Published December 9, 2008

Saving the Big Three may worsen recession

GM, Ford and Chrysler's pledge to cut jobs may further weaken economy

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(SOUTHFIELD, Michigan) US carmakers' pledges for more payroll cuts to win federal aid may deepen the recession after they eliminated more than 100,000 jobs in the past three years.

Seeking aid: (from left) Chrysler's Robert Nardelli, Ford's Alan Mulally and General Motors' Richard Wagoner

While the loans may spare General Motors Corp, Ford Motor Co and Chrysler LLC from collapse, shrinking their workforces would sap an already weak economy, said Paul Ballew, chief of consumer insight and analytics for Nationwide Mutual Insurance Co in Columbus, Ohio, and an adviser to the Federal Reserve.

'The degree of restructuring is much broader and much deeper than people assume,' said Mr Ballew, a former GM sales analyst. The industry has endured 'a tough slog for the past few decades, and this is the next phase of restructuring that is probably going to be more severe'.

Even a successful industry rescue of the carmakers would hurt suppliers and dealers along with governments and industries as disparate as railroads that haul cars and broadcasters dependent on car ads.

'Sometimes you have to sacrifice a piece to save the whole,' said Kim Rodriguez, a principal at accounting firm Grant Thornton LLP. 'Regardless of the funding you're going to have major plant closures, major brand cuts, and there is unfortunately going to be a loss of jobs.'

Carmakers say a bankruptcy would cause a domino effect in which the failure of one company likely would topple the others. GM has said that it needs US$4 billion to keep operating through the end of this year.

Congress and the Bush administration are now working on a package of at least US$14 billion in loans that GM and Chrysler say they need to keep operating through March 31. GM, Ford and Chrysler requested US$34 billion last week in exchange for retrenching to stem losses amid a dwindling US market.

The rescue plan as outlined may do little to revive car sales, which exceeded 15 million a year from 1996 to 2007. US sales probably will total 13.3 million in 2008, Standard & Poor's said on Nov 24. Annual totals may not reach 13 million over the next four years, according to GM's worst-case scenario.

'Even if the companies succeed in getting a bailout plan enacted, the restructuring is going to be costly in terms of jobs lost,' said Robert Scott, an economist at the Economic Policy Institute, a Washington-based research group aligned with unions.

Because the industry's employees are among the best-paid in the US, the elimination of one car worker amounts to erasing 1.7 jobs because of the loss of purchasing power, Mr Scott said.

GM told Congress that it projects trimming its workforce by as many as 30,000 employees by 2012, or 33 per cent. Dealers for the biggest US carmaker would fall to 4,700 from about 6,500.

Job losses at the dealerships might be 100,000, Mr Scott said. 'That will hit a lot of local economies, including money dealers often give to local institutions.'

The motor-vehicle and parts industry employed about 827,700 people as of November, down 15 per cent from a year earlier, according to the US Bureau of Labor Statistics.

Ford and Auburn Hills, Michigan-based Chrysler didn't project future employment in their survival plans. Dearborn, Michigan-based Ford said that it expects US$1 billion in operating-cost reductions in 2009, while Chrysler chief executive officer Robert Nardelli told Congress that the third-largest US carmaker has pinpointed US$4 billion savings from its restructuring.

Senator Christopher Dodd, a Connecticut Democrat who is chairman of the Senate Banking Committee, said on Dec 7 that GM chief executive Richard Wagoner should be replaced as a condition for federal aid and Chrysler may have to merge to survive.

Television stations and advertising agencies likely would suffer from GM's strategy to focus on just four of its eight brands and Ford's push to emphasise its namesake nameplate.

Local television stations get 25 per cent or more of their advertising from carmakers, dealers, and dealer associations, Mr Cassino said.

Fewer brands and models will translate into more pressure on suppliers' employment, which fell 18 per cent through June to 590,000, according to the Motor & Equipment Manufacturers Association. - Bloomberg