concession" stance, saying that it only serves to strengthen the opposition to a taxpayer-funded bailout for the struggling Detroit Three automakers. The CTF further pointed out that "It is especially difficult to understand anyone asking for government help that refuses to do anything to help itself to begin with", since they "fail to realize they've existed at the substantial largesse of taxpayers for decades". Kelly McParland, a columnist for the National Post, has suggested that "if he won't give anything, he and his members are likely to lose everything." He also said that the problem facing the North American auto industry was borne equally by management and labor alike, criticizing labor for building up pay and benefits for themselves that was as unsustainable as it was enviable, while attacking management for its short-term strategy of selling gas-guzzling trucks and sales tactics (price cuts, rebates, free gas and cash-back schemes).

The CTF has opposed the proposed $3.5 CAD billion bailout for Canadian subsidiaries of the Big Three, saying that it was an unfair financial burden on the average Canadian, as well as another excuse for the Detroit automakers to postpone much needed change. The CTF noted that federal and provincial governments spent $782-million in the past five years on the Big Three, saying "These have been a bottomless pit of requests for cash". Lewenza disagreed, saying that the bailout should be seen by Canadians as a loan that will be paid back when the country's economy is prosperous again.

On December 20, the government of Canada and Ontario province offered 3.3 billion dollars in loans to the auto industry. Under the plan GM will receive 3 billion dollars and Chrysler will receive the rest. Ford only asked for a line of credit but will not be participating in the bailout.

Japanese automotive industry

With high gas prices and a weak US economy in the summer of 2008, Toyota reported a double-digit decline in sales for the month of June, similar to figures reported by the Detroit Big Three. For Toyota, these were attributed mainly to slow sales of its Tundra pickup, as well as shortages of its fuel-efficient vehicles such as the Prius, Corolla and Yaris. In response, the company has announced plans to idle its truck plants, while shifting production at other facilities to manufacture in-demand vehicles. On December 22, 2008, Toyota declared that it expected the first time loss in 70 years in its core vehicle-making business. Loss of $1.7 billion, in its group operating revenue, would be its first operating loss since 1938 (Company was founded in 1937). Toyota saw its sales drop 33.9 percent and Honda Motor by 31.6 percent.

On 5 December 2008 Honda Motor Company announced that it would be exiting Formula One race with immediate effect due to the 2008 economic crisis and are looking to sell the team. Honda has predicted that there may be reductions among part-time and contract staff. Upper management bonuses would also be reassessed and directors in the company will take a 10 percent pay cut effective January 2009.

Nissan, another leading Japanese car manufacturer, announced that it also would be slashing production and will reduce its output by 80,000 vehicles in the first few months of 2009.

In December 2008, Suzuki Motor Corporation, Japan's second biggest car manufacturer, announced that it will cut production in Japan by about 30,000 units due to falling demand. The company is expected to face its first profit drop in eight years for financial year ending in March 2009.

Reported in Bloomberg on Dec 23, 2008, that Mitsubishi Motors is to widen production cuts on falling demand. The Japanese maker of Outlander sport-utility vehicles, will scrap the night shifts at two domestic factories as the deepening global recession saps auto demand. The carmaker will halt the night shift at its Mizushima plant, excluding the minicar line. Nighttime work at the Okazaki factory will stop from Feb. 2. The cuts are part of Mitsubishi's move to reduce planned output by 110,000 vehicles in the year ending March because of tumbling sales in Japan, the U.S. and Europe. Japan's vehicle sales may fall to the lowest in 31 years in 2009, according to the country's automobile manufacturers association. Mitsubishi will also halt production of passenger cars on every Friday next month at the Mizushima factory in western Japan. The Okazaki plant in central Japan will close every Saturday in January and for another five days.

Toyota recently announced on Dec 22, 2008, it expects to barely break even this year and slashes profit forecasts amid sales slump. The Japanese automaker, often held up with Honda as a success story for the rest of the auto industry to follow, said it expects a slim profit margin of US$555 million for the year ending in March 2009. Toyota had originally been projecting a massive profit of $13.9 billion for that period. Their sales in the United States were down 34 per cent last month and were down 34 per cent in Europe as well. They are expecting a loss which would be the equivalent of about $2 billion (CDN)." Toyota President Katsuaki Watanabe said the impact on the company from the struggling global economy has been "faster, wider and deeper than expected." "The change that has hit the world economy is of a critical scale that comes once in a hundred years," Watanabe said, speaking in Nagoya.

South Korean automotive industry

South Korean automakers have been generally much more profitable than their US and Japanese counterparts, recording strong growth even in depressed markets such as the United States. Despite a global economic slowdown, Hyundai-Kia successfully managed to overtake Honda Motor as the world's 5th largest automaker, climbing eight rankings in less than a decade.

Nonetheless, South Korean automakers were not immune to this automotive crisis and in December 2008 Hyundai Motor Company had began reducing production at plants in the U.S., China, Slovakia, India and Turkey because of sluggish demand. The company missed an earlier projection of 4.8 million units for 2008 and announced a freeze of wages for administrative workers and shortened factory operations as demand weakens amid a global financial crisis.

South Korea's fourth largest automaker, SsangYong Motor, owned by the Chinese automobile manufacturer SAIC (Shanghai Automotive Industry Corporation), is the worst effected company in this crisis as it manufactures mainly heavy petroleum consuming SUVs. The carmaker recorded its fourth straight quarterly losses by the end of 2008 with red ink of $20.8 million in the third quarter. Also during the July to September period, sales dropped 63 percent to 3,835 vehicles. Its production lines have been idle since Dec. 17 as part of efforts to reduce its inventory. The automaker has halted production twice previously this year. In December 2008, SAIC gave an ultimatum to the SsangYong union to accept its restructuring plan or face the parent company's withdrawal, which, if implemented, would mean certain bankruptcy.

However, the South Korean Ministry of Knowledge Economy said that there will be no liquidity provision at the government level for five automakers - Hyundai, Kia, GM Daewoo, Samsung Renault and Ssangyong."We have no plans to inject liquidity into the carmakers, a ministry official said. "It has been repeatedly made clear.

Russian automotive industry

In December 2008, protectionist tariffs of 30% were announced on cars imported into Russia, described by prime minister Vladimir Putin as vital to save jobs in the domestic auto industry. These provoked protests across Russia; those in Vladivostok (the main port of entry for Japanese cars) were broken up by riot police.

See also

• Automotive industry
• Business as usual
• Global financial crisis of 2008
• Lemon socialism
• Corporate welfare
• Crony capitalism
• Chrysler bailout
• Great American streetcar scandal
• Bailout mentality
• Too Big to Fail policy

External links

• Auto Industry Financing and Restructuring Act.
• Auto Industry Bailout Coverage.