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Are automakers also too big to fail?

A sharp drop in demand is driving the industry to pursue a bailout.

By Ron SchererStaff writer of The Christian Science Monitor / November 3, 2008

Closing: GM worker Dan Jenks stands by a Michigan plant slated to close at the end of '09.

Rebecca Cook/Reuters/file

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Now, the Detroit automakers have their hands out.

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In a financial scenario that probably sounds all too familiar to Uncle Sam, the auto industry is declaring itself too important – with hundreds of thousands of workers – for the government to allow it to fail.

Ford, Chrysler, and General Motors have recorded years of losses and are now hit with a significant downturn in consumer spending. The industry is seeking billions of dollars in low-cost government loans or some form of federal guarantee or bailout – with the possibility that some of the money could be used for a merger. Business groups and governors are approaching the US Treasury on the industry's behalf.

"The companies are desperate. They need help," says Rebecca Lindland, director of the autos group at IHS Global Insight, an economic consulting firm in Lexington, Mass. "For the country this is our version of 'Joe the mechanic,' and if Joe loses his job, the ripple effect is tremendous."

Behind the crisis is a sharp drop in sales. The break-even point for Detroit is annual sales of 16.2 million vehicles, says Art Spinella, president of CNW Marketing Research in Bandon, Ore. Sales are now about 14.8 million, he says.

"It's fairly easy to lose billions when your average wholesale price is $27,000," Mr. Spinella. "It's amazing some of the manufacturers are still around even now."

Although the auto industry is not nearly as important as in the 1950s, when a GM president is reported to have said, “... what was good for our country was good for General Motors and vice versa,” the industry still has a long reach on Main Street. The US auto companies directly employ 355,000 workers, and another 4.5 million Americans are indirectly supported by the industry, according to a letter sent to US Treasury Secretary Henry Paulson by six governors on Friday. Total auto employment amounts to 3.3 percent of the US civilian workforce and more than 36 percent of the US manufacturing workforce. [Editor’s note: The original version of this paragraph gave the wrong time frame for the GM president’s quote. It also had an inaccurate version of the quote.]

"If the auto companies ask for help, the federal government should give that help and give it quickly," says Elizabeth Boyd, press secretary to Michigan Gov. Jennifer Granholm, one of the authors of the letter that asked for "immediate action."

The industry needs help on several fronts, Ms. Lindland of IHS Global Insight says. First, the companies need to find a way to shore up their captive finance companies, such as Ford Motor Credit. These financing arms are now rated well below investment grade and would pay more than 18 percent for new borrowings for themselves. Last Thursday, GMAC said it was trying to convert to a bank so it would be eligible for some of the $700 billion in bailout funds that Congress passed to address the financial and credit crisis.