A big-picture view of automotive bailoutÂ’s impact
On Dec. 19, President Bush announced a plan to aid ailing auto giants General Motors and Chrysler Corp. The plan loans the companies $13.4 billion by mid-January, with funds coming from those that Congress had authorized to rescue the financial industry earlier in the year. But the two companies have until March 31 to produce a plan for long-term profitability, including concessions from unions, creditors, suppliers and dealers.
In February, another $4 billion will be available for GM, if the rest of the $700 billion bailout package has been released.
Terry Clower, associate director of the Center for Economic Development & Research at the University of North Texas in Denton, spoke with the Business PressÂ’ Tonie Auer about the plan and its impact on the auto industry and auto dealers.
Q: What is the big-picture impact of the automaker bailout?
A: The bailout doesnÂ’t give us any sense of what the impact may be. It is a short-term solution to a long-term problem. It is essentially an extension that keeps them afloat until March, and in mid-February, theyÂ’re supposed to report on whether they are making progress. It is not much time for planning their program and making it viable. The challenge lies in the fact that the auto industry has to correct the business model theyÂ’ve used for the past 50 years in a three-month period. The UAW [United Auto Workers] has to agree to wage and workplace reductions as part of the loan, if I understand correctly, so there is a whole lot to still play out.
Q: How will this impact the suppliers and businesses that work with the automakers?
A: Suppliers will be cautious to extend credit for parts because they will worry if bankruptcy is imminent, [wondering if they] will get their money back. This loan is a short-term solution that helps them get through another order, possibly.
Q: How will the bailout impact consumers and auto dealers?
A: It won’t help dealers because consumers are not willing to buy a GM or Chrysler product when they don’t know if the company will be around to honor warranties. The chief automaker executives, themselves, said they need this [loan]. Dealerships are like a wasteland, with salesmen waiting for the next customer to come in. Customers are worried about buying products. I think the automakers are overselling that fear of bankruptcy. Despite the posturing by the automaker executives, many large firms go into bankruptcy and come out stronger than before. Chrysler did it in the late 1970s. Auto executives and the UAW are saying they can’t go into bankruptcy because they won’t emerge. That is too much posturing, I think, and it has had a negative impact on their sales by doing this. Consumers believe what the executives are saying because why would they have said it otherwise? So they’re determining that “this is not the product for me.”
Q: How does the loan benefit the automakers?
A: What it does, is give them time to develop plans, but what those plans are is still unknown to most of us. If they fail to meet the standard showing their viability, how will this have helped? I donÂ’t see any immediate collapse.
Q: How will the government measure the automaker plans?
A: I wonder how they will measure the viability and plans that are reported in March. If they do grant additional funding, they will supplement the loan with another $4 billion, but even that is contingent upon CongressÂ’ funding that part of the budget.
Q: Will the loan make the difference in the companiesÂ’ viability?
A: This is like taking a little Flintstones Band-Aid and using it on a leg that has been amputated. If this gives them time and the impetus to do a plan, thatÂ’s fine. But the automakers keep saying different things. At first, they were facing imminent collapse in mid-2009. Then, it was mid-March and now it is the end of the year.
Q: What was the motivation for President Bush to make this move now?
A: It all boils down to giving some level of confidence to consumers and Wall Street. President Bush is communicating that he wonÂ’t allow two American icons to collapse on themselves. The Bush administration also wanted to do something before the Obama administration gets into office because, had [Bush] not done something, the entire collapse would be attributed to him.
Contact Auer at bizpress@bizpress.net
