How Best To Bailout The Auto Industry
Monday, November 17, 2008SUSIE GHARIB: Late today, Senate Democrats proposed a $25 billion bailout of the U.S. auto industry, with the money coming from the government's financial rescue plan. Senate Republicans and the White House oppose the measure. While that may make passing an auto rescue package difficult in this lame duck term, industry insiders and experts agree any deal will come with string attached. We have two reports tonight on the potential auto maker bailout and what's at stake for Detroit. We begin with Washington bureau chief Darren Gersh.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: One surprise in the Senate auto rescue plan is just how far down the strings attached to the government bailout will reach. Congress is considering a ban on bonuses for any executive making more than $250,000. The auto industry fears that saying it could make it harder to attract and keep talent. Also on the list, a ban on golden parachutes for top executives and limits on compensation that could, quote, encourage excessive risk-taking. The government would also receive warrants which are like stock options in the auto companies. Though it's not clear he will have the votes to act before the new Congress meets in January, Senator Majority Leader Harry Reid is still hoping to move forward on an auto rescue package this week.
SEN. HARRY REID, MAJORITY LEADER: We're seeing a potential meltdown in the auto industry with consequences that could impact directly upon millions of American workers and cause further devastation to our economy.
GERSH: Skeptics want Congress to go further, firing the current big three management. Tennessee Congressman Jim Cooper says Detroit's leadership has been on a downward slide for decades.
REP. JIM COOPER, (D) TENNESSEE: I don't see any strategic vision. And what does the Bible say, where there is no vision, the people perish. We've got to have a plan so that these companies will be stronger five, 10 years from now, than they are today. And all Detroit has been doing for the last 40 years is decline in market share.
GERSH: An auto industry source points out two of the big three leaders are recent hires. And auto analyst John Wolkonowisz says it would be a bad idea for the government to push for a management change during a crisis.
JOHN WOLKONOWISZ, AUTO ANALYST, IHS GLOBAL INSIGHT: I think it's a bad. (INAUDIBLE) government would have pushed for management changes. I think that there's no substitute for experience in this business. This is an unusual business, the auto business. And it's not something that can be easily stepped into.
GERSH: Economist Dan Ikenson opposes any bailout, but if there is one, he says it would be better to rip up the current union contract.
DANIEL IKENSON, ASSOCIATE DIRECTOR, CATO INSTITUTE: The average compensation at GM for an hour of work is about $74 and at Toyota, about $47. And that reflects the fact that the big three are using unionized labor and the unions have extracted demands that are just implausible.
GERSH: The UAW argues it has already agreed to end traditional union benefits for new hires. The big three are also funding a union-run trust that will assume responsibility for retiree benefits. By 2010, some auto industry analysts say the big three could have an employee cost structure as competitive or more than a Toyota plant or Honda plants in the United States, that is, if the companies make it to 2010. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Diane Eastabrook. On a recent afternoon there were lots of new vehicles, but no customers at this Chevrolet dealership in suburban Chicago. Owner Bill Kay says high fuel prices slowed sales earlier this spring. But, the credit crunch slammed the brakes on them this fall. He fears emerging from this slump will be much harder than the others he's seen in his 30-year career.
BILL KAY, CHEVROLET DEALER: From a domestic dealer standpoint there is less market share for all three of the domestic manufacturers. And, coming out of this recession, I don't think that the sales volume will be the same as we could have expected in the last two downturns that I have been through.
EASTABROOK: Industry expert John Casesa says overcapacity, not high fuel prices or a credit crunch is at the heart of the dilemma now facing Detroit's auto companies.
JOHN CASESA, PRESIDENT, CASESA STRATEGIC ADVISORS: These three companies today are a size 38 in size 44 suits, too many factories, too many people, too many dealers and they need to be smaller and it's hard to succeed as a small auto company and that is why there has been consolidation globally.
EASTABROOK: GM, Ford and Chrysler have been losing market share to foreign competitors for the past 40 years. But despite that, the domestics still have more than twice as many dealerships as the imports. Paola Sapienza is a finance professor at Northwestern University's Kellogg School of Management. She agrees GM, Ford and Chrysler must resize, but questions whether a government bailout can do that.
PAOLA SAPIENZA, FINANCE PROFESSOR, NORTHWESTERN UNIVERSITY: We have a process, a procedure in the U.S. which is Chapter 11 which actually does this. It's not always perfect, but basically forces the management to come with a restructuring plan within a certain period of time and it's not entirely clear why the intervention of the government would be preferable to that.
EASTABROOK: Casesa thinks Congress could require restructuring in a bailout. He says in either a bankruptcy or bailout, thousands of jobs will be lost, but he's optimistic the industry will adjust.
CASESA: Not every dealership will go away and not every plant will go away. And there will be new companies and new jobs that will fill the gaps.
EASTABROOK: Chevy dealer Bill Kay believes there could be fewer U.S. auto companies and fewer dealers five years from now. His challenge will be remaining one of the survivors. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Downers Grove, Illinois.
