End of the Road?
In December, GM and Chrysler each took loans from the federal government to keep their companies out of bankruptcy. Will history show the money was well spent, or will it be as many feared — “good money after bad?” We’ll soon find out.
In exchange for the loans, and in order to receive any additional aid, these companies were required to develop and submit plans outlining their future potential. Viability plans submitted in February are now facing in-depth scrutiny. So, are the plans good enough? And who gets to decide?
Instead of appointing a single “Car Czar” as many had anticipated, President Obama appointed a 20-member Auto Industry Task Force. The Washington Post reports that one of the key members is Steven Rattner, an auto-industry outsider who has “built a long, lucrative career on his chameleon-like talent to adapt to the situation at hand, to understand complex problems quickly and to display keen, level-headed judgment.” In recent weeks, Rattner and others have been traveling the country, grilling auto executives, labor representatives and supply chain manufacturers. Their job is to decide by March 31 if and how the automakers can survive, and what the ramifications would be if they did not.
Republican leaders favor allowing automakers to file bankruptcy, arguing that would allow a quicker turn around of remaining assets. Senator John McCain said on Fox News last Sunday, “The best thing that could probably happen to General Motors, in my view, is they go into Chapter 11.” But the bankruptcy of a major American automaker would cascade throughout the auto industry, likely leading to many additional bankruptcies. The decision certainly won’t be an easy one.
What of the auto-parts suppliers in this mess? With their fates linked to those of the powerful manufacturers, suppliers are in equally dire straits. Approximately 700,000 Americans work at 5000 businesses, making all the parts that become an automobile. The auto industry is incredibly interwoven, and the suppliers are organized in tiers: A third-tier company supplies raw materials to a second-tier company, which refines them and hands them off to a first-tier that manufactures the finished part.
Suppliers that provide parts to GM are also likely to provide parts to other manufacturers such as Ford or Toyota. If one company fails, the effect can cascade up and down the food chain. Market Watch reported that when Toyota’s John Lentz got his chance to speak with the Task Force, he said, “The biggest challenge we face is really on the supplier side.” He told them as many as 100 companies that provide auto parts to Toyota in the United States are struggling to survive. It is a veritable house of cards.
One of the key factors that has crippled the U.S. auto industry is the cost of labor, especially in comparison to its foreign counterparts. Though American manufacturers have been trying to reduce costs for years, strong labor unions have resisted giving up hard-won pay and benefits. But at this point the unions have a choice: to make a deal or lose everything. Concessions are beginning to appear.
Ford is in slightly better shape than are Chrysler and GM, though it also needs to make dramatic changes in its business model to become profitable. As reported in the New York Times, Ford recently announced an agreement with the United Auto Workers (UAW) that will allow the company to reduce employees’ average hourly rate, including benefits, from more than $60 to $55 an hour. This will save Ford more than $500 million a year, and moves wages closer to the rate — about $49 per hour — that Toyota and Honda have been paying in their U.S. plants.
What else are manufacturers doing to save their companies? GM is eliminating 47,000 jobs, cutting executive pay and discontinuing or selling off brands such as Saturn, Saab and Hummer. Chrysler is cutting 35,000 jobs and eliminating slow-moving models, and has sold $1 billion in assets — including land in the U.S. and an engine plant in Brazil, according to Chrysler Vice Chairman and President Tom Lasorda.
Is there any good news? Recently Fiat has offered to take a 35 percent share in Chrysler. Fiat would get access to U.S.-based manufacturing and markets, while Chrysler would benefit from Fiat’s experience building smaller and more fuel-efficient cars. Some say Chrysler has to make this deal because it has cut so many positions that it no longer has the critical engineering staff to make next-generation vehicles. Fiat announced this week that it had perfected a new engine technology called Multiair, which uses a hydraulic system to vary valve action. The result is a carbon-emissions reduction of 10 to 20 percent and a 60 percent reduction of other pollutants, while delivering a 10 percent increase in performance. That’s the kind of technology Chrysler needs.
While Chrysler’s hope lies in partnering with an outside entity, GM’s is with an internal project — ironically, an electric car. The documentary Who Killed the Electric Car? detailed GM’s launch, and then infamous discontinuation, of the first widely used electric vehicle, the GM EV1. That car was created because California mandated it; it was subsequently killed by pressure from oil companies and the Bush administration. Now GM is hoping to stake its future on a new electric vehicle, the Chevy Volt, which will be available in 2010. Members of the Auto Industry Task Force took demo models out for a spin during their visit to Detroit.
The future of millions of jobs and a mammoth industry rests with this hand-picked group. The clock is ticking while they make decisions about reshaping, revitalizing or recycling big players such as GM and Chrysler. I, for one, hope they’re approaching a crossroads and not a dead end.