Cynical Synapse

Mon, 24 Nov 2008

Why Does Citigroup Get $25 Billion But Big 3 Don’t?

Filed under: Bailout, Business, Cars, Detroit, Economy, Politics — cynicalsynapse @ 9:39 pm

Detailed Plan?

Congress told the auto company CEOs they needed a detailed plan on what they planned to do with a $25 billion loan. They also have to show how the loan will return the companies to profitability. Did Citigroup come up with such a plan over the weekend? Citigroup got another $2O+ billion on top of the $25 billion they got last month. What’s up with that?

Some have suggested there’s an East Coast bias. I suspect it has more do to with the financial industry has given way more to politicians of both parties than the auto industry has. Is that why Wall Street denizens still get bonuses but auto workers have to give up benefits?

The Big 3 = Detroit

I’m rather concerned at a recurring theme in blog and news articles that refer to the Big 3 (GM, Ford, and Chrylser) as “Detroit” or the “Detroit automakers.” Make no mistake: this is much farther reaching than most care to admit. GM has manufacturing plants in 29 states; Ford and Chrysler each operate in about a dozen states. Each has plants in both Canada and Mexico. So, this is not a Detroit thing, even just considering direct employment.

Beyond direct employment in the design and manufacture of vehicles, there is a dealer network and a host of suppliers that touches all 50 states. And, don’t forget the ancillary businesses, like the local diner, that exist to support, or because of, a plant’s operations. Oh, and a minor detail: the taxes all those jobs generate.

Anyone live in a town where a major employer just closed up shop? Anyone have a friend, neighbor, or relative who got laid off or fired because the employer down-sized or moved? The potential job losses at stake with one or more of the Big 3 going belly-up is huge: 1-3 million. If that happens, the current recession will last for years. Walmart doesn’t have enough low-paying, part-time jobs to put 3 million people to work. So, like it or not, we need the Big 3 right now for the sake of our economy.

Not Meeting Consumer Demands

Funny how no one complained about the Big 3’s focus on trucks and SUVs until 2008. What happened? Oh, yeah. Gas prices shot up over $4 for a brief period. Now, all of the sudden, it’s the fault of the Big 3 and their “refusal” to make cars ordinary people want. Excuse me, but until this year, the Big 3’s profits came from those trucks and SUVs. They’ve each always had small cars but they never enjoyed much market share.

It’s not fair to make product mix a part of the rescue plan. Even the leanest design trail takes a good 5 to 6 years from concept to market. It takes several months to a year or more to adjust manufacturing capacity. Until the recent gas crisis, the Big 3 were providing the vehicles American consumers wanted. Just because consumers have suddenly changed their minds doesn’t mean the Big 3 refused to make small cars. The credit crisis is as much to blame as anything for the Big 3’s current situation.

As for quality, US-designed cars account for a quarter of the top 20 brands. Mercury and Ford are in the top 10, with Cadillac, Chevrolet, Pontiac, Lincoln, and Buick joining in the top 20. This does not indicate an industry that lacks quality and customer focus.

Competitive Labor Costs

This is, admittedly, an issue. But it is one the Big 3 and the United Auto Workers are working on. Would you want next year’s pay cut by 30% compared to this year? I suspect not. Would you want unemployment benefits eliminated without warning? Probably not if you were dependent on them.

In the 2007 contract, the UAW and the Big 3 agreed to sweeping changes. These including shifting retiree health care to the union, limiting Jobs Bank time to 2 years, and a two-tiered wage structure. The benefits of some of these changes will begin to accrue next year.

Bailout vs. Loan

“Bailout” carries with it a negative connotation. While you could apply the term to the present circumstances, it’s really a loan. Unlike the Wall Street bailout, there’s an expectation the taxpayers will be reimbursed for the money advanced the auto makers.

Few people batted an eye regarding the $700 billion bailout for Wall Street banks. In 5 business days, not only was that a good deal, but the Senate stacked another $100 billion of pork on top of it. But a $25 billion loan to the auto industry? Why such wailing and gnashing of teeth? I’m confused. Where’s Citigroup’s plan? Why is their executive compensation not under scrutiny?

Even though it makes no real product, $700 billion is ok for an industry that created the current economic crisis through greed and questionable practices. But an industry with tangible products and manufacturing plant doesn’t even deserve 1/28 of the Wall Street bailout in the interests of 3 million jobs? Seems penny wise and dollar foolish to me.

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5 Comments

  1. Perhaps the better question might be; Why should any of the four companies be “bailed out” or for that matter any company period!!!

    Comment by spiritualway — Mon, 24 Nov 2008 @ 9:54 pm

  2. One thing I have noticed about the bailouts — our Pres. appears in the news when announcing approved bailouts, but he doesn’t appear in the news where assistance is denied.

    Comment by Fiddlehead Filly — Mon, 24 Nov 2008 @ 11:17 pm

  3. I concur that greed has veered us onto this recession highway. But, have any of the bailouts forestalled a financial disaster? We can only hope. Let us also hope that at the current velocity and heavy congestion of bailouts that we don’t careen into a full-blown depression.

    Frankly, you have an excellent point about the Citigroup comparison. If they qualify for ANOTHER $20 billion, surely the Big-3 should likewise qualify … particularly in light of the many downstream repercussions.

    However, one has to ask when they’ll request the next one. Will it be February or March? And, why aren’t BMW, Honda, Toyota, Porsche, Mercedes, and Subaru importuning in the bailout queue?

    IMHO, there are two reasons. First, their management teams have made more correct decisions. Second, the unions take far less from these companies. Estimates are that Big-3’s car prices include nearly $2000 in union expenses that these other manufacturers are not burdened with. Thus, Honda and Toyota can offer $2000 “more” features for the same price.

    Ergo, these issues must be addressed so that the Big-3 don’t come back in three months like swine to the slop trough.

    Finally, here’s my idea. Instead of an outright bailout or an enormous loan, why not offer a government funded rebate on new car purchases? Let the amount range from $1500 to $3000 based on the fuel-economy of the vehicle.

    Comment by LukeAmerica2020 — Sat, 29 Nov 2008 @ 3:12 am

  4. Valid comments, all.

    @LukeAmerica2020:
    Regarding the so-called union expenses, bear in mind the Big 3 have been in business for over 100 years. The legacy costs of pensions and healthcare continue to grow. Comparing this with the foreign companies is like apples to oranges. Both Germany and Japan underwrite the healthcare and pension systems. Even so, their auto industries started fresh after WWII.

    As for the transplants, they’re located in the traditionally non-union south and in right-to-work states. Can’t blame them and that does give them a competitive edge. They also have zero legacy costs since they’re relatively new plants. I don’t have an answer for this one, but I don’t think we want the unions to give back everything they’ve worked for over the last century. Do we all want to make Chinese wages? The UAW has made concessions. They do need to participate in the bridge loan process, though.

    Agreed, the Big 3 haven’t been the smartest or most astute. But most people didn’t see the financial meltdown coming nor did anyone expect gasoline to shoot to $4/gallon. Until then, they were making the vehicles consumers wanted. Now consumers can’t get loans.

    I like our voucher idea. That will stimulate the economy and keep people working. Ultimately, that’s my end objective. So when is that $700 billion Wall Street bailout going to start making a difference?

    Comment by cynicalsynapse — Sat, 29 Nov 2008 @ 10:39 am

  5. Again, to re-phrase the question in last comment: “Why do we think a $700 billion “bailout” is going “to make a difference”?

    If we truly wish to look at our present situation in the reality of the global economic situation, we are going to have to lose some “hubris”; which I define as an outsized confidence in the ability of the federal government to re-shape the national economy for the better!

    Comment by spiritualway — Sun, 30 Nov 2008 @ 11:34 am


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