Detroit Facing Dramatic Downsizing

Within the next couple of years, 600,000 more jobs will disappear in the U.S. auto and related industries.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

December 3, 2008

U.S. automakers are too big to fail, but they’re also too big to succeed in their current form. So Congress will reluctantly help, but the aid will come at a cost to Detroit in the form of scorched-earth downsizing and restructuring.

Figure on around 60,000 blue-collar jobs disappearing a year from now -- a 25% cut, on average -- at General Motors (GM), Ford and Chrysler, which will reduce the car companies’ workforce to 180,000 or less in coming years. The number of U.S. auto assembly plants in the Midwest will drop from 53 to around 36.

The net effect on the U.S. auto industry: 600,000 jobs lost, if you include the impact on suppliers, service providers and businesses in towns that rely on the Detroit Three. That’s a body blow to an economy already in recession and a devastated industry. Overall sales for Detroit automakers plunged 40.2% in November compared with a year ago: Chrysler, down by 47%; Ford, a 33% drop; and GM, a 41% decline.

The United Auto Workers union will have to swallow big cuts in pay and benefits, with more workers shunted to the tiered system created in 2007. That means wages and benefits totaling $25 an hour, which is what Toyota and Honda pay U.S. workers, rather than the $75 an hour most union workers get now. And there’ll be no more contracts that pay idled autoworkers 95% of wages plus health and pension benefits, which are already costing Detroit car companies around $330 million a year.

Detroit will have to be weaned off incentive cash back and 0% financing. Those deals knocked $10 billion from GM's earning every year they were available and billions from the earnings of GM’s American-based rivals.

U.S. automakers will downsize their brands, too, to weed out relatively weak-selling models, gaining cost efficiencies that accrue with large-volume production. "For GM, that means getting rid of anything outside of Chevrolet and Cadillac, such as Buick and Pontiac," says Erich Merkle, an auto industry analyst with Crowe Horwath, a consulting firm.

Ford may well look to fold its tent on the Mercury brand, focusing on Lincoln. There's not much Chrysler can do, since its Chrysler, Dodge and Jeep brands have all taken a wallop in the market and are bleeding away their share of sales, Merkle says.

Chrysler is likely to pull through the crisis, but its long-term prognosis is poor. Without the leverage of global operations to drive down the cost of parts and just a 10% share of the U.S. market for new-car sales, Chrysler is at a cost disadvantage that makes it hard to compete with domestic and foreign rivals.

Cerberus Capital will buff up Chrysler and sell Jeep and other brands piecemeal. "Chrysler will use the federal loan to try to make itself a little healthier for a sale or a partner in the interim, but there's no way that Chrysler can survive on its own in the U.S. because the volume sales are just not there anymore," says Aaron Bragman, an auto analyst with IHS Global Insight, a business consultancy.

There’ll be big changes, too, in the kinds and sizes of car Detroit produces. GM will put the Chevy Volt’s plug-in hybrid technology in many more models within five years. GM will focus on its core brands Chevrolet, Buick, GMC and Cadillac. The company will sell Saab, shrink Pontiac to a niche brand and consider selling or closing Saturn. It also plans to trim its U.S. dealerships from today’s 6,450 to about 4,700.

Also expect a turbocharged, fuel efficient Chevy Cruze in two years. Ford will roll out the hybrid Fusion, which is touted as more efficient than the Toyota Camry, and in 2010 will unveil a Fiesta that gets 40 miles per gallon on the highway. Chrysler will sell a high-mileage subcompact from Nissan in 2010, but it has nothing else in the works -- one reason the firm may be sold off.

Congress can’t actually rescue automakers headed for bankruptcy court, truth be told. Auto executives, lawmakers and investors know that this strategy would at best buy Detroit a few weeks of extra time. And probably nothing good would happen during that period. Raising billions of dollars in necessary debtor-in-possession financing from banks and investment houses is unlikely in today’s wretched markets. And selling autos to spooked consumers would be extremely tough, since most would-be buyers are already wondering whether these companies will even be around long enough to honor auto leases, let alone to back car purchase warrantees.

If a car company were to go belly-up, it would turn into a de facto liquidation, says Bragman. "There would be a quick cascading effect that would see that bankrupt automaker's suppliers fail, and since Toyota, Honda and others rely on many of the same suppliers, most of the industry would have to shut down production for months," he adds.

Auto executives will be back in Washington this week to plead their case for billions of dollars in loan guarantees as UAW leaders meet behind closed doors to consider new concessions. The next few months for the U.S. auto industry will probably be the most difficult in decades, but the American automaker is not at death’s door.

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