If there were any doubts about the severity of the economic downturn and its impact on the “real economy,” they were put to rest last week by reports from U.S. automakers. General Motors Corp. warned that it may not have enough cash to keep operating through the year; Ford’s situation is not as dire, but it is burning through its reserves at a comparable rate.
Their competitors should not celebrate: Their financial situation is equally precarious. A bailout is almost certain to follow, but it should come with conditions: American automakers must retool and reorganize to build cars for the 21st century. Adjustment to new economic, social and political realities is obligatory, not an option.
On Friday, GM announced a $4.2 billion operating loss in the third quarter, as its cash reserves fell from $21 billion to $16.2 billion. In a blunt warning to lawmakers, the auto giant said those reserves were dangerously close to the $11 billion to $16 billion minimum required to keep the business going. Meanwhile, Ford acknowledged its own operating loss of $2.98 billion in the third quarter and noted that cash reserves fell $7.7 billion.
Both companies blamed one-time expenses for the drop in reserves and said they had sufficient funds to continue operations. Together, the two companies used a little more than a quarter of their cash and other liquid assets last quarter.
Not surprisingly, heads of the Big Three automakers — GM, Ford and Chrysler — are pushing the U.S. government for help. They have already received $25 billion in low-interest loans to build more fuel-efficient vehicles (due to arrive next year), but last week they asked the government to double down with another $25 billion to get through this especially rough patch and yet another $25 billion to help cover their health-care obligations for 780,000 retirees and dependents.
The automakers blame the economy for their difficulties. Sales are down 18 percent, the worst downturn in 15 years. The prospect of a prolonged recession has consumers forgoing new purchases. High oil prices have turned those who want to buy away from the gas-guzzling sport utility vehicles that have been the Big Three’s bread and butter. And the credit crunch has made it harder for those who want to buy any cars to get financing. It is a perfect storm for the Big Three.
Will the government provide the aid? Most likely, yes. While the Bush administration has been reluctant to open the coffers, President-elect Barack Obama noted the plight of the auto industry in his press conference last week, highlighting the presence of Michigan Gov. Jennifer Granholm on his economic advisory team. But the most important factor guiding the thinking of lawmakers is jobs.
A GM bankruptcy would cost 2.5 million jobs from the automaker, its suppliers and related businesses. As many as 3 million jobs are tied to the industry nationwide. The pressure to act is mounting. Statistics released last week showed a national loss of 240,000 jobs and a downward revision of previous estimates: Another 179,000 people joined the ranks of the unemployed. The prospect of another 3 million unemployed is difficult to fathom.
Conservatives counter that the market must thin the herd. The simple fact is that there are too many automakers. Those that cannot make cars that consumers will buy must pay the price. According to this logic, U.S. automakers conceded that they could not compete with foreign rivals when it came to building efficient vehicles; they are now paying for that inability to adapt. GM’s $73 billion in losses since 2004 is proof of that.
Such market purism ignores political reality. It also ignores steps that U.S. automakers have taken: GM has cut 100,000 jobs since 2006 and has been closing factories. It plans to cut an additional $15 billion in costs and sell some assets, such as its Hummer division. Ford wants to trim $17 billion by cutting jobs, eliminating bonuses for salaried workers and reducing capital expenditures. But those efforts have no impact on one of the biggest costs — the estimated $100 billion in health-care costs that automakers must provide workers, past and present, and their families. Given the centrality of health-care costs to current U.S. economic debates, the automakers may get help here too in the next administration.
Rivals of U.S. automakers are experiencing their own troubles. Toyota lost $336 million in the third quarter. There are fears its rapid expansion in recent years leaves it especially vulnerable to an economic downturn. BMW and Daimler AG had sharp sales declines in October and have reduced profit forecasts for their automobile business.
Auto manufacturing is a strategic industry: not only because of job creation, but because of the technology it spins off and the skills it requires. No government can afford to abandon this sector. The question then is whether automakers will abuse that bottom line and use it to avoid making adjustments that are required in a new economic environment. If so, automakers can remain masters of their own destinies. If not, they will continue to be overwhelmed by a rapidly changing world.
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