US car bail-out fails in Senate

[Vulpix]

BBC News: A $14bn (£9.4bn) bail-out deal for the US car industry has failed to get Senate support, raising fears of job cuts and a possible industry collapse.

Bipartisan talks on the rescue plan collapsed over Republican demands that the United Auto Workers (UAW) union agree to swift wage cuts.

The White House said the plan was American carmakers' "best chance to avoid a disorderly bankruptcy".

Shares fell sharply around the world on the news.
Japan's Nikkei share index fell 484.68 points, or 5.6%, to 8253.87, with carmakers among the hardest hit. Shares in Toyota, Honda and Nissan all fell by at least 10%.

German, French and UK stocks all opened lower on the news, with the FTSE-100 index of leading shares down 147.4 points at 4,241 in early trade.

Tense and emotional

The Republicans left the closed-door meetings after the UAW union refused to cut wages next year to bring them into line with their Japanese counterparts. UAW's current contract with the car makers expires in 2011.

"We were about three words away from a deal," said Republican Sen Bob Corker . "We solved everything substantively and about three words keep us from reaching a conclusion."

Alan Reuther, the UAW's legislative director, declined to comment to reporters as he left a meeting room during the negotiations, according to the Associated Press.

The BBC's Andy Gallacher in Washington says it was always going to be a battle to get the US Senate to approve the $14bn bridging loan.
With a majority of just one in the Senate, the Democrats needed some Republicans to back the bill as some in their own party was expected to vote against the bill.

The atmosphere in the Senate was tense and at times emotional, our correspondent says, as the Democrats made last-minute pleas to get their Republican counterparts to vote in favour of helping America's biggest car makers, Ford, Chrysler and General Motors.

Millions affected

The three companies employ 250,000 people directly and the failure of the bail-out raises the prospect of huge job losses.
The Senate majority leader, Harry Reid, said he was "terribly disappointed" when it became clear the vote had collapsed, calling it a "a loss for the country".

"Millions of Americans, not only the auto workers but people who sell cars, car dealerships, people who work on cars are going to be directly impacted and affected."

White House spokesman Tony Fratto said the government would evaluate its options in light of the collapse of the negotiations, but did not elaborate.

"We think the legislation we negotiated provided an opportunity to use funds already appropriated for automakers and presented the best chance to avoid a disorderly bankruptcy while ensuring taxpayer funds only go to firms whose stakeholders were prepared to make difficult decisions to become viable," he said.

President-elect Barack Obama had also supported the bill.

Help needed

The deal would have given the Big Three carmakers access to emergency funding to help them cope with the sharp downturn in sales because of the global financial crisis.

General Motors and Chrysler have said they risk ruin without immediate aid. Ford says it may need funds in the future.
The bosses of the three firms had previously asked for $34bn from Congress.

They have all seen sales fall sharply this year in the US, partly reflecting an industry-wide fall, and partly because their large gas-guzzling vehicles are no longer what customers want.

[SwordoftheVistula]

The three companies employ 250,000 people directly and the failure of the bail-out raises the prospect of huge job losses.
The Senate majority leader, Harry Reid, said he was "terribly disappointed" when it became clear the vote had collapsed, calling it a "a loss for the country".

"Millions of Americans, not only the auto workers but people who sell cars, car dealerships, people who work on cars are going to be directly impacted and affected."

These people would not be immediately put out of work if a company files for bankruptcy. Operations would continue for a time period while the company, the people to whom it owes money, and others negotiate under court supervision and try to come up with a plan to make the company profitable again. If this fails, the company is 'liquidated', meaning the company is disbanded and its assets are sold off piecemeal. Even this would not mean all jobs would be lost: for example, if GM has an assembly plant in Tennessee, and Hyundai buys this assembly plant at the bankruptcy sale, there would still be jobs at this assembly plant.

Over time, there would not be a net job loss, as people would continue to want to buy cars, and those cars would have to be made by someone. If not by GM and Chrysler factories, then by the Kia and Hyundai factories that replace them.

There may well be permanent job losses in 'people who sell cars'. This would be a good thing. Part of the reason the Detroit companies are losing money is because they have multiple times the number of dealerships as other car companies with similar amounts of sales. They can't close down these excess dealerships due to contracts and anti-monopoly laws. Bankruptcy would allow them to do this with court approval. Car salesmen don't do anything productive for the economy, and this sort of reorganization would get rid of unproductive jobs.

To claim 'people who work on cars' will lose jobs because of a bankruptcy filing is absurd. Auto mechanics get work from the number of existing cars on the road, not new car sales. If anything, there would be more work for auto mechanics, as people who can't buy a new Dodge Ram or whatever have to get their old ones fixed up instead.

They have all seen sales fall sharply this year in the US, partly reflecting an industry-wide fall, and partly because their large gas-guzzling vehicles are no longer what customers want.

This is not really true. The Detroit companies make large vehicles that customers want: pickup trucks, SUVs, and sport cars.

What Detroit companies do not make is small cars that people want. People prefer Hyundai, Kia, Honda, Toyota, Suzuki, Nissan, and Subaru small cars.

The sensible business move would be for the Detroit companies to do what Land Rover does and focus on building the products that people actually want (SUVs and Trucks) and stop trying to compete in markets that they lose out on (small cars). But-they can't do this as a matter of law thanks to the CAFE 'fuel-economy standards' which means that the average vehicle produced by the company must get a certain mpg. This means that they are forced to produce small cars and sell them at a loss in order to be allowed to sell the trucks & SUVs that they do well with. They are not even allowed to import their small & fuel efficient cars from overseas, as the law divides the measurement up into 'vehicles made in North America' and 'vehicles made overseas', both of which must meet the 'total average mpg' standard.

[Vulpix]

Very interesting, I had no idea about this.

The sensible business move would be for the Detroit companies to do what Land Rover does and focus on building the products that people actually want (SUVs and Trucks) and stop trying to compete in markets that they lose out on (small cars). But-they can't do this as a matter of law thanks to the CAFE 'fuel-economy standards' which means that the average vehicle produced by the company must get a certain mpg. This means that they are forced to produce small cars and sell them at a loss in order to be allowed to sell the trucks & SUVs that they do well with. They are not even allowed to import their small & fuel efficient cars from overseas, as the law divides the measurement up into 'vehicles made in North America' and 'vehicles made overseas', both of which must meet the 'total average mpg' standard.

[Æmeric]

The Big Three auto manufacturers have been begging for a bailout from Congress or else they will run out of money & declare bankruptcy. Today Chrysler announced it would shutdown all of it's plants for a month starting Dec. 19. They may not reopen & this could be the end of Chrysler.

On a brighter note, crude oil fell below $40. Whoever thought we'd see oil this cheap again.

[SwordoftheVistula]

The investment fund that owns Chrysler doesn't want to put anymore money into it, so I don't see why the taxpayers should be expected to.