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Tuesday, November 18, 2008

Job Losses, Benefit Cuts for the Big Three With or Without the Bailout

The overriding reason given to bailing out the automakers is that without the bailout millions of jobs will be lost. This is a distortion because there will be significant cuts in jobs with or without this bailout. The big three are being buried under a mountain of inflated labor costs, cars that don't sell, and poor management. In order for the automakers to survive for any long period of time, they will need to cut costs, cut jobs, cut division, and replace management. This means that plants will need to be closed, contracts renegotiated, and all sorts of management shake ups will need to occur. Right now, the big three spend almost $30 an hour more on labor to produce a car than does Toyota. If this isn't fixed, there is no future for any of them. This has happend specifically because of the rich contracts negotiated by the UAW. Unless those are restructured, the three will fail sooner or later.

Let's take Chrysler to start. The only division of Chrysler that could clearly have a future is Jeep. This means all of the other divisions might need to be cut. As such, we are talking about tens of thousands of job cuts with or without this bailout. Let's look at GM. Here is how this article from 2005 put it.

There's another reason GM can't afford a strike. It's no secret that GM is essentially two companies: an unprofitable car-making company, saddled with poor products and high operating and legacy costs, and a profitable lender, General Motors Acceptance Corp. For the past few years, GMAC has been more profitable than the car-making operations. In the third quarter, GMAC turned a $675 million profit.

GMAC, which was started to help customers buy GM cars, has evolved into a diversified lender. It's a huge force in the home-mortgage and construction-loan business, for example. Indeed, in the third quarter, the mortgage operations accounted for about 60 percent of the unit's profits. But GMAC's bread and butter is still financing the sales of GM cars. To a degree, the company produces the cars at a loss so GMAC can finance them at a profit. A strike that halts production and throws a wrench into sales would thus be a double-whammy for GM. It would lose the revenues from car sales, and it would lose the profits from financing those sales.

And given the parlous state of GM's finances—Standard & Poor's has assigned a junk-credit rating to GM—a significant disruption in either phase of its business—the money-losing car operations or the money-making lending arm—could prove disastrous. Ford faces essentially the same predicament.

Of course, that was in 2005 when auto financing was still profitable. What does all of this mean? It means that in order for GM to have any sustainable future there would not only need to be major restructuring but major downsizing. GM is full of gas guzzlers and it needs to become full of energy efficient vehicles. That sort of evolution won't happen overnight. It also will take a major initial downsizing. This means that jobs are going to be lost bailout or not.

Folks that insist on a bailout further insist that Chapter 11 would significantly disrupt the manufacture of automobiles. This notion is another distortion of reality. Right now, the manufacture of automobiles is a losing proposition. GM would be better off halting the manufacture of automobiles for months, restructure, and come back more lean.

The bailout, in effect, would only perpetuated all of the very business practices that have put GM in this position. GM doesn't need a bailout to renegotiate contracts, cut divisions, and re structure. In fact, a bailout would make all three of those things that much more difficult. GM loses money selling cars. Why should the tax payers continue to fund such an operation. The best option, the only option, is for GM to go into Chapter 11. That would allow them to restructure, downsize, and revolutionize into something that can be profitable in this environment.

The idea that we need to bailout the big three because millions of jobs would be lost without it is a misnomer. Millions of jobs will be lost with or without it. The big three have been funding millions of jobs for a losing proposition for almost a decade. No business can sustain that. The bailout would only fund such a business for a while longer. What GM and the rest of the big three need to do has nothing to do with a bailout.

The reason that GM, and the rest of the big three, are all screaming that without an infusion of cash they will run out of money is because their operations are currently going to fund over sized labor costs, over sized pensions, and unprofitable divisions. Filing for Chapter 11 would immediately halt all of this and stop it in its tracks. It would cost the tax payer nothing. It would allow the companies to come back more nimble and profitable. It is the right thing to do. It is the only thing to do. It is the thing that all companies do when a bad business model causes them to hemorrhage cash. It's what the big three need to do this time. As such, this idea that a bailout is necessary in order to protect millions of jobs is a misnomer because those jobs must be lost as they are part of the problem.


Don P said...

Your statement that Detroit is basically making cars at a loss, so that they can finance them for a profit is on point. The solution is found at the beginning of the article. Say GM sells an Impala for 21k, and Toyota sells a Camry for around the same price: The cars both spend 30 days on the assembly line, that's 160 working hours x$30 =$4800. Multiply that by every car that GM produces, and you can see why a bailout would be the worst thing for them. Anything that allows them to keep doing business as usual will only delay the end. Restructuring may be painful for a lot of people, but it really is their only solution long term.

Jason said...

Today GM suffers a loss of about $2,000 per vehicle sold. On the other hand Toyota whose employees are not part of the UAW earns a profit of about $1,200 per vehicle sold. If GM was able to operate with labor prices near Toyota’s it would have pocketed an additional $29,715,200,000.

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