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Despite bailout, U.S. auto industry still ailing

Thousands could still lose their jobs, affecting region's economy

December 31, 2008
On Dec. 22, President Bush approved the funding of emergency loans totaling $13.4 billion to General Motors and Chrysler. The money comes from the remaining $15 billion of the first $350 billion of the TARP fund set up to rescue ailing financial institutions in October.

This past Monday, GM and Chrysler each received $4 billion of that loan, and another $5.4 billion will go to GM in January. GM could get an additional $4 billion in February, taking the total loan amount to $17.4 billion between the two companies, if Congress approves the second half of the $700 billion TARP fund.

The emergency loans were handed down from the White House after Congress failed to approve money for the cash-strapped automakers the previous week. The money doesn't come easily, though. Both GM and Chrysler will be forced to live up to certain terms and prove they are viable companies before March 31 or the loans will be revoked.

Terms of the loans include lowering labor costs to the level of competitors like Toyota. Currently, it costs GM nearly $70 an hour to manufacture vehicles. For Toyota, labor costs are about $48 an hour. The difference in costs doesn't come from wages paid to workers, as both Toyota and GM workers have comparable salaries ($29 an hour for GM and $30 an hour for Toyota, after bonuses). The difference instead comes from retiree health care. GM has three retirees for every active worker, and all of the benefits that go to both workers and retirees are factored into that $70-an-hour labor cost. Toyota, a relatively new company to the United States, has nowhere near that number of retirees and its workers don't receive as many benefits as the UAW workers at GM and Chrysler.

The problem with health care costs prompted GM and Chrysler to negotiate with the United Auto Workers union last year to do away with health care coverage for retirees over the age of 65. The companies and the UAW reached a compromise and created a program known as the Voluntary Employee Beneficiary Association (VEBA) that would allow for the creation of a trust fund that retirees over 65 may dip into instead of the company providing health care. The funding for the program from GM and Chrysler was due in 2010, but the UAW agreed on Dec. 3 to postpone the payments until 2012.

One of the terms of the emergency loans is that half of the companies' payments to the VEBA be made in equity. This means that GM and Chrysler must use company stock to pay half of the $21 billion due to be paid to the VEBA by 2012.

Japanese and European automakers don't have as much trouble with health care costs since health care is nationalized in those regions. The companies pay taxes to support the system, but, overall, the cost is less than the amount that U.S. companies are paying for health care. This means that Japanese and European manufacturers in the United States can shift the burden of health care costs in the United States to their places of origin, where there is national health care, and keep labor costs low overall.

The terms of the loans are clear, but GM and Chrysler have the arduous task of just how they are going to meet those terms. The end result may not be pretty, but it's what they'll have to do to survive.

When it comes to laying out plans, GM has been the more vocal of the two, but both Chrysler and GM have made it clear that they intend to reduce their number of domestic dealers. GM is set to close 1,750 of its dealers, or 27 percent. Chrysler hasn't set a target number yet.

The automakers' idea behind cutting dealers is to both reduce cost and have fewer, larger dealerships in which they can safely invest more money to compete with companies like Toyota. Toyota has only 1,500 dealers in the United States compared to GM's 6,500. As a result, Toyota is able to invest more money per dealership and expand current dealers instead of creating new ones.

Although the number of dealers may make it difficult for GM and Chrysler to compete effectively, it seems to be the consensus among many auto analysts that GM's main problem is the number of brands it is trying to field in the United States. GM accounts for 22 percent of the auto market with seven different brands: Buick, Cadillac, Chevrolet, GMC, Hummer, Pontiac and Saturn. It also owns Sweden-based Saab.

By comparison, Toyota commands about 18 percent of the market with only three brands: Lexus, Toyota and Scion.

GM has said it will be looking to sell Hummer, Saab and Saturn and downsize Pontiac to the point that it may be reduced to a single model.

There are multiple reasons for losing these brands. The most obvious is that they aren't selling and have become a drain on the company. Additionally, GM is now spending money on advertising, research and design, dealerships, parts and so forth on seven different brands domestically and is essentially spreading itself too thin. In order to compete with foreign automakers, GM must beef up its base by selling off the weak brands and investing more in its strong ones.

Although cutting these brands may prove to buoy up GM in the long run, the cost can bog the company down in the short term. The reason for the expense is that all the dealers of the brand they wish to terminate must be bought out due to state franchise laws. For example, it cost GM $1 billion to stop manufacturing Oldsmobile in 2004.

Chrylser is in a different situation altogether. Like Toyota, it only fields three brands: Chrysler, Dodge and Jeep. However, its sales numbers are far below that of both GM and Toyota. Chrysler's U.S. sales trends are the worst of any automaker, with a 27.9 percent in domestic sales this year through November. Some analysts have attributed this to Daimler not investing any money into research and design or new technologies for the company during its last two years of ownership.

Chrysler is only set to receive $4 billion compared to GM's possible $13.4 billion. Chrysler will use this money to restructure its $9 billion debt and purchase $8 billion worth of parts in the first quarter of 2009.

Unless the UAW and other holders of Chrysler's massive debt are willing to make concessions in order to put Chrysler back in the black for 2009, it's almost certain the company will be forced into bankruptcy.

Cerberus, Chrysler's current parent company, told the Treasury during Chrysler's plea for funds that it would be willing to sell its 80-percent stake in the company to the UAW and other creditors in order to help with the restructuring of the company. This move would take Chrysler from a private company to a publicly-traded one like GM.

Unlike GM, this is not the first time Chrysler has been bailed out by the government. Back in 1980, it received a $1.5-billion loan to prevent bankruptcy.

But despite GM and Chrysler receiving last-minute government assistance, many people likely will still lose their jobs. GM has already said it may be forced to reduce its workforce by 33 percent. Chrysler has idled all of its plants through January. Some smaller GM factories in Ohio and Michigan have already been shut down, and both companies have been forced to delay vehicle programs that could have brought new plants and jobs to the country.

The hope is that through restructuring and better planning, the automakers will be able to invest in making cars better suited for the 21st century and regrow their industrial base to replace the jobs that have been lost.

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