Site Search

Custom Search

Saturday, December 20, 2008

Auto bail-out: can we afford not to?

The recently announced bail-out package for the Big-three auto makers in the United States amounts to a $17.4 billion Christmas present to an industry that has very little chance of surviving the next 12 months intact. The general  consensus uscongressdoes seem to be, however, that this is the price U.S.  taxpayers must pay to have any chance of an orderly restructuring of their domestic auto industry.

Actually, this deal is a temporary rescue package for the Big-two U.S.-owned automakers: General Motors and Chrysler, along with their supply chain of parts manufacturers, etc. Ford seems to be in OK condition for the present and only needs to know there will be funds available if needed in the uncertain economic future of the next year or so.

On our side of the border, we will be shelling out some $4.2 billion of taxpayers’s money for our U.S.-owned auto makers. Details are expected later today.

quote-left-red-grey-bgI would estimate that by the time this is all over, they [U.S. government] could end up spending $150 billion, even more, $200 billion over the next several years.quote-right-red-grey-bg

– Peter Morici, professor at the University of Maryland

Have no doubt, taxpayers will not see a cent of this money back. This is simply bridge financing to allow the automakers to survive until U.S. president-elect Barack Obama takes office in January, after which a more comprehensive bail-out package is expected. We probably will not know for several months just how much the rescue of the Detroit automakers will end up costing Americans and Canadians.

Peter Morici—a business professor at the University of Maryland and an outspoken critic of the Big-three—suggests the federal and Ontario governments could eventually contribute CAN$48 billion.

Another industry analyst, Bill Pochiluk of AutomotiveCompass LLC, said he thinks the bailout will cost the U.S. government “at least” US$60 billion, suggesting the Canadian figure will be closer to CAN$15 billion.

The way I see it, the Big-three are not viable in the long term, but this bailout should buy enough time for an orderly restructuring plan to be developed that, according to experts, will see Canadian workers giving up in the range of $15 to $25 an hour, and job losses in our vehicle assembly and parts sector of between 15,000 and 20,000. The three companies currently operate seven assembly plants, from Oshawa to Windsor, as well as parts factories, in southern Ontario, and have a combined workforce of about 35,000 people, with tens of thousands more working for their suppliers, etc.

In the United States, hourly wages for GM’s unionized factory workers are $29.78 per hour, while Toyota says it pays about $30 per hour. When benefit costs are added, however, GM’s total hourly labor costs balloon to what is said to be $69 an hour, including wages, pensions and health care for active employees and retired workers and spouses. Toyota, which has far fewer retirees and its pension and health care benefits are not as rich as those paid to GM workers, says its total costs are around $48 an hour. This $21 an hour difference can add up to an astounding $42,000 annually per employee.

With the Canadian dollar at par with the U.S. dollar, Canadian Auto Workers (CAW) hourly wage and benefit costs are in the $75 an hour range. That’s $150,000 a year folks.

A disorderly collapse of the Big-three would have a catastrophic cascading effect throughout all three North American economies. If this can somehow be avoided with a total Canadian government investment of $15 to $40 billion in equity and/or repayable loans, I’m all for it. However, this cannot mean subsidizing wage costs five to six times the average industrial wage. This would be clearly unfair to Canadians who do not work in the auto sector.smleaf

1 comment — This is a moderated blog and comments will appear when approved. Please don’t resubmit if your comment doesn’t appear immediately, and please do not post material that is obscene, harassing, defamatory, or otherwise objectionable.

  1. A good post. What is interesting is Ford, I mean they bit the bullet a full two years ago and did a gutsy move. It looks like it paid off. Kudos to them. Chrysler has been a perpetual problem for decades, even with some good products they can't seem to stay more than a few steps from trouble. GM is exactly the general, not that adaptable and not that quick on its feet. A real clean-up crew will need to be brought in to fix these two. (real conservative)

    ReplyDelete

ShareThis