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A lot rides on Big 3 bailout

Posted by tothewire on November 16, 2008

Big chunk of area’s economy is hitched to motor vehicles.

It is far worse than anyone had imagined – portending such damage to the economy that President-elect Barack Obama, President Bush, and the lame-duck Congress are making it Issue No. 1: General Motors Corp. is teetering on the edge of bankruptcy. As political leaders debate whether to toss a taxpayer-funded life preserver to all three beleaguered Detroit automakers, the damage from the industry’s implosion is spreading rapidly even in the Philadelphia region, where new-car dealers employ 15,000 people.

Whether bailout or bankruptcy prevails, the stakes are huge: In Pennsylvania, New Jersey and Delaware, automotive-related jobs produce $1.8 billion in annual wages, according to one tally. If GM or any of its counterparts were to fail, the impact could not be understated.

GM is a company with an iconic name and a century-old pedigree once synonymous with U.S. industrial hegemony, and it’s an economic engine for about 2.5 million wage earners nationwide.

Never has the famous 1953 quote from Defense Secretary Charles Erwin “Engine Charlie” Wilson seemed more fraught: “For years I thought what was good for our country was good for General Motors, and vice versa.”

Already this fall, communities across the Philadelphia region have watched new lots and showrooms shut down almost weekly and braced as the ax fell on the few local factories.

The frenzied effort at cost-cutting to match hemorrhaging sales provoked by the global financial crisis and consumer squeeze has largely come at the hands of the onetime Michigan auto giants: GM, Ford Motor Co. and Chrysler L.L.C. Theirs are the dealerships going dark.

As the companies scramble to cut costs and consolidate operations, many workers are going home with little more than a paycheck and a final handshake goodbye. Commercial real estate is going empty acres at a time.

And state coffers are draining as big-ticket car sales dry up and corresponding sales-tax revenue diminishes. In Pennsylvania, for example, which normally collects about $100 million a month in auto-related sales taxes, anemic sales are compounding its own fiscal woes, according to an official with the state’s leading auto-industry trade group.

As Senate leaders begin hearings tomorrow on a proposed $25 billion emergency-loan package for the industry, one thing appears certain: The damage will continue. And it will extend from the Capitol in Harrisburg into the mortgaged living rooms of unemployed car mechanics in South Jersey and beyond.

“All the employment and the ripple effect felt through the economy – I think an overwhelming majority of people don’t want to see any of these companies fail,” said John Devlin, vice president of the Pennsylvania Automotive Association.

In New Jersey, there were 11,000 jobs generating $670 million in wages as of October, said Kristin Dziczek, senior project manager for the Center for Automotive Research in Ann Arbor, Mich. In Delaware, 2,200 jobs attached to $161 million in payroll. And in Pennsylvania, there were 27,000 jobs in automotive assembly, parts, wholesale and new-car dealerships with a $1 billion annual payroll, she said.

Many of the jobs in those states are on the retail side. Pennsylvania is home to the third-highest number of new-car dealerships in the nation, though it is only the sixth-largest state by population.

It has an arguably bloated dealership network, partly the product of a decades-old legacy dating to when domestic automakers commanded market share. They could make money anywhere they set up shop – so they did.

GM, Ford and Chrysler liberally dispensed dealership franchises across the state, which was early to embrace the nation’s car-loving culture and is home to the first major four-lane highway in the country (the Pennsylvania Turnpike).

State numbers on the total number of new-car dealerships by manufacturer are hard to come by, in part because, as foreign vehicles have become more popular, dealers have modified their approach and now sell U.S. and foreign models on their lots, officials said.

But experts say most new-car dealerships shutting down sell domestic cars, whose large offering of gas-guzzling models made them especially vulnerable when gasoline hit $4 a gallon this year – and when the September stock-market panic sent the economy into the danger zone.

The economic mess is expected to take out even more Pennsylvania dealerships in the months ahead, whether in far-flung rural areas or the Philadelphia suburbs.

“You can’t have five different dealers in a 10-mile radius,” said Sean Maher, associate economist and automotive analyst at Moody’s Economy.com in West Chester. “It’s just too much.”

Two of the state’s 67 counties – rural Forest and Cameron Counties, where “there’s more deer than people” – have no remaining new-car dealerships, Devlin said. A third county, which Devlin declined to name, will join that list in the next few months when its only remaining dealership (domestic) is expected to go out of business.

In 1970, long before foreign competition was a threat to U.S. manufacturers, Pennsylvania was home to about 2,000 new-car dealerships, Devlin said.

Many of them remained open over the last decade even as Ford, Chrysler and GM’s combined share of U.S. auto sales dropped from about 72 percent in January 1998 to 47 percent last month.

There were 1,161 new-car dealers across the state by the end of 2007. Devlin said up to 70 – mostly Big Three franchises – would be closed by the end of this year, a state record.

“They have too many dealers based on the much lower level of market share,” Maher said. “Only the most profitable dealerships are going to be able to survive.”

The dismal earnings reports released this month by Ford and GM, combined with rising unemployment and the credit crunch that has frightened consumers, have pushed the Big Three into desperate straits.

Leading U.S. automaker GM posted a 45.1 percent sales drop in October – its worst since World War II, Maher said. Its shares hit a 65-year low after the company said it might run out of the cash it needs to pay its bills by the end of the year.

Overall, industry sales in the United States fell 31.9 percent last month.

Ford, the second-largest U.S. automaker, said its automotive operations had lost $2.9 billion in the third quarter, which just ended.

In September, Congress approved a measure to lend the three U.S. carmakers $25 billion to help speed the development of fuel-efficient vehicles.

But with the global economy rapidly deteriorating, the automakers are lobbying hard for $25 billion in emergency bailout loans to help them keep operating.

Democrats and Republicans are divided on whether this would be a wise or wasteful expenditure of taxpayer money. The $25 billion would be extracted from the $700 billion financial-sector bailout approved by Congress.

Economists say there would be reverberations across the economy if any of the automakers died out – a worst-case scenario that is nonetheless plausible.

“The industry’s been struggling for a long time,” said economist Maher. “But this is the first point where anyone’s really thought that any of these guys are on the edge and they could disappear.”

 


8 Responses to “A lot rides on Big 3 bailout”

  1. I found your site on Google and read a few of your other entires. Nice Stuff. I’m looking forward to reading more from you.

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  2. I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you down the road!

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  3. tothewire said

    Hey Mike Thank you for stopping in! We try to update the site daily.

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  4. tothewire said

    Hello Bruce! We love to hear from our readers and value your opinions!

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  5. cylkis said

    What did GM expect? When they transferred all the jobs to “Best Shore”? Did they expect loyalty to remain? Even if it did where is our purchasing power? The automakers employment outside of the US far exceeds the domestic numbers. Michigan UAW members couldn’t even fill Ford field (The home of the Detroit Lions). Families here in the US are losing their jobs no matter what happens to GM & Chrysler. If the automakers fail, the US jobless count will not increase by that huge of a number. All ex-pats would have to return to their home country. What hardship would fall on the upper management? They are the ones responsible for the jobs being transferred overseas.

    In 1979 Chrysler suffered a loss of $1.1 billion. That year the corporation requested aid from the government. In 1980 the Chrysler Loan Guarantee Act was passed, which provided $1.5 billion in loans to rescue Chrysler from insolvency. Thirty years later they still are not producing cars the consumers want or need. They have an inventory of unwanted cars so large they plan on giving a $25,000 voucher to those employees being let go. Those families can’t eat metal & rubber. Who is going to do the maintenance & warranty repair? Now they think we the people should give them over $50 billion dollars. “Warren Buffet” types will walk in & pick up the pieces for the real value. We would be better off giving the displaced UAW workers the $10 billion dollars to feed back into the system through purchases. These purchases would raise demand. Increase in demand would require an expanded workforce. The Government would get the money back through various taxes.

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  6. tothewire said

    Hello Cylkis! Good points and well written! Enjoyed your post!

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