Collapse of US auto industry looms

Advocates for US automakers are warning that the collapse of the Big Three could set off a catastrophic chain reaction in the economy.

A Sept 2008 file photo shows Renaissance Center headquarters building in Detroit, US automaker advocacy groups are warning a collapse of companies could have catastrophic results.

DETROIT // Advocates for US automakers are warning that the collapse of the Big Three - or even just General Motors - could set off a catastrophic chain reaction in the economy, eliminating up to 3 million jobs and depriving governments of more than $150 billion in tax revenue. Industry supporters are offering such grim predictions as Congress weighs whether to bail out the nation's largest automakers, which are struggling to survive the steepest economic slide in decades. "We've got to do this because the cost of inaction is so high to communities, to workers, to companies," said Sen Sherrod Brown, a Democrat. He was among many lawmakers worried that an industry collapse would be devastating for everything from school districts to small businesses. Even if just GM collapsed, the failure could bring down the other two companies - and even the US operations of foreign automakers - as parts suppliers run out of money and shut down. Concern about the automakers hit new heights Friday when GM and Ford reported they spent a combined $14.6 billion more than they took in last quarter. GM said it could run out of money by the end of the year. Ford said it could last through 2009, but only because it arranged a hefty credit line last year. All this comes after tight credit and economic uncertainty in October reduced US auto sales to their lowest level in 25 years - with no rebound in sight. If the industry failed, among the hardest-hit communities would be Lordstown, Ohio, a village of 3,600 people about 80 kilometres east of Cleveland that has been home to a GM factory since 1966. If the plant closed, Lordstown would lose up to 70 per cent of its budget, a scary scenario that proponents of a multibillion dollar bailout say would be repeated across the industrial Midwest. "If they went completely under, obviously it would financially devastate us," said Michael Chaffee, a school teacher and Lordstown's part-time mayor. "It would be catastrophic for our whole area." "Without GM and nearby parts factories", he said. Lordstown's $4.2 million budget would take about a $3 million hit that would almost certainly require layoffs of police and drastic cuts in park programmes. A study by the Center for Automotive Research in Ann Arbor estimated that the failure of Chrysler LLC, Ford Motor Company and General Motors Corp. would eliminate up to 3 million jobs, including those at parts suppliers and smaller businesses that rely on the automakers. State, local and federal governments would lose more than $150bn in tax revenue over three years, the study said. Next week, Congress plans to consider giving the auto industry part of the $700bn Wall Street bailout during a lame-duck session. Opponents of the idea say government money will just delay the inevitable demise of companies that are on death's doorstep because of years of mismanagement and labour costs that are far higher than their global competitors. "How is this money going to make a positive difference in creating a new competitiveness?" asked Sen Jeff Sessions, a Republican. Mr Sessions and others also fear that opening the treasury to automakers will invite more industries to plead for federal help. "Once we cross the divide from financial institutions to individual corporations, truly, where would you draw the line?" said Mr Sessions, who also opposed the Wall Street bailout. Automakers say bankruptcy protection is not an option because people would be reluctant to make long-term car and lorry purchases from companies that might not last the life of their vehicles. But Mr Sessions and others say bankruptcy might be a better option than government loans. Airlines, Mr Sessions said, have reorganised through bankruptcy, and the auto industry could do the same, protected from creditors and lawsuits while companies work to become profitable. "I would prefer they would go through a reorganisation process, and sometime in that process, if targeted aid might be effective, I would consider it," he said. "It seems like the larger the amount of money that's being spent, the less attention anybody pays to how it's spent." Automakers say they are poised to rebound because they have been restructuring for years - shedding jobs, consolidating engineering and design, and making plants more efficient. The Big Three have cut their combined US hourly workforce more than 40 per cent since 2005, from 244,000 to about 139,000. David Cole, chairman of the Center for Automotive Research, said Detroit is losing money now because it has too many factories making more vehicles than the market is buying. "As a result, it must discount with incentives to sell them. But as factory cuts take effect, automakers will see more profits - about $2,000 per vehicle - because they won't have excess cars and lorries and won't have to discount", Mr Cole said. But that means consumers will probably pay more for cars in the future. The increased profits, coupled with about $1,000 per vehicle in savings from a cost-cutting contract with the United Auto Workers, will allow automakers to repay debt to existing creditors plus the government, Mr Cole said. "The earning potential of this industry has the potential of covering that debt surprisingly fast," he said. If a bailout is approved, it's likely to come with significant strings attached. Even proponents like Brown would like to see limits on executive pay and a ban on shareholder dividends. Others have suggested management changes and tougher fuel economy requirements. But back in Lordstown, people just want to the government to act. Joellen Spletzer, owner of a convenience store about a mile from the GM plant, can't understand how Congress could quickly bail out Wall Street but balk at helping an industry that supports so many people. "I'm not talking about my little store on the corner," she said. "It will affect people in so many widespread ways it's unbelievable." * AP