21 November 2008
editorial
Johannesburg — IN THE middle of the previous century US drivers would not been seen in anything other than an American car. The US automobile held pride of place in the hearts of most Americans.
How times have changed. The big three Detroit car manufacturers - General Motors (GM), Ford and Chrysler - are now on the brink of bankruptcy and are asking taxpayers to bail them out to the tune of $25bn - and many taxpayers are not keen. As it is, the average American has fallen out of love with US car makers, allowing Japanese manufacturers such as Toyota and Honda to win a large share of the US market. The Detroit trio have disappointed even the most faithful motorists with uncompetitive models.
The three companies' executives were again in Washington this week to ask Congress for funds to stave off bankruptcy, with GM claiming it did not have enough cash to see the year out. Its shares plunged to 60-year lows this month, and its cumulative losses over the past five quarters reached $7bn.
It has been an uphill battle for the three as a reluctant Congress weighs up whether or not to save the motor companies. Whichever option is finally endorsed, there will be huge ramifications for the US and global economy, SA not excluded.
On Wednesday, House financial services chairman Barney Frank criticised those who argued the car manufacturers should file for bankruptcy in order to shed contracts with the unions and dealerships, saying that was "bankruptcy as a spectator sport".
He said it would be unwise to ignore the damage that would be done to the overall economy if one or more car companies went bankrupt. The collapse of the US motor industry will not only affect those directly employed by the companies. The big three motor companies support a large complex of suppliers across a range of industries as well as thousands of dealerships. In all, 1,6-million jobs could be on the line.
In SA 3000 workers face retrenchment if GM were to collapse and several thousand more jobs would be under threat.
However, the proposed cost of a bail-out is not inconsiderable and it would be naive to believe that cost of the overall $700bn bail-out package -- from which the motor companies are seeking $25bn - will not weigh heavily on the US fiscus for years to come, regardless of what the programme achieves in the short term.
There is also the question whether the $25bn bail-out for three car manufacturers will achieve what it is intended to. The three groups will find it hard to compete in an ever-shrinking market. In this market consumers can't afford to buy new cars - in the US and elsewhere.
GM also burned through $6,9bn during the third quarter, leaving it with only $16bn on hand at the end of September. Yet it needs $11bn-$14bn to continue operations.
While it is clear the cost to the economy of collapse is huge, so is the fact that there is no room for three large car companies. They will have to scale back their operations and may eventually disappear. The question is whether that happens now or later.
In 1908 there were 253 car manufacturers in the US. After the 1929 market crash the number of companies in the industry dwindled to 44. How many will be left in 2009?
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