Feeding Frenzy

The buggy whip manufacturers Detroit automobile manufacturers want a $50 billion bite out of the $700 emergency rescue program, part of which has already been approved by the Congress:

With the nation’s automotive industry hemorrhaging cash, congressional leaders called on the Bush administration yesterday to offer government assistance to the car companies as part of the Treasury Department’s $700 billion emergency rescue program.

The call came one day after General Motors, the nation’s largest auto manufacturer, announced another multibillion dollar loss for the third quarter and said it was running out of money fast. Ford, the second-biggest car company, also reported heavy losses. Unless the government steps in, analysts warned, GM could face bankruptcy, endangering the livelihoods of about 100,000 North American autoworkers and hundreds of thousands of others whose jobs depend on the industry.

In a letter to Treasury Secretary Henry M. Paulson Jr., House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry M. Reid (D-Nev.) asked Paulson to “review the feasibility . . . of providing temporary assistance to the automobile industry during the current financial crisis.”

When Lee Iacocca secured a loan from the federal government to keep Chrysler afloat 25 years ago, it turned about to be a pretty good deal. It did keep Chrysler afloat and its employees off the unemployment rolls and within 5 years Chrysler had paid its loan back. The market for automobiles was growing as more and more people outside the U. S. bought cars.

A lot has changed since the Chrysler bailout 25 years ago. In 1980 the U. S. automobile industry employed 714,300 and its suppliers employed millions more. As of 2006 the U. S. automobile industry employed directly 377,000 people counting both hourly and salaried workers. The number of workers in domestic parts manufacturing has declined even more dramatically as much of that activity is being done overseas now.

Even more importantly the world has tremendously more automobile production overall than it did 25 years ago. In 1980 the total world automobile production was around 40 million units with U. S. production about a quarter of that. Now it’s more than 73 million units with U. S. production still about a quarter of that.

And China and India are coming up fast. Between the two they produce nearly 10 million units and I would expect that to double over the next 5 to 10 years.

The point in this is that not only has the employment landscape changed for the U. S. automobile industry, so has the marketing landscape. Is there really a niche for the U. S. automobile industry to expand into?

Here are some of the questions I think that we should be considering before handing over any cash to the domestic automobile industry:

  1. What are the prospects for the loan being repaid?
  2. Will $50 billion given to the automobile industry result in the greatest amount of economic growth for the country? Frankly, I think there are other industries that could make better use of the dough.
  3. Will $50 billion given to the automobile industry result in the greatest benefit to the people of Detroit and Michigan. I suspect you could divvy the jack up among the people in the Detroit metro phone book and get a better outcome.
  4. If you’re bound and determined to hand $50 billion to the automobile industry, what requirements will you place on them in the areas of corporate governance? The domestic automobile industry got itself into its current fix. If the rest of us get them out of it, we need to make sure we don’t do so just to have them come back for another handout a couple of years down the road.
15 comments… add one
  • PD Shaw Link

    The interesting stat (derived from those numbers and a little rounding) is that US auto mfg employs half as many people and produces twice as many vehicles as 25 years ago. I assume that trend has to continue to be competitive, which makes this a pretty poor jobs program.

  • Yeah, I noticed that, too. It seems to me that an industry that’s likely to have flat or declining sales while it trims another 50% from its hourly employee rolls probably isn’t a particularly good investment employment-wise.

    There’s one thing I didn’t mention in my post because it didn’t really fit in but I think it merits mentioning here. The number of hourly employees has fallen far faster than the number of salaried employees. IMO that’s a scandal and an outrage.

  • All critical questions that look likely to be overlooked in the crush of events. I figure that the loans are done deals as the government strives to avoid another “Lehman” effect and the immediate loss of jobs at a time of fast rising unemployment.

    And I agree about the salaried (white color) stats being an outrage. But that’s how corporate American has done things for as long as I can recall. My wife works for a to remain unnamed mortgage lender (yes, ouch) in internal communications and the org charts in that company were completely upside down in most of the departments she worked in. And most of those people are getting mini golden parachutes while the working stiffs get a couple months severance.

    @ PD Shaw, I’d agree 100% but I think it’ll be looked at more as a job loss prevention rather than a growth program.

  • PD Shaw Link

    I’m not outraged by the rise of salaried employees. With labor costs for hourly employees over $70 per hour at the Big Three, the incentives are to look to mechanization and expansion in the salaried employees. My assumption is that if you gave the automakers a big check, they would build more machines and buy more advertising.

  • My experience, based on interacting with employees of one of the Big 3 automakers over a period of 25 years, is that

    a) most of the salaried employees who work there do so because they couldn’t get a job anywhere else and

    b) the levels and complexity of the bureaucracy that employs most of the salaried workers is genuinely absurd.

  • Larry Link

    PD Shaw, does that $70 an hour include benefits? And even if this is the case, that still would not equal $70 and hour?

    What happens if we let the Big Three sink…will this not ripple through the national economy, as the failing bank and financial sectors? At what point would you personally feel the financial effects from the loss of this industry?

    What about national security issues…as we saw during WWII, the potential for future war(s) has not gone away…

    Next to purchasing a home, is not the car one of the biggest purchases for most Americans..is this failing industry just the next in line to go under because of our failing financial systems…what comes after Americans can no longer purchase cars…computers, high tech…then education..then…then..is this just be beginning of a snowball effect…what comes next? Your line of work?

    Is this economic crises so big that we are unable to wrap our minds around it…who out there has the clearest understanding on what is going on…and why isn’t anyone talking about it..

    What will we do when the energy issue comes back..when gasoline returns to $4.00 or more a gallon, or hearing fuel again goes back up?

    Have we been so busy attacking each other, Right, Left, that we’ve been blindsided by this whole mess…I’m trying not to worry, but it’s getting more difficult everyday to do so. My state has an annual budget of 6 billion, we’re about to cut nearly one billion from the coming budget cycle..that’s a big problem..and if things do not improve on the economic front..there will be more of that to come..

    Isn’t it time to set aside ideologies and the blame game and figure out what is going on?

  • PD Shaw Link

    The $70 per hour is the labor cost, not what the employee actually receives. For example, it should include employment tax. Labor cost is the total of what the company pays on average per hour of employment.

    Here’s a chart:


  • Larry Link

    Interesting, but the link to Forbes is broken, not working…I would like to have read that article. Can you break down this “labor cost” for us. It seems a bit of a red herring of sorts, something to cover your pointing a finger and blaming labor
    for the failure of the auto industry. The real problem is that Americans have less to spend, when we don’t spend, the economy slows…and so on…it’s a Catch 22…and mean while the system continues to crumble…

    Interesting post by Robert Reich’s Blog today…

    “This means bailing out Wall Street or the auto industry or the insurance industry or the housing industry may at most help satisfy creditors for a time and put off the day of reckoning, but industry bailouts won’t reverse the downward cycle of job losses.

    The real problem is on the demand side of the economy.

    Consumers won’t or can’t borrow because they’re at the end of their ropes. Their incomes are dropping (one of the most sobering statistics in Friday’s jobs report was the continued erosion of real median earnings), they’re deeply in debt, and they’re afraid of losing their jobs.”


    Seems that we’ll continue to argue ideology while the nation crumbles around us.

  • PD Shaw Link

    Larry, if you google around you’ll find that $73 per hour labor costs is reported as average in the auto industry for unionized workers. The number you might be looking for is the $25 to $30 per hour that shows up on the worker’s paycheck. The difference are the benefits (healthcare and pensions), payroll taxes and insurance for worker’s comp. and unemployment.

  • PD Shaw Link

    On the demand side, sales of cars have been sliding for years in the U.S., never getting close to their high in 1985. And I hate to be the optimist, but I think cars last longer and are more reliable than they were 25 years ago. Each year the median age of vehicles on the road increases (since at least 1990). I think the answer to Dave’s question “Is there really a niche for the U. S. automobile industry to expand into?” is NO. Unless that niche is called China or India, but expansion there is unlikely to help the American economy much.

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