Some Ideas for the Auto Industry Loan

Emil Bandriwsky
December 1, 2008

Chrysler should file a pre-packaged Chapter 11 bankruptcy. The US Government should then provide, or guarantee, $10 billion of Debtor in Posession Financing, and guide a merger of Chrysler into General Motors. A successful merger could reportedly reduce combined structural costs by $5 billion per year. Naturally, the combined company would have to close facilities, close dealerships, and reduce employees. Unfortunately, this is inevitable in almost any scenario. There is simply too much overcapacity in the US auto industry, where total annual sales may drop from 17,000,000 units to as low as 11,000,000 for the next few years. This merger and downsizing could be done in a controlled way over a few years, and would “take care of the Chrysler problem”, which has been passed around like an unwanted orphan for the past decade, and which is almost certainly too weak to stand as an independent company for much longer.

Tomorrow, the UAW leadership will meet in Detroit to discuss further concessions, in addition to the “landmark contract of 2007”, which the Detroit 3 and the UAW claim will make American automakers competitive with the transplants by 2010. Features include shedding the retiree health care obligations, and introducing a 2-tier pay scale, with new hires starting in the $14/hour range, and only a self-funded pension (401k etc). All parties are under pressure to hammer out a contract that more quickly models the pay and benefits package of the foreign transplants in the Southern US, or even the terms of the Delphi bankruptcy.

Some obvious concessions from the UAW are :
· The infamous Jobs Bank will be eliminated. There are still over 3,000 layed off autoworkers, receiving near full pay, for an indefinate period of time; possibly for years until retirement.
· Work rules need to be modernized. The creation of artificial Job Classifications greatly contributes to overstaffing and inefficiency.
· Seniority can no longer be the primary determinant for job assignments. Certainly there are whole departments that could save huge amounts of money by assigning work based on performance, and not on seniority.
· Health care needs to be more in line with what salaried employees receive, which include an annual deductible of over $2,000.
· There are dozens or hundreds of small changes that can save the struggling automakers millions of dollars when added together. For example, all GM salaried employees went to mandatory electronic deposit of paychecks years ago, but UAW members can still request a paper check which must be printed, handled and sent by Federal Express to dozens of facilities around the country every single week.
· In exchange for further concessions the hourly workers can receive either some ownership, or an expanded profit sharing plan.
· Expand the use of temporary workers, which are widely used in the US transplants, and even in the paternalistic domestic Japanese auto industry.

Some other ideas :
· The federal TARP financial bailout should also recapitalize the auto lenders, GMAC and Ford Credit. The disappearance of credit has been devastating to auto sales, where 60% of new cars purchased require financing.
· A tax credit of $1,500 for all US military veterans who purchase a vehicle from the Detroit 3.
· An immediate nationwide moratorium on taxpayer funded inducements to foreign owned automakers. Historically, hundreds of millions of dollars were thrown at Japanese, German, and Korean automakers in the southern US for the purpose of “creating”jobs, but in reality all it did was transfer jobs from one state to another, and send the high value engineering work out of the USA permanently. Each transplant job costs 6 domestic auto industry jobs.
· The government should not set unrealistic “Green Goals” and attempt to design or specify what types of vehicles to build. This is a market function. Reportedly , the Toyota Prius, the largest selling hybrid, with over 1 million units sold in the past 10 years is still a money loser for Toyota. We don’t need the US government to mandate money losing vehicles for the US automakers.

External Variables :
· The largest factors affecting the health of the US auto industry are the overall economy, and the availablility of credit, since 60% of new cars purchased require financing.
· The current sad condition of the once dominant American auto industry has triggered a national debate on the issues of : labor unions effects on company competitiveness, guaranteed employer pensions versus self-funded 401k etc., and the cost of health care. General Motors is the world’s largest purchaser of private health insurance; spending about $5 billion a year, and has a $1,000 per vehicle cost disadvantage compared to vehicles built in coutries with nationalized health insuarance. The US is the only major industrialized nation without national health insurance, and this puts every American manufacturer, not just auto makers, at a major cost disadvantage. It is time for a national dialogue on major health care reform.