Big Three

by Save the Rustbelt

Title: The Big 3 Dilemma

During the 80s I was an accounting and tax professor two days a week and a consultant three days a week. In cost accounting class I often used the Big 3 as examples of bad business models and disastrous labor contracts. All this in communities with huge auto assembly and parts activity (point being, I was early to the party).

The potential “bail out” of the Big 3 automakers is a hot topic these days.

The federal government, throwing money around the banking system and seeing very little results, is now besieged with requests to help Detroit. Does this make sense?

First, a myth: The Big 3 have made no changes to the union contracts.

Reality: The Big 3 bought out thousands of employees and new employees are starting at low wages and benefits. The Big 3 structured VEBAs in an attempt to control long-term retiree health care obligations.

The Big 3 have also made substantial changes to their business plans and cost structures, although the changes are not a guarantee of long-term viability. The long-term survival of the Big 3 is still in doubt. I figure the Big 3 had about two years to make or break.

Then…………….. along comes the credit crunch and a recession. Now, the Big 3 have about 2 months to make or break.

In the past two months sales for the Big 3 and the transplants (Toyota, Honda, etc.) have cratered, diving to levels no one could have imagined. The Big 3 have huge and urgent cash flow problems.

What happens if the Big 3 go into Chapter 11?

Consumers will be even more hesitant to buy Big 3 autos, due to warranty concerns.

Hundreds of part suppliers will likely go into Chapter 11 within 60 days (this could even hurt the transplants, who sometimes use the same suppliers) as their pre-filing accounts receivable will be frozen. There will be a chain reaction across numerous sectors of the economy (steel, tires, electronics).

Massive job cuts will occur, following the major job cuts that have already occurred. Whole communities would quickly become waste lands. Ohio and Michigan will take an incredible beating, after a decade of beatings. Ugh.

The UAW contracts are toast. Retiree health care benefits are toast. White collar jobs are toast. It is reported that the pension plans may still be viable. The health care VEBAs will be in doubt.

So what should we do? Prepackaged bankruptcy? Bail out? Let the market run its course? Let the ripple effects ripple?

I have no easy answer. Talk among yourselves.
by Save the Rustbelt