Michael Palay: Articles - Interesting articles about Palay and Friends

Way back in 1979 when Chrysler needed government help, there was a political cartoon that perfectly captured the situation. If featured an old Plymouth Fury with giant tail fins teetering halfway over a cliff, with a tow truck parked nearby. A bystander wearing a shirt labeled U.S. Taxpayer was staring at the car on the cliff. The tow truck driver was nonchalantly picking his teeth and telling the taxpayer, "I can tow it out, or push it over the cliff, but either way it's going to cost you."

And so here we are again, only this time it's not just Chrysler. Now GM and Ford need to get towed back onto solid ground, too. And while there are plenty of people saying, "Let them die," the reality is that it'll be cheaper to bail them out.

John McElroy is host of the TV program "Autoline Detroit" and daily web video "Autoline Daily". Every week he brings his unique insights as an auto industry insider to Autoblog readers.

While it's frustrating to see that Chrysler needs help again, it's important to remember what happened after the government bailout of 30 years ago. Not only did Chrysler come roaring back and pay off the loans seven years early, Uncle Sam made a $350 million profit on the whole deal. Investors who stuck with the company made a fortune, too. Chrysler stock shot from $3 a share to over $30, a 1,000% return in just a few years time. Most people seem to miss the fact that they are on the verge of a massive turnaround. If the Big Three get a government bailout this time, I see history repeating itself. Most people seem to miss the fact that they are on the verge of a massive turnaround. I'm not trying to be a rah-rah cheerleader here. I'm persuaded simply by the facts.

Last year's UAW contract was truly historic in that it will completely remove the health care cost burden off the Big Three. Though they have to give the union the money to assume this burden, they're paying 40% less than it would otherwise cost them. After 2010 they stop paying billions in health care every year and start dropping that money to the bottom line.

Moreover, there will no longer be any pensions for new hires. They'll get 401k's instead. Again, massive cost savings going forward.

On top of that the UAW workforce takes big pay cuts, and new hires come in at a wage rate that is roughly the same that Toyota, Honda, Nissan, et al, are paying their American workers. In other words, the Big Three can finally compete with the transplants from a labor cost standpoint. That means they can now make small cars in America without losing money on every one they make. The Big Three can finally compete with the transplants from a labor cost standpoint. Another benefit of that new labor contract is that the Big Three are no longer pressured to keep building cars and trucks in the face of weak demand. Under the old labor contract it was cheaper to build cars and slap big incentives on them than it was to not build them in the first place. Now, they can build to actual demand, and they're running on much tighter inventory.

That means they'll be able to slash their incentives. Every $1,000 that General Motors cuts from incentives will drop roughly $4 billion to the bottom line. And GM has an average of $3,500 in incentives!

Plus, the Big Three are taking out a huge amount of overcapacity, roughly two million units. To fulfill demand in the future their plants will have to run at full capacity, and that's when car companies literally become cash machines.

What this means is that when the economy finally starts to recover and the car market begins to grow again, GM, Ford and Chrysler will be in an extremely competitive position, one they haven't been in for more than 40 years.

And that's why those who say giving them a bailout is just throwing good money after bad are dead wrong. The Big Three are not only on the verge of a roaring comeback, I predict that in the next decade they'll go on to hit record profits.

Auto industry turns its back on a miserable 2008, focuses on new opportunities

TORONTO - The North American auto industry is hanging on by its fingernails as the smash-up derby that was 2008 crashes to a close.

But industry players are turning to the new year with as much optimism as they can muster, convinced the industry will not only survive but will emerge rejuvenated and ready to innovate.

Sam Gindin, former economist for the Canadian Auto Workers union and currently a political scientist at York University in Toronto, said there's plenty of opportunity waiting to be seized, but first the industry has to shed its defeatist attitude.

"Part of the problem is that people have been defeated for a long time, expectations have been lowered about what's possible, and that's why it's so important to get out of that frame of mind," Gindin said. "If we think small, we're going to end up losing everything."

Employees drive past a "thank you" banner outside the GM Moraine Assembly plant in Dayton, Ohio on Tuesday, Dec. 23, 2008, after the final shift at the plant. The last SUV was built at 3:48 pm, ending a production run that began in 1982 and leaving over 1,000 employees without a job. THE ASSOCIATED PRESS/Skip Peterson

It's difficult to be anything but defeatist when reviewing the auto industry's fortunes in 2008.

Between 12,000 and 13,000 fewer Canadians work in the industry today than at the end of 2007, according to Scotiabank economist Carlos Gomes. That's a decline of almost 10 per cent.

The industry was suffering long before the economic slowdown from a combination of a high Canadian dollar, which hurt exports, and a slump in U.S. demand for North American-produced vehicles.

When the financial crisis hit in the fall, economic worries sent demand plummeting even further, the automakers suddenly finding it was nearly impossible to squeeze cash out of tight credit markets, pushing GM and especially Chrysler to the verge of bankruptcy.

The two automakers pleaded with governments in both the U.S. and Canada to provide them with emergency loans. Without the funding, they warned they might not survive the year.

Both governments eventually complied. The Bush administration provided US$17.4 billion to the beleaguered automakers on Dec. 19, and the federal and Ontario governments followed suit on Dec. 20, providing a proportional C$4 billion to GM and Chrysler's Canadian subsidiaries.

Ford, the third member of the so-called Detroit Three, is doing slightly better and hasn't asked for a loan, just a line of credit to draw upon if required.

Joe D'Cruz, a professor at the University of Toronto's Rotman School of Management, said that even with the loans, the industry is going to continue to shrink dramatically.

"Even in the best-case scenario there will be many further job losses," he said.

Analysts have predicted that, even with the aid package, the Canadian industry will lose as many as 20,000 more jobs as GM and Chrysler work to restructure and streamline their operations.

But Gindin said it's time to stop worrying so much about the automakers and focus instead what can be done with mothballed plants and, more importantly, the communities they once helped to build.

"I think the way to think about it is to go beyond auto, to say, 'Look, if we want to strengthen our manufacturing base, we can't just lose these productive capacities, these component plants, these tool and die plants,"' Gindin said.

"We have to have some kind of general plan in the economy about where we're going."

CAW president Ken Lewenza said his union is doing exactly that.

"Right now we're thinking about surviving, but long-term we're thinking about positioning ourselves so that when there's a global financial crisis, the stormclouds won't be as heavy next time," Lewenza said.

He said the union will be more aggressive going forward to attract the best and newest technology, an area in which he said Canadian plants currently lag.

"We want to meet whatever the benchmark is in terms of technology. We want in," he said.

But "the union can't do it in isolation," he added.

Lewenza called on the federal government to "let the stakeholders set policy" and give more clout to the Canadian Automotive Partnership Council - an industry organization comprised of automakers, part suppliers, industry associations, the CAW and the Ontario and federal ministers of industry.

Lewenza acknowledged that the "first six months of next year are going to be incredibly tough," but said he's optimistic the industry will emerge from the wreckage smaller but stronger.

"There seems to be a great deal of optimism beyond this four-or five-month window of survival, and we have to think that way," Lewenza said. "Running around with your head down to your knees doesn't do any good."

Bill Pochiluk, president of industry adviser AutomotiveCompass LLC, said there are plenty of opportunities for innovation as the entire industry restructures, and Canada is well positioned to take advantage of these.

"The underlying trend can quickly be summarized as green transformation," Pochiluk said.

"The single best thing you can to do improve fuel economy is mass reduction, you cut the weight," and Canada's aluminum industry is perfectly placed to fill the demand for lighter-weight metals, he added.

New technology is also leading to the replacement of expensive precious metals like platinum and palladium with cheaper metals such as nickel used in catalytic converters.

"There are places in Canada, Sudbury being one of them, that are sitting on a mountain of nickel," Pochiluk said.

"This new technology would be a great opportunity for Canada to use some of its natural resources."

Gindin said it is exactly this type of opportunity that Canada needs to take advantage of to revitalize its economy and revive the manufacturing sector. He said it's not necessarily easy to retool old plants so they can manufacture new items, but it has been done before.

"In 1942 the auto industry stopped production because of the war and we ended up with more jobs because people were making military things at that point in time," he said.

"If we consider this as serious and as urgent as we did the war... why can't we get creative?"

LET EVERYONE KNOW

For the record...

Ford, Chrysler and GM's contributions after 9/11

An interesting commentary...You might find this of
interest:

'CNN Headline News did a short news listing regarding Ford
and GM's
contri butions to the relief and recovery efforts in New
York and Washington .

The findings are as follows.....

1. Ford- $10 million to American Red Cross matching
employee contributions of the same number plus 10
Excursions to NY Fire Dept. The company also offered ER
response team services and office space to displaced
government employees.

2. GM- $10 million to American Red Cross matching employee
contributions of the same number and a fleet of vans,
suv's, and trucks.

3. Daimler Chrysler- $10 million to support of the children
and victims of the Sept. 11 attack.

4. Harley Davidson motorcycles- $1 million and 30 new
motorcycles to the
New YorkPolice Dept.

5. Volkswagen-Employees and management created a Sept 11
Foundation,
funded initial with $2 million, for the assistance of the
children and victims of the WTC.

6. Hyundai- $300,000 to the American Red Cross.

7. Audi-Nothing.

8. BMW-Nothing.

9. Daewoo- Nothing.

10. Fiat-Nothing.

11. Honda- Nothing despite boasting of second best sales
month ever in
August 2001

12. Isuzu- Nothing.

13. Mitsubishi-Nothing..

14. Nissan-Nothing.

15. Porsche-Nothing. Press release with condolences via the
Porsche website.

16. Subaru- Nothing.

17. Suzuki- Nothing.

18. Toyota-Nothing despite claims of high sales in July and
August 2001.
Condolences posted on the website

Whenever the time may be for you to purchase or lease a new
vehicle, keep this information in mind.

You might want to give more consideration to a car manufactured by an
American-owned and / or American based company. Apart from Hyundai and
Volkswagen, the foreign car companies contributed nothing
at all to the citizens of the United States ...

It's OK for these companies to take money out of this
country, but it is apparently not acceptable to return some
in a time of crisis.

I believe we should not forget things like this.
Say thank you in a way that gets their attention..