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Is the Automotive Industry Too Vital to Fail?

Gina-Marie Cheeseman
| Monday November 24th, 2008 | 1 Comment

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When Rick Wagoner, CEO of GM, was asked what it would mean if the U.S. automotive industry failed, while appearing before Congress last week, he responded, “the cost would be catastrophic in jobs lost, income lost, government tax revenue lost, and a huge blow to consumer and business confidence.”
Robert Mardelli, CEO of Chrysler, told Business Week, “It’s one thing to lose a company. What we’re dealing with is the loss of an industry. I think you will see a ripple effect that will be unprecedented.”


Sen. John Kyl (R-AZ) said on the PBS’ show News Hour, “Without some kind of restructuring, for example, under Chapter 11, they’re not going to be able to voluntarily do that. They have mortgages on property that they’re not even using they have to pay, bonds that they have to pay off, legacy costs for health care and pension costs for union workers.”
If nothing is done to help the automotive industry, according to the Big Three (GM, Ford and Chrysler), the effects on the U.S. economy will be devastating. GM has a website called GMfactsandfiction.com which lists reasons why the industry can’t fail.
The claims are the following:

1. Nearly 3 million jobs would be lost in the first year alone – with another 2.5 million to follow over the next two years.
2. Personal income in the United States would drop by more than $150.7 billion in the first year.
3. The cost to local, state, and federal governments could reach $156.4 billion over three years in lost taxes, and unemployment and health care assistance.
4. Domestic automobile production would more than likely fall to zero – even by international producers, due to supplier bankruptcies.

The site states why Americans should support federal loans to automakers. According to the site, the American auto industry is “the backbone of American manufacturing. Almost 4% of the Gross Domestic Product is auto-related. Three million U.S. jobs are dependent on the health of U.S. automakers, and they are not all in the Midwest.”
Bankruptcy is not an option for automakers, according to the site, because “any automaker that filed for Chapter 11 reorganization, car sales would plummet even further. A study by the automotive market research firm CNW found that 80 percent of people intending to buy a new car would switch brands if the car came from a manufacturer that went bankrupt.”
Are GM’s claims fact or fiction? Are they just “scaremongering” tactics to support a federal bailout of automakers? The Center for Automotive Research (CAR) calculates that about seven million jobs, both directly and indirectly tied to the auto industry, would be lost if the three companies fail.
“‘The government stands to lose 60 billion dollars in the first year alone, and the three-year total is well over 156 billion dollars,” Sean McAlinden, CAR’s chief economist said. According to Bloomberg reports GM failing would cost the federal government4 $200 billion.
“Our model estimates that a complete shutdown of the Detroit Three U.S. production would have a major impact on the U.S. economy in terms of lost wages, reductions in social security receipts, personal income taxes paid, and an increase in transfer payments,” McAlinden said.
Mark Zandi, Moody’s Economy.com chief economist said an estimated 2.6 million jobs will be lost if the automakers failed. The economy is too weak to deal with a failed automakers industry failure. “We are in a very fragile state. This could be the thing to push us over. The ripple effect is like throwing a big boulder into the economic pond.”
“It’s really a national impact across the service sector, as well as the manufacturing sector,” says John Paul MacDuffie, co-director of the International Motor Vehicle Program at the Wharton School at the University of Pennsylvania.
Coming tomorrow: A Bailout for Automakers?


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  • http://www.vanno.com/ Nick DiGiacomo

    Either we hope for some disruptive breakthrough from startups like Tesla, or we incrementally improve the systems, methods, supply and distribution chains that exist now (e.g. the auto industry). Car companies like GM may fail as businesses, but we need to keep their infrastructure and methods as a starting point if we hope to address the global and systemic nature of our transportation challenges.