Automakers: Senate's Carrot and Stick Strategy Undermined

After the Senate's failure to pass a package for the auto industry, a different sort of black Friday seemed in store for America. However, just before the market opened, the White House took to fire fighting. The well-timed Administration statement served to settle volatility. Still, the Senate's carrot and stick strategy was sure to fail as long as the UAW knew the Administration had a carrot store of its own ready to offer.

The White House blamed Congressmen, while Congressmen blamed the UAW. The UAW in turn, argued the Senators didn't understand the situation. Meanwhile, the UAW made public appeal Friday morning to U.S. Treasury Secretary Henry Paulson, asking him to backstop the industry. Paulson issued a near simultaneous statement that the U.S. Treasury was prepared to preserve automakers following the failure of the Senate. Stocks stabilized by midday, and rose into the close.

The Situation

What started out as an industry request for $25 billion, later upped to $34 billion, ended up trimmed to a $14 billion package meant to tide automakers over until the Obama Administration takes office. Cutting the number was a wise decision on the politicians' part. It forces General Motors (NYSE: GM) and Chrysler to make more of the hard choices, like Ford (NYSE: F) has made. It also raises the stakes for the UAW, that first must ensure their union workers are employed, before ensuring their contracts are honored.

While realizing the opportunity before them, Republicans in the Senate sought to offer carrot and stick to the companies and the union. Led by novice Republican Senator Corker from Tennessee, the Senate laid out an aggressive plan to ensure automakers would emerge from this tough time more competitive and without need for further funding. Corker sought to offer incentive for the Big 3 to "cram down" two-thirds of the auto giants' debt, which would obviously make it more manageable.

Corker's rotten carrot that the UAW couldn't digest was a request for the union to move Detroit into a more "competitive" operating position. However, Detroit has already restructured legacy retirement costs, to be picked up by the UAW starting in 2010. Also, U.S. corporate health care expenditures do not compare with social welfare provided in Asian nations. Still the UAW could cut its per hour salary average by $3.50, to bring it in line with U.S. workers employed by foreign automakers.

A Poor Bluff

The UAW stubbornly held, likely counting on the Administration to swoop in to the rescue. Rumors abound that the Administration would do so, so wouldn't any bargain-artist worth his sales pitch play that card out before making any concession? After all, the six month crutch might provide Detroit the buffer it needs to find other means towards survival. I can't blame the UAW chieftains for doing exactly what any negotiator with sense would do. Its role is to protect the interests of its members, and so anything less would be a failure of its responsibility. So, as long as there was hope the Administration would provide safety net, the UAW had room to maneuver.

The only question that remains now falls to the Administration. Do Bush and Paulson carry a stick in their back pocket, and if not, how many carrots can one TARP farm produce?

Comments

[china1324:]

auto industry will be passing the hat again in matter of months it's a bottomless pit!

2008 Dec 14 11:03 AM

[rwoods13@ms...:]

The senate and your article is misfocused: thinking that the cost of absolute wage rates - the cost of an hour of labor paid to an employee even if it includes benefits - is the wrong issue and should not be part of the bridge financing the auto industry is trying to obtain.

Generally, good companies pay above average wages relative to its peers, however, good companies also have lower wage costs as a percentage of either overall costs and/or gross receipts. It comes back to the productivity of those labor costs, not the absolute wage rate. the relative costs not the WAGE RATE PAID TO AN EMPLOYEE is relevent
Second,
Although, the Auto industry is not innocent in this mess the big three are currently a victim of circumstance:
They are not responsible for the lack of car financing, at almost any cost or term; add the state of the capital markets: commercial debt financing is not available at any cost and compound that by the unavailability to access the equity market and you have the current state of affairs - all outside the control of the auto executives and their stakeholders - Blame Wall Street for this one.

Congress needs to take some responsibility too: add the gas crisis to the mix – cheap gas thru the nineties and early part of this decade to gas prices near quadrupling in six years, excluding the last three months or so. Add the incentives, through the tax code, to acquire large vehicles and no incentive through tax policy to build and/or acquire smaller, more fuel efficient vehicles and now you have congress as a contributing factor to this current mess.
Third,
Bankruptcy is not an option: Debtor-in Possession Financing, (DIP financing) would still have to be provided by the federal government, because DIP financing is not available from any commercial lender at least in the current finance/banking environment, and the Federal government still ends up providing the funding except the pain the auto industry would experience is only multiplied in BK and ripple through the economy to many other sectors.

Pundits and republicans should stop trying to exact a pound of flesh for some imagined slight perceived and invest in ourselves – our fellow Americans - and quit playing politics with the auto bailout.

2008 Dec 14 11:46 AM

[woodsey:]

Exactly.

2008 Dec 14 01:07 PM

[working at ...:]

Senate seat for sale

December 14, 2008

A “No” vote on the loan package for Detroit’s Big Three was a chance for the GOP senators from the South who led the charge against the legislation to kill two birds with one stone. Not only could they strike a blow to the United Autoworkers, a traditional adversary, but they could also advance the economic interests of their own states. Unfortunately, these senators voted against the economic interests of their own country.

Foreign automakers have spent billions building plants in the states these senators represent. Should America’s automakers go down for the count, Americans would still need cars and foreign automakers would step in and spend additional billions building more plants in, you guessed it, the states of these very same GOP senators.

Christopher Hayes of The Nation magazine was interviewed on MSNBC’s Countdown with Keith Olbermann show last week and pointed out what he called “the worst-kept secret in Washington.” Hayes was referring to the glaring double standard that these Southern senators, Alabama’s Senator Richard Shelby in particular, have displayed.

“They’ve been throwing taxpayer dollars at Toyota for years in Alabama and no one raises a stink about that” Hayes said. In fact, as Olbermann noted, Alabama alone has given more in tax subsides per job to foreign automakers than Detroit was asking for in the bailout plan to save jobs at American companies.

The Big Three haven’t been competing against Toyota and Honda and Nissan; they’ve been competing against Japan. Unlike America, that nation actually has an industrial policy. While our government talked about the virtues of free trade, the Japanese government worked hand in glove with their automakers to help make them the world leaders.

Japan is aggressively trying to do with autos what they did with consumer electronics – undercut American manufacturers, drive them out of business and capture the American market. Japan heavily subsidizes their automakers, they fund their research, they manipulate their currency, and they erect trade barriers that make it virtually impossible for American automakers to export to their country. Think the fact that Pacific Rim nations buy up 80-percent of our government debt has something to do with keeping our government from enacting policies to level the playing field? The bank that holds your mortgage doesn't dance to your tune, you dance to the tune of the bank that holds your mortgage.

I don’t care what you’re manufacturing or if your CEO is Albert Einstein, if you are competing against a country that actually has universal health care, while you’re forced to add $1,200 to $1,500 to the cost to every unit you manufacture to cover your employees’ health care, you’re not going to be competitive. If your country doesn’t rebate the value added tax when you export your product while your competitor’s country does, not only will you be priced out of their market, your foreign competitor’s government subsidy will put them at a tremendous price advantage on your home turf.

Now, thanks to the likes of Senator Shelby, the Big Three are not only competing against Japan, they’re also forced to compete against their very own government.

The fact that nothing is made in America anymore is a familiar lament of Americans. But here’s what Americans don’t seem to get: what little is still being manufactured in America is increasingly being made in foreign-owned plants of foreign-owned companies.

I realize that there is a long history of sharecropping in the South, but I see no advantage to we Americans becoming sharecroppers in our own country.

2008 Dec 14 11:06 PM

[working at ...:]

Senate seat for sale
December 14, 2008
A “No” vote on the loan package for Detroit’s Big Three was a chance for the GOP senators from the South who led the charge against the legislation to kill two birds with one stone. Not only could they strike a blow to the United Autoworkers, a traditional adversary, but they could also advance the economic interests of their own states. Unfortunately, these senators voted against the economic interests of their own country.

Foreign automakers have spent billions building plants in the states these senators represent. Should America’s automakers go down for the count, Americans would still need cars and foreign automakers would step in and spend additional billions building more plants in, you guessed it, the states of these very same GOP senators.

Christopher Hayes of The Nation magazine was interviewed on MSNBC’s Countdown with Keith Olbermann show last week and pointed out what he called “the worst-kept secret in Washington.” Hayes was referring to the glaring double standard that these Southern senators, Alabama’s Senator Richard Shelby in particular, have displayed.

“They’ve been throwing taxpayer dollars at Toyota for years in Alabama and no one raises a stink about that” Hayes said. In fact, as Olbermann noted, Alabama alone has given more in tax subsides per job to foreign automakers than Detroit was asking for in the bailout plan to save jobs at American companies.

The Big Three haven’t been competing against Toyota and Honda and Nissan; they’ve been competing against Japan. Unlike America, that nation actually has an industrial policy. While our government talked about the virtues of free trade, the Japanese government worked hand in glove with their automakers to help make them the world leaders.

Japan is aggressively trying to do with autos what they did with consumer electronics – undercut American manufacturers, drive them out of business and capture the American market. Japan heavily subsidizes their automakers, they fund their research, they manipulate their currency, and they erect trade barriers that make it virtually impossible for American automakers to export to their country. Think the fact that Pacific Rim nations buy up 80-percent of our government debt has something to do with keeping our government from enacting policies to level the playing field? The bank that holds your mortgage doesn't dance to your tune, you dance to the tune of the bank that holds your mortgage.

I don’t care what you’re manufacturing or if your CEO is Albert Einstein, if you are competing against a country that actually has universal health care, while you’re forced to add $1,200 to $1,500 to the cost to every unit you manufacture to cover your employees’ health care, you’re not going to be competitive. If your country doesn’t rebate the value added tax when you export your product while your competitor’s country does, not only will you be priced out of their market, your foreign competitor’s government subsidy will put them at a tremendous price advantage on your home turf.

Now, thanks to the likes of Senator Shelby, the Big Three are not only competing against Japan, they’re also forced to compete against their very own government.

The fact that nothing is made in America anymore is a familiar lament of Americans. But here’s what Americans don’t seem to get: what little is still being manufactured in America is increasingly being made in foreign-owned plants of foreign-owned companies.

I realize that there is a long history of sharecropping in the South, but I see no advantage to we Americans becoming sharecroppers in our own country.
Hey, Southerners: Detroit 3 helped you to survive

BY TOM WALSH
FREE PRESS COLUMNIST
When Hurricane Katrina slammed into Louisiana and Alabama on Aug. 29, 2005, the automobile companies of Detroit did not harrumph that the gulf coast should have been better prepared.
They didn't sit back and wait for New Orleans to submit a detailed plan for future repair of the ruptured levees.
General Motors Corp., on Aug. 30, donated $400,000 to the American Red Cross 2005 Hurricane Relief Fund, pledged to match up to $250,000 more in employee contributions, and sent more than 150 vehicles to the stricken area for use in relief work.
Ford Motor Co. and the UAW quickly made a joint donation of $100,000 to the Red Cross. The Chrysler Group gave $150,000 to the Red Cross and $200,000 to local New Orleans charities. DaimlerChrysler Services chipped in $200,000 for the Red Cross and pledged to match employee donations up to $50,000.
The three Detroit auto companies together gave more than $18 million in cash and vehicles to the Katrina relief effort in the ensuing months. No strings attached.
The U.S. Senate’s most adamant naysayers about whether Detroit deserves rescue loans should have thought about that before now. It might have made Thursday’s futile wrangling over a compromise to get $14 billion in emergency rescue loans for GM and Chrysler a bit less tortuous.
U.S. Sen. David Vitter, R-La., for one, might have dialed down his earlier rhetoric.
Vitter said Wednesday that he plans to vote against the rescue because, in his words, it is "ass-backwards" to give money to the distressed companies before Congress sees more detailed survival plans.
Sen. Richard Shelby, R-Ala., should think about Hurricane Katrina, too. He has threatened a filibuster against the bill, calling it "a bridge loan to nowhere" and stating that Detroit's automakers should undergo a fundamental restructuring before they ask Congress for money.
None of the logical arguments made by, or on behalf of, Detroit's auto industry seem to resonate with certain congressional critics.
Not the fact that GM, Ford and Chrysler have slashed billions of dollars in costs. Not the fact that they have the nation's top-selling pickups and minivans. Not the fact that they have lots of high-mileage vehicles and more on the way. Not the fact an auto company bankruptcy would have a horrible ripple effect, wiping out scores of suppliers and making hundreds of thousands more U.S. workers jobless.
No, to the most adamant auto-rescue opponents in the Senate, Detroit doesn't make cars people want. It's a dinosaur not worth preserving.
Could the opinions of these senators be colored by the fact that the foreign-owned plants of Toyota, Honda, Hyundai, Kia, BMW, Nissan and Volkswagen -- which compete with the Detroit Three -- are located in their states?
Nah, let's not even go there.
Let's just say that since logic hasn't worked, we should fall back on a simple moral argument.
If you see a fellow American is drowning, gasping for air, do you quiz him for a while about whether he's drunk or why he never learned to swim better? Or do you throw him a life buoy and ask questions later?
That, it seems to me, is where we are with America's car companies.
You have done nothing and failed them, senators.
So now it's up to President George W. Bush and Treasury Secretary Hank Paulson to, hopefully, rush in with emergency aid from the $700-billion Troubled Assets Relief Program.
They could still hold the Detroit Three's feet to the fire afterward, empowering a strong auto czar to bring all stakeholders together to forge business models for these companies that can withstand future shocks.

2008 Dec 14 11:09 PM

[Tim Miles:]

Auto workers wages were not really the issue 1) since wages only represent 10 percent of the cost of a car and 2) Toyota's average wages in the United States are comparable to the BIg 3. The Center for Automotive Research has already exploded the myth that U.S. auto workers are over paid at $70 per hour.

The Republican Senate vote was an outrage and a disgrace. Here are people who gave Wall Street and financial services companies$700B with little oversight and few strings attached. In fact, there is a recently discovered loophole that will result in no limitations on CEO compensation.

As reported in an unpublished Federal history of U.S. assistance to Iraq since 2003, Congress has wasted $117B on Iraq reconstruction. These same Republican senators can bail out Iraq, but they can't give $15B to help 3 million workers in the U.S. auto and related industries, not to mention businesses in the communities where they are located. I hope the "average joes" in Ohio and elsewhere in the United States remember this attack on organized labor.

2008 Dec 15 07:27 AM

[sumosama:]

I think you need to learn how voting works. The ones with 50 or more votes wins. Today, the Dems have 55+ seats in the senate. Thus, there are dems who did not vote the way you want them to.

Like wise the votes for reconstruction aid to Iraq.

You really do need to revisit your civics lessons!


On Dec 15 07:27 AM Tim Miles wrote:

> Auto workers wages were not really the issue 1) since wages only
> represent 10 percent of the cost of a car and 2) Toyota's average
> wages in the United States are comparable to the BIg 3. The Center
> for Automotive Research has already exploded the myth that U.S. auto
> workers are over paid at $70 per hour.
>
> The Republican Senate vote was an outrage and a disgrace. Here are
> people who gave Wall Street and financial services companies$700B
> with little oversight and few strings attached. In fact, there is
> a recently discovered loophole that will result in no limitations
> on CEO compensation.
>
> As reported in an unpublished Federal history of U.S. assistance
> to Iraq since 2003, Congress has wasted $117B on Iraq reconstruction.
> These same Republican senators can bail out Iraq, but they can't
> give $15B to help 3 million workers in the U.S. auto and related
> industries, not to mention businesses in the communities where they
> are located. I hope the "average joes" in Ohio and elsewhere in the
> United States remember this attack on organized labor.

2008 Dec 15 12:23 PM