Tags: Mike Caggeso

Auto Bailout Awaits Congressional Approval with Millions of Jobs at Stake

By , Money Morning •

By Mike Caggeso
Associate Editor
Money Morning

Congressional Democrats and the White House yesterday (Wednesday) finalized a short-term package that’ll supply General Motors Corp (GM), and Chrysler LLC with $14 billion in emergency loans.

The bill clearly falls short of the $34 billion the Big Three were asking for, but should be enough to keep the automakers running through January, when the new Congress and Obama administration take the wheel.

As previously reported in Money Morning, there will be limits on executive pay, prohibitions for golden parachutes and requirements that the automakers get rid of their corporate aircraft and not pay dividends while loans are outstanding. The bill also provides a "car czar," or presidential appointee, to oversee keep tabs on the companies’ restructuring efforts.

Of course, the bill is still awaiting congressional approval and there is cause to believe it may stall in the Senate.

Sen. Richard Shelby, R-AL, was a member of the panel that twice grilled Big Three CEOs and one of the bailout’s most vocal critics. Yesterday (Wednesday), Shelby threatened to filibuster the deal if it reaches the Senate.

It’s interesting to note that Shelby’s home state of Alabama, has built three foreign car assembly plants – Honda Motor Corp. (ADR:HMC), Mercedes-Benz and Hyundai – as well as a Toyota Motor Corp. (ADR:TM) engine plant, in the past 20 years.

Shelby’s efforts induced the formation of Boycott Alabama Now, a group that says it wants America to give Shelby a taste of what he’s doing to America. Such a boycott “will include any travel into the state well as boycotting the purchase of anything produced in any way within the state,” according to the group’s Web site.

Senate Minority Leader Mitch McConnell expressed reservations about the bill’s legislation and doubts it’ll garner enough Senate votes to pass. The state he represents, Kentucky, has a 7,000 employee Toyota plant, The Boston Globe reported.

Then there’s Tennessee, the only state with U.S., Asian, and European auto assembly plants. And in an interview with BusinessWeek, Tennessee’s Sen. Bob Corker seems to understand his colleague Shelby’s positions on the bailout more so than his own.

“It has not been an issue of local politics. For me there is no issue of local politics. I try and dig into these issues and present thoughtful responses to the situation. In defense of Senator Shelby, I knew where he was going to be on this issue before this ever arose,” Corker said. “He was against the Chrysler loans back in 1979. He was always going to be against this, as he was against the Wall Street bailout legislation. In his case, it's not the politics of the auto industry. That's just who he is.” 

But Corker nailed the source of problem.

“Regardless of what happens this week, the legislation, if passed, is not going to move people to buy cars,” Corker said.

Auto Woes Extend Beyond the Big Three

Falling demand is something all carmakers can agree on, especially in Germany, Europe’s largest economy and the home of Europe’s largest carmaker, Volkswagen.

While all focus has been on Detroit’s Big Three, few have noticed that Volkswagen – like Detroit’s Big Three – is trying to bite off its own piece of a broad government bailout. In October, Germany’s parliament passed a $642 billion (500 billion euro) bank-rescue plan to stabilize the country’s banks. And Volkswagen has quietly sought government help for its financial services and banking units.

Premium carmaker BMW said it wasn’t sure if it would ask for similar help, Reuters reported. 

That’s why it’s not accurate to assume bailout opponents share the same opinions on the bailout as foreign automakers. As Money Morning previously reported, it’s more than just Big Three employees on the line.

While the Big Three employ more than 200,000 people directly, they support millions more indirectly through suppliers and dealerships. The collapse of the Big Three could ultimately cost the economy more than 2 million jobs total. And that doesn’t count the estimated 1 million Americans – including many retired autoworkers – who rely on the U.S. auto companies for pension and healthcare benefits.

According to Germany’s VDA industry group, parts purchased by manufacturers account for 75% of the value of an average car, Bloomberg reported.

Here in the United States, as many as 60% of Honda’s U.S. parts suppliers are also major parts sources for the Big Three. 

If a manufacturer’s major customer goes under, it too may scale back operations and therefore be unable to meet the manufacturing and shipping demands of another customer.

“You can’t underestimate what would happen when a large player collapses,” BMW Chief Executive Officer Norbert Reithofer e-mailed to Bloomberg. “That would impact the supplier structure and therefore the entire industry.”

The United States is also the largest market for most foreign automakers. Allowing one or all of the Big Three to go under would add millions to the running unemployment numbers and deepen the recession, making the U.S. market less likely to buy their cars.

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