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Automobile Industry in Crisis

The holidays may be a bit jollier for families affected by the automobile industry now that the U.S. Congress has approved an infusion of $15 billion for Detroit's Big Three.

That's good news, but there is no silver lining in this problem. General Motors, Ford and Chrysler have been losing market share to foreign manufacturers and bleeding money for years. Company executives first visited Capitol Hill last month to request loans totaling $25 billion, which they said would allow them to stay in business through the spring.

Congress, whose members were baffled by the unrepentant attitudes shown by the automobile executives, wasn't sure this is a good idea. Much of the American public is still annoyed and puzzled by the $770 billion bailout package pushed through in October and many average citizens are wondering when the corporate welfare will cease.

The executives were more contrite on their second appearance on Capitol Hill. They ditched their expensive corporate jets back home, drove to the hearings in hybrid model automobiles, and offered to trim their annual salaries to $1. The mea culpas sat well with the congressmen, who were more agreeable to listen to their requests.

The new plan would loan $15 billion to the Big Three. The Bush Administration wants assurances that the automakers will have plans to build more fuel-efficient models. There may even be a Car Czar appointed to oversee restructuring of the industry and that reimbursements for the loans would begin as early as next year. The auto unions are looking to gain a seat on the GM board of directors as a response for its concessions. Investors saw the news as positive. Stock for Ford and GM were both up at least 16 percent on Monday.

The demise of The Big Three is well chronicled. GM stock sold for $80 a share less than a decade ago and in the $40 range in October 2007. Ford sold for as much as $38 in April 1999, but hasn't been in double-digits since October 2005. Chrysler became privately held in August 2007 when it was taken over by Cerberus Capital Management. Executives from each company say the situation is dire enough to warrant possible bankruptcies. And there's a prevailing opinion that if one of the Big Three fails, the others might follow.

The problems are too many to mention. The American companies have been surpassed by the foreign companies in terms of reliability and style, even though the imports have a higher sticker price. There are questions about bad management and about how labor union have driven the price of manufacturing too high and need to agree to concessions, although UAW president Ron Gettelfinger did not indicate whether the union would make further concessions.

Much of the problem is image. There is no question that American-made cars have improved. Consumer Reports rates Ford even with Honda and Toyota in terms of quality. And Chevrolet has more vehicles that average 30 mph in its fleet than either Honda or Toyota. But the Big Three has lost so much ground and has such a bad reputation to overcome, that the field is tilted against them.

Should GM go bankrupt, nearly 123,000 people would immediately be out of work. The ensuing ripple effect (suppliers and related companies) could touch almost three million people. And less employment means less tax revenue; the Center for Automotive Research estimates losses of nearly $156 billion over three years.

So where do we go? Congressional members weren't going to budge until the auto leaders provided more specifics on how the money would be spent. Senate majority leader Harry Reid said, "Unless they can show us the plan, we can't show them the money."

President-elect Barack Obama said last week that the companies should not be allowed to fall into bankruptcy, which likely takes that option off the table. But Obama said the automakers should be held accountable for what happens.

- by BetterTrades Financial Analysts