Thursday, December 18, 2008
The Automotive industry is in meltdown
Chrysler LLC announced yesterday that they were shutting all their plants for a month. Ford announced they were extending their shutdown times. The slow sales are also affecting the Japanese transplants. They are cutting production too. GM and Chrysler LLC are facing possible bankruptcy. Many auto parts suppliers are on the verge of their own bankruptcy. Automotive sales look to be down 30~50 percent next year compared to the already low sales volume of this year. While this auto company pile up is taking place, the Bush administration is reading a bailout for GM and Chrysler. Will this work? An infusion of cash will not save the American auto industry. It will only postpone the time before they go bankrupt. Two things are needed to restart Detroit's engines. Car sales must improve and the cost of production must be reduced. How can this be done? Instead of directly bailing out the big three, we should place tax rebates of $3000~5000 on every vehicle sold in 2009 with 75% or more US content. This would cost around 20~35 billion dollars. The money would go to consumers and start a trickle up effect in the auto industry. Also, this would have a very good environmental impact. Newer, less polluting, gas efficient cars would replace the older models still on the road. Idled factories would be restarted and laid off UAW members would be recalled to their jobs. There would be a strong incentive to increase US content in vehicles to meet the 75% threshold. This would revitalize the US auto parts industry.
Of course GM and Chrysler LLC would need a low or no interest loans to stave off bankruptcy until sales picked up.This would cost an estimated $15~25 billion. In order to qualify for this, their creditors should be required to take a 25% write down in their debt and the UAW should be required to take a 25% reduction in pay and benefits for the next three years. All Management should be forced to take a 25% cut in pay and benefits. No bonuses could be given for the three year period.
If we just throw money at the Big Three with out doing anything to stimulate sale or force them into cost controls, we are only postponing the inevitable. With out a sales increase,the Big Three can not survive without an extreme down sizing and the auto parts supply base will collapse in the next year.