Big Three failure may be catastrophe ?? or Worse ??

Big Three failure may be catastrophe
Blow to economy could be costlier than bailout, automaker CEOs say
By S. CARTY and B HAGENBAUGH USA Today

When the heads of General Motors, Chrysler and Ford went to Capitol Hill last week, they tried to persuade lawmakers that if they go under, an already fragile U.S. economy will be dealt a blow far costlier than the $25 billion in aid the companies are seeking.


As lawmakers wrestled, then decided to head home and not quickly approve a bailout, foremost in their thinking was a question the Big Three CEOs apparently failed to answer: If we let these guys fail, how bad will it really be for the economy?

Critics say Detroit created its own problems with poor planning and inferior products, and cite a healthier foreign auto industry operating mostly in southern states that isn't seeking a taxpayer bailout. But even Toyota said over the weekend it fears the impact on the parts suppliers it uses if the U.S. auto industry collapses.

Moody's Economy.com chief economist Mark Zandi estimates that 2.6 million jobs -- about 1.9 percent of the U.S. work force -- would be lost if GM, Chrysler and Ford were to go under.

That includes more than 255,000 people directly tied to the three companies and another 2.3 million whose jobs are indirectly dependent -- everything from people who work in the steel, glass, fabric, tire and electronic industries to the barista who makes $4 cappuccinos for the ad executive who'll be out of work when his auto industry business ceases to exist.

Zandi argues the economy is too weak to absorb that fallout.

"This could be the thing to push us over," he says. "The ripple effect is like throwing a big boulder into the economic pond."

The auto industry is woven into the grass roots of the U.S. economy, through its dealer networks, the advertising it buys in newspapers and local TV and radio stations, the health care it buys for its workers and their families and the retirees it supports.

The domestic auto industry supports nearly 800,000 retirees and spouses with pensions and, until recently, health care for everyone. Now that's being cut back for white-collar retirees, but if the automakers file for bankruptcy, they could shed their pension costs and force the government to pick up the tab.

Advocates of a bailout argue that if one of the Big Three fails, it could take down the entire supply chain that cuts a wide swath from Wisconsin to Ontario, Canada, and south from Florida to Texas. As Toyota officials pointed out, the effect would be on all companies making vehicles in the USA.

The impact of the industry woes already is being felt beyond Detroit. Saturday, a Chrysler-Dodge dealer in North Brattleboro, Vt., closed after 20 years, citing slumping sales. It became one of the projected 700 dealers nationwide expected to have closed by the end of this year.

Advertising agencies and media from New York to local TV stations in New Mexico are seeing revenue dry up because the automakers and their dealers are spending less money hawking cars. Suppliers in North Carolina, host to roughly one-quarter of the parts-manufacturing base for the auto industry, are declaring bankruptcy at an alarming rate.

'Very difficult judgments'
The ripple effect of an industry collapse could further trim consumer confidence and unemployment, said Lyle Gramley, a former Federal Reserve Board governor who is senior economic adviser at the Stanford Group.

"As a general principle, I don't think that bailing out individual companies is a good idea," said Gramley. However, "You have to contemplate the possibility of 1 million employees losing their jobs and the entire industry at risk" if an automaker were to fail.

Comerica Bank chief economist Dana Johnson said there are some "very difficult judgments" for lawmakers to make about the potential impact an auto industry failure would have on the economy. If one or more of the companies were to go under, the U.S. government would be on the hook for unemployment benefits, retraining and pension obligations while receiving less in taxes, he said.

"There are roughly two parts producers for every employee at the car companies, and there are a lot of vendors -- steel producers, paint producers, glass producers, business services, accounting, advertising," he said. "There's no question that it is an important industry, that there are linkages to employment elsewhere."

Zandi and other economists argue there is a better way to aid the auto sector than to provide bailout loans.

There is growing support for allowing the companies go into bankruptcy, using government funds to guarantee financing from banks. That would allow the automakers to restructure, including tearing up old labor contracts and reducing their sizes. Government support could give consumers confidence that the car companies would exist after bankruptcy, soothing worries about car warranties and availability of replacement parts.

"Like the airlines, I think they should go into Chapter 11 bankruptcy and start with a clean slate," said Michael Cusumano, a professor at MIT's Sloan School of Management who has written two books on the auto industry. He said reorganization should include replacing management.

But then, there are two auto industries in the U.S. The first, based in and around Detroit, is GM, Ford and Chrysler. The second is sprinkled around the Southeast and includes foreign automakers Toyota, Honda, Subaru, Nissan, BMW and Mercedes-Benz.

Parts suppliers are spread out between them "like pearls on a necklace" along the highways connecting the South and the Midwest, said Thomas Klier, senior economist with the Federal Reserve Bank of Chicago.

Suppliers in the past tended to focus on one customer, but now almost all have overlapping customer bases. That's why Toyota is worried about the Big Three. About 75 percent of Toyota's suppliers here are North American companies who also make parts for the Detroit companies.

"We are concerned with the industry in general, but we're mostly concerned about our suppliers," Toyota spokesman Mike Goss said. "If the worst happens in Detroit and these companies suffer, we're worried about their longevity as well."