When the heads of General Motors gm, Chrysler and Ford Motor f and their major union go to Capitol Hill on Tuesday, they will try to convince lawmakers that if the Big Three automakers go under, the fragile U.S. economy will be dealt a blow far costlier than the $25 billion in aid the companies want.
There's no question the automakers are in dire straits. Without federal aid, or a sales rebound that no one is forecasting soon, at least one of them could have to file for bankruptcy protection. GM has said it's just a quarter or two away from running out of cash. It told dealers it will delay their reimbursement for rebates and incentives due next week, a sign cash flow problems are deepening.
Congress is considering aid for automakers during a special, lame-duck session. Senate Majority Leader Harry Reid, D-Nev., on Monday introduced a bill to amend the $700 billion financial rescue package to mark $25 billion for loans for automakers and their suppliers.
CEOs Rick Wagoner of GM, Alan Mulally of Ford and Robert Nardelli of Chrysler — as well as United Auto Workers union President Ron Gettelfinger — will make their case Tuesday before the Senate Banking Committee, with a similar session set for Wednesday in the House.
The question legislators, pundits, lobbyists and taxpayers are asking is: If we let these guys fail, how bad will it really be for the economy?
Critics say Detroit created its own problems by relying too much on trucks and SUVs and cite a healthier foreign auto industry operating mostly in Southern states that isn't seeking a taxpayer bailout. But even Toyota said this weekend that it fears the impact on the parts suppliers it uses if the USA's domestic auto industry collapses.
Moody's Economy.com chief economist Mark Zandi estimates that 2.6 million jobs — about 1.9% of the U.S. workforce — 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 an additional 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 the fallout from an auto industry crisis.
"We are in a very fragile state. 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 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 who are scattered across states well beyond the Midwest, where the domestic auto industry is based.
Advocates of a bailout argue that if one of the Big Three fails, it could take down an entire supply chain that cuts a wide swath from Wisconsin to Ontario, Canada, and south from Florida to Texas. As Toyota officials pointed out, that would affect all companies making vehicles in the USA.
The impact of the industry woes already is being felt beyond Detroit. Saturday, a Chrysler-Dodge dealership in 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.
Major ad agencies and local media from New York to New Mexico are seeing revenue dry up because automakers and dealers are spending less.
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.
"It's really a national impact across the service sector, as well as the manufacturing sector," says John Paul MacDuffie, co-director of the International Motor Vehicle Program at the Wharton School at the University of Pennsylvania.
The ripple effect of an industry collapse could cause further deterioration in consumer confidence and unemployment, says 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. Under present circumstances, you're looking at an economy in a steep fall already," says Gramley, who, as a member of the Council of Economic Advisers, opposed Chrysler's bailout in 1979.
However, he says, "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.
'Very difficult judgments'
Comerica Bank chief economist Dana Johnson says there are "very difficult judgments" for lawmakers to make about the 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 says.
"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," Johnson says. "There's no question that it is an important industry, that there are linkages to employment elsewhere."
Zandi and many other economists argue there is a better way to aid the auto sector than to bail it out. There is growing support for letting the companies go into bankruptcy, using federal funds to guarantee bank financing.
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," says Michael Cusumano, a professor at MIT's Sloan School of Management who has written two books on the auto industry. He says any reorganization should replace management.
In bankruptcy, there still would be layoffs. "But that will happen in an orderly way," Zandi says. "It won't be millions, or hundreds of thousands, but it would be tens of thousands over a period of time."
Allowing the companies to go into bankruptcy also signals to other industries that the government isn't in the business of easy handouts. And many economists say they don't buy claims by auto industry officials that if the companies go into bankruptcy, the U.S. industry would die.
"When we talk about bankruptcy, we're not talking about them disappearing," Macroeconomic Advisers President Chris Varvares says. "Maybe three become two, and the two are both leaner and meaner."
There are two auto industries in the USA. The first one, 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 spread out between them "like pearls on a necklace" along the highways connecting the South and the Midwest, says Thomas Klier, senior economist at 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 worries about the Big Three. About 75% of Toyota's suppliers here are North American firms that also make parts for Detroit.
"We are concerned with the industry in general, but we're mostly concerned about our suppliers," Toyota spokesman Mike Goss says. "If the worst happens in Detroit and these companies suffer, we're worried about their longevity as well."
And if the supply chain falls apart, Goss says, it could stop production at Toyota's plants, too.
Brian Sanderoff is the president of a New Mexico polling group that does a lot of political work. That meant watching a lot of TV before the presidential election. One of the main things he noticed was a lack of auto ads.
"When one watched the local news in the evening, they used to be filled with car dealer ads," Sanderoff says. "Now, those have been cut back significantly."
In 2007, automakers and their dealers spent more than $17 billion on TV, magazine, Internet, newspaper and billboard advertising, according to TNS Media Intelligence. This year, that's on track to fall at least 17%.
"The auto category obviously has hurt our local television stations quite a bit," CBS CEO Leslie Moonves says.
Banking, an industry battered and bruised already, is at further risk if the auto industry falls apart. In 2007, banks lent $77.1 billion to the auto sector, up 47% from 2000, according to Thomson Reuters.
Yet even if auto companies go into bankruptcy, that doesn't mean the loans held by banks will default, says Joshua Rosner, managing director at investment research firm Graham Fisher.
Automakers say that if they collapse, banks will go down, too. Joe Belew, president of the Consumer Bankers Association, calls that argument "a little hysterical." He says, "The economy is in extremely fragile shape." But "it's a little extreme to say this will pull the banking industry down."
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.
Most of the Big Three's big plants are in the Midwest, but there are retiree groups for each in Florida, Arizona, Alabama, Maryland, Massachusetts, Montana and Tennessee.
John McAlpine, president of a GM retiree club in Phoenix with about 250 members, says retirees have been writing letters and calling lawmakers, urging them to help bail out the auto industry.
"We would hope that they would help, because the domino effect on the number of people involved" would be huge, McAlpine says. "It's not just the people who work at GM or Chrysler or Ford, it's all the suppliers, the subsuppliers, all the people involved in the industry."