In December 2008, the auto industry asked the government for a $34 billion bailout to avoid bankruptcy. The Big 3 stated that their demise would trigger 3 million layoffs within a year, plunging the economy further into recession.
Many opposed the bailout because they felt U.S. automakers had brought their near-bankruptcy on themselves by not retooling for an energy efficient era, which then reduced their competitiveness in the global market.
Auto Bailout Specifics
The auto bailout proposal from the Big 3 auto companies totaled $34 billion in government loans. In return, the companies promised to fast-track development of energy-efficient vehicles, and consolidate operations. GM and Ford agreed to streamline the number of brands they produce. They also won agreements from the UAW union to delay contributions to a health trust fund for retirees and reduce payments to laid-off workers. The three CEO's agreed to work for $1 a year and sell their corporate jets.GM's Bailout
GM received $6 billion through GMAC, which became a bank holding company. GM had asked for $18 billion in loans, of which $4 billion was needed to avoid bankruptcy before the end of the 2008. In return, GM agreed to give the government warrants for common stock, preferred stock, and a promise to repay the loan in 2012, when it anticipates it will again break even. GM will also cut its debt by $30 billion by converting debt ownership for equity. It will decrease union health-care benefits to be paid to retirees in 2010. It would also sell its Saab, Saturn and Hummer divisions, reducing the number of models for sale to 40. It would reduce employment from 96,000 to 45,000 by 2012. (Source: Bloomberg, Chrysler Financial to Get $1.5 Billion to Aid Car Sales, January 19, 2009)Chrysler's Bailout
Chrysler's $1.5 billion EESA loan was made to a new financing corporation, Chrysler Financial, set up for the purpose. The interest rate for the loans is 1 point above LIBOR. In addition, Chrysler Financial will pay the government $75 million in notes and reduce executive bonuses by 40%. As a result, car buyers will be able to get 0% financing for five years on some models.(Source: Washington Post, U.S. Expands Aid to Auto Industry, January 19, 2009)Chrysler received $4 of the $7 billion bridge loan it originally requested. It had also asked for $6 billion from the Energy Department to retool for more energy efficient vehicles. In return, Chrysler's owner Cerberus would convert its debt to equity. Chrysler would like the Big 3 to partner with the Federal government in a joint venture to develop alternative energy vehicles. Chrysler said it could debut an electric vehicle in 2010, ramping up to 500,000 by 2013.
Ford's Bailout Proposal
Ford requested a $9 billion line-of-credit from the government, and a $5 billion loan from the Energy Department. Ford said it would accelerate development of both hybrid and battery-powered vehicles, retool plants to increase production of smaller cars, close dealerships, and sell Volvo. Ford is in better shape than GM or Chrysler because it had already mortgaged its assets in 2006 to raise $24.5 billion. Although Ford didn't need, and didn't receive any funds, it also doesn't want its competition to get the upper hand thanks to the government bailout.Congressional Plan
Congress first explored whether a planned bankruptcy reorganization was the best alternative for the companies, but it was felt it could take too long to implement. Congress was also divided on whether to use the $700 billion EESA funds, instead of the $25 billion available from a Department of Energy energy-efficient loan program.Why the Bailout Is Needed
Last month, auto sales in the U.S. dropped 37% compared to a year earlier. This was 400,000 fewer vehicles, or the equivalent of two factories' annual output. GM and Chrysler had the worst decline, while Ford's loss was about the same as industry leaders Honda and Toyota.However, many in Congress feel that the auto-makers have not been operating competitively for years. They delayed making alternative energy vehicles, while reaping profits from sales of SUV's and Hummers. When sales began to decline in 2006, they launched 0% financing plans to lure buyers. Union members get paid $70 per hour, on average, while new hires make $26 per hour. GM has twice as many brands as needed, and twice as many dealerships, thanks to state franchise regulations. For them, the bailout is needed to restore the U.S. auto industry to global competitiveness. (Source: WSJ.com, Big Three Seek $34 Billion Aid, December 3, 2008; Bloomberg, UAW Offers Cuts, December 3, 2008; The Economist, Back AGainDecember 3, 2008))
The Impact of the Big 3 Automakers on the U.S. Economy
The auto industry contributes 3.6%, or $500 billion to total U.S. GDP output. This means that the current 30% decline in auto sales will translate directly into a 1% decrease in economic output. The auto industry also employs 850,000 workers in manufacturing, and 1.8 million workers in auto dealerships. Therefore, a decline in output will result in direct job losses, as well as auto-industry related losses. (Source: BLS, Auto Industry Employment)However, these figures include foreign-owned as well as the Big 3 auto makers. Many analysts feel that Chrysler will go bankrupt, even with a bailout, and Ford doesn't really need it. Therefore, the main impact from the bailout would be to save jobs at GM. However, the economic slowdown is causing GM to slash its employment and production, whether it receives a bailout or not. Furthermore, once the recession is over, Toyota and Honda will continue to increase their U.S. factories, providing jobs for U.S. auto workers.
