Problems in Detroit could trickle down to the Fort Smith area

The political machinations of a potential auto industry bailout might be taking place in Washington, D.C., but the Fort Smith area is not immune from the impact of decisions made by political leaders of both parties and the executives at General Motors, Ford and Chrysler.

The executives of the big three auto companies are asking for a $25 billion bailout. The details on such a bailout are not only complex, but unclear — with the lack of clarity being the primary cause behind lack of political certainty on how best to help the auto industry.

BAILOUT POLITICS

The political sides are best presented in the reports of Congressional hearings that took place Wednesday (Nov. 19). U.S. Rep. Barney Frank, D-Mass. and chairman of the House Financial Services Committee, asked how the government could justify a bailout for banks and insurers, but not the automakers. Senate Republican leader Mitch McConnell proposed to tap $25 billion of auto retooling loans already approved by Congress. The White House endorses McConnell’s idea.

Barclays Capital analyst Brian Johnson said a workable bill is possible only if certain restructuring requirements in the proposed House bill are combined with the proposed Senate bill draft and the funding pulled from the energy bill to gain White House support.

“Assuming defeat, GM would have to ‘run on fumes’ until the next Congress and administration, unless Congress were to reconvene in December to address emergency compromise legislation,” Johnson said in a note to clients.

FORT SMITH REGIONAL IMPACT

But what does this mean for the Fort Smith region? Potentially a loss of more regional manufacturing jobs. And, if conditions are as bad as some economists suggest, the region could see bankruptcies or closings among area car dealers.

The Arkansas Economic Development Commission reported in 2006 that 80 companies employing more than 12,500 are tied to auto and auto parts manufacturing.

There are numerous small and large companies in the Fort Smith region tied closely to auto manufacturing — directly by providing products and material to auto makers and their vendors, or indirectly by providing services to companies affiliated with the auto sector.

Those include:
• Bekaert Corp., with large manufacturing operations in Van Buren and Rogers. 
• Cloyes Gear, which employs about 300 (estimate, unconfirmed) at operations in Fort Smith, Paris and Subiaco.
• Gerdau Ameristeel (formerly MacSteel), which employs about 400 in Fort Smith, produces steel rolls used to manufacture auto products.
• BorgWarner Morse TEC in Sallisaw employs about 300. The company, at four locations in the U.S., manufactures automotive chain systems for engine timing and power transmission transfer and oil pumps.

Also, Fort Smith-based ABF Freight System and Van Buren-based USA Truck could see freight demand decline if one or all of the automakers fail. Arkansas Best Corp., the parent company of ABF, has already instituted layoffs as a result of weak national freight demand.

Companies doing business with the big three U.S. automakers should expect to see that business decline, said Jeff Collins, an economist with Springdale-based Street Smart Data Services.

“No matter what happens with respect to the bailout, these are going to be smaller companies,” Collins said of GM, Ford and Chrysler.

Collins predicted a “continuation of the trend in which the U.S. auto manufacturers are not as competitive” in the global auto market. Labor and health care costs, Collins said, are key reasons for the competitive disadvantage.

Also, Collins said, a bailout should come with the same requirements of a bankruptcy court; that is to say, the government should require automakers to show how they will change their models so they will be profitable going forward.

“A bankruptcy court demands that kind of change … They want to know, ‘Hey, how are you going to be profitable when you emerge from bankruptcy?’ I don’t see why that shouldn’t be required of a bailout,” Collins explained.

COSTS OF A COLLAPSE

To be sure, a collapse of the big three U.S. automakers will create negative economic pressures in almost every U.S. metropolitan area.

The Center for Automotive Research, an Ann Arbor, Mich.-based group, recently reported that almost 3 million jobs nationwide would be lost if all three U.S. automakers failed. More than 2.4 million jobs would be lost if just 50 percent of U.S. automaker production was lost. The research group said 732,800 U.S. workers were direct employees of the U.S. motor vehicle and parts industries as of September 2008.

Despite the impact on local and national economies, there remain valid differences of opinion as to the merit of a bailout and, if a bailout is necessary, what the bailout package should cover.

BAILOUT PROS AND CONS

Two of the more succinct pros and cons on this issue come from Gary Becker and Richard Posner.

Becker argues against a bailout. His points include:

“The main problem with American auto companies is that during the good times of the 1970s, 1980s and 1990s, they made overly generous settlements with the United Auto workers (UAW) on wages, pensions, and health benefits. Only a couple of years ago, GM was paying $5 billion per year in health benefits to retirees and current employees because their plans had wide health coverage with minimal co-payments and deductibility on health claims by present and retired employees.”

“It is not that cars cannot be produced profitably with American workers: the American plants of Toyota and other Japanese companies, and of German auto manufacturers, have been profitable for many years. The foreign companies have achieved this mainly by setting up their factories in Southern and border states where they could avoid the UAW, and thereby introduce efficient methods of production.”

Posner, who says a bailout is needed, makes these points:
“The major problems with allowing the automakers to be forced into bankruptcy within the next few months are three, all arising from the depression that the nation appears to be rapidly sinking into. The first problem is that the companies might have to liquidate, because they might be unable to attract the substantial post-bankruptcy loans that they would need to enable them to remain in business.”

“Second, not only the size of the automakers, but peculiarities of the industry, would cause bankruptcy to greatly exacerbate the nation’s already dire economic condition.”

“(Third) The likely psychological impact of a bankruptcy of the U.S.-owned auto industry should not be underestimated. Already consumers, rendered fearful by repeated misinformation from government officials concerning the gravity of the economic situation, are reducing their buying, precipitating big layoffs in the retail industry, which in turn reduce buying power, which in turn spurs more layoffs. This vicious cycle would be accelerated by the laying off of hundreds of thousands of workers in the automobile industry, including employees of suppliers and dealers as well as of the manufacturers.”