Bailout fever is proving as difficult to contain as West Nile virus.
With 700 billion taxpayer dollars already marshalled for the beleaguered financial services industry, the auto industry is now negotiating for a bailout above and beyond the $25 billion in loan guarantees it’s already scheduled to receive to help it develop new fuel-efficient vehicles.
Is it really necessary?
For the moment, Ford seems in better shape than its two domestic rivals. But General Motors is seeking government help to merge with faltering Chrysler.
Some critics scoff at the notion. University of Maryland business professor Peter Morici argues that while Chrysler’s still strong position in the dwindling minivan and SUV markets could help GM, Chrysler remains plagued by quality control problems that could be better solved by merging with a Japanese manufacturer, such as Mazda or Toyota.
Still, GM is aggressively pursuing the merger and considering a scheme that would finance the merger by having its financing arm, GMAC Financial Services, apply for part of the banking bailout — a move authorized by Michigan lawmakers as part of the rescue plan. As it happens, GM sold 51 percent of GMAC in 2006 to Cerberus Capital Management LP, which is now the majority owner of Chrysler.
Any reorganization of the giant auto industry would send shock waves throughout the economy. All three domestic automakers are heavily burdened by “legacy costs” stemming from the generous “30 and out” early retirement plans they negotiated with the United Auto Workers in more prosperous days.
Shrinking market share and increased automation now means Chrysler employs about 49,000 people in the U.S. but supports 125,000 retirees and spouses. GM has 177,000 U.S. workers and about 500,000 people receiving pensions.
As purely economic choices, the best route for both companies might be to declare bankruptcy and shed themselves of those legacy costs. But such a move would pass huge unfunded pension liabilities to the federal Pension Benefit Guarantee Corp. — another bailout of sorts — while also leaving retirees under age 65 largely without medical insurance. Also, federal pension guarantees drop sharply for early retirees like those who took advantage of “30 and out.”
Even if GM succeeds with its visionary Volt plug-in hybrid, and its expanding fleet of vehicles able to run on E-85 and other alternative fuels, it can never compete evenly with Honda or Toyota’s U.S.- based plants without an easing of those legacy costs. Chrysler’s long-term prospects on its own are even dimmer than GM’s.
We hope any rescue plan for the auto industry renews the debate on how to provide a universal health care plan for Americans comparable to those offered by other advanced industrial nations — and how to pay for it.
