The rising price tag for the possible bailout of General Motors and Chrysler reflects some challenges that are particular to Detroit and the car industry, but also some problems that are much broader – ones at the core of the current US recession.
No doubt about it, the industry got itself into a big mess. The Detroit carmakers were unprepared when gasoline prices surged past $2 a gallon, then $3, then close to $4. For years, management and the United Auto Workers crafted labor deals that proved to be unsustainable in the face of growing foreign competition.
But as GM and Chrysler seek an additional $21.6 billion in emergency loans from the government, other factors are also at play. Like much of the US economy, the challenge for Detroit now involves things like sagging pension funds, tighter access to credit for consumers, and questions of whether government can provide a bridge toward recovery.
“It’s a symptom of what we’re facing as a country right now,” says Don Grimes, a University of Michigan economist who follows the auto industry. “They need people who can get loans in order to buy the product, which is a problem with the whole private sector now.”
Labor and management at the car companies have made a lot of mistakes, in his view. But their travails also parallel themes that go beyond the auto industry. The carmakers are among the hardest hit by the fallout of a housing bubble and credit crisis that was manufactured in Washington and on Wall Street, not Detroit.
While some economists warned in advance of a possible storm, the mainstream view before last year was that a deep recession was very unlikely. When the storm did hit, consumers pulled back first from big-ticket purchases that they could postpone. The sales volume at car dealerships fell by 40 percent.
Ford Motor Co. is trying to survive and restructure by tapping credit lines it secured before car sales tanked. GM and Chrysler, facing a severe cash crunch, say they can’t make it without US help. They’ve received $17.4 billion in loans since December. On Tuesday, they requested more cash and outlined how they would use it to become viable again.
Many Americans don’t want Detroit to get any extra government help, given the challenges throughout the economy. Policymakers are generally concerned that, without more aid, the result would be a disastrous tide of job losses at a time when unemployment is already soaring.
ither way, the auto industry is at the leading edge of problems that resonate throughout the economy. These include:
•Losing touch with fundamentals. In many eras, recessions are times when excesses in the economy are exposed and corrected. This time is a reckoning for Detroit, with its rich union contracts and the need to ramp up the quest for more fuel-efficient technologies.
But the recession is broadly about a different kind of losing touch, in which home values decoupled from personal incomes, and investors bought mortgage securities without knowing their risks.
•Diminished access to credit. Car sales are down not just because people are worried about their jobs and about wealth lost in stocks or the housing market. Conditions on loans are in fact tighter, linked to stresses in the banking industry. That’s a problem throughout the economy, but a particularly acute one for carmakers.
•Pension troubles. In seeking new aid – $16.6 billion in addition to the $13.4 billion GM has already received – chief executive Rick Wagoner warned that the company may also have to ask for extra money to fill a hole in its pension fund. That’s a widespread problem in corporate America and for state and local governments. The others aren’t seeking bailouts, but many pension funds face the prospect of scrambling to fill a gap created by this past year’s stock market slide.
•Forced restructuring. Just as marketplace conditions are compelling GM and Chrysler to cut costs and reposition themselves, the same is true throughout the economy. Banks and investment firms are scaling back on leverage, or debt. Millions of households are restructuring through processes such as bankruptcy, foreclosure, or loan refinancing.
For the carmakers, the restructuring required to win new government support is massive. The plans outlined this week represent a progress report toward a March 31 deadline.
GM, in presenting its plan Tuesday, said the alternative of a restructuring in bankruptcy would be much riskier and costlier. In bankruptcy, vehicle sales might plunge, and the ripple effect on suppliers and the economy would be more severe.
Even with government aid, the carmakers will shrink. Chrysler is cutting several nameplates, laying off 3,000 more workers, and planning an alliance with the Italian carmaker Fiat.
GM plans to sell or shut down the Hummer, Saab, and Saturn brands, slash the number of dealerships, and is in the process of shedding 47,000 jobs globally this year.
Will all the cost-cutting work? Only if and when the economy gets back on track, economists say. There, again, GM is in the same boat with the rest of America. The auto bailout is part of a larger effort by government to revive a credit-strained economy. The stimulus plan President Obama signed Tuesday, and foreclosure prevention plans he outlined Wednesday, are other links in that same chain. Detroit has to hope that those efforts bring consumers back to car lots.