Auto Industry Duress to Take Toll, Worsen Unemployment

Be careful what you wish for. Even a successful auto industry restructuring will involve substantial headcount cuts, deepening the recession underway. A Bloomberg story tallies the likely damage;

While the loans may spare General Motors Corp., Ford Motor Co. and Chrysler LLC from collapse, shrinking their workforces would sap an already weak economy, said Paul Ballew, chief of consumer insight and analytics for Nationwide Mutual Insurance Co. in Columbus, Ohio, and an adviser to the Federal Reserve.

“The degree of restructuring is much broader and much deeper than people assume,” said Ballew, a former GM sales analyst….

Because the industry’s employees are among the best-paid in the U.S., the elimination of one auto worker amounts to erasing 1.7 jobs because of the loss of purchasing power, [economist Robert] Scott said…

GM told Congress it projects trimming its workforce by as many as 30,000 employees by 2012, or 33 percent. Dealers for the biggest U.S. automaker would fall to 4,700 from about 6,500.

Job losses at the dealerships might be 100,000, Scott said…..

Television stations and advertising agencies likely would suffer from GM’s strategy to focus on just four of its eight brands and Ford’s push to emphasize its namesake nameplate.

“If the dealers go out, that is the biggest local advertiser in virtually every market, with nothing obvious to replace it,” said Kip Cassino, research director at consulting firm Borrell Associates in Williamsburg, Virginia.

Local television stations get 25 percent or more of their advertising from automakers, dealers, and dealer associations…

Fewer brands and models will translate into more pressure on suppliers’ employment, which fell 18 percent through June to 590,000, according to the Motor & Equipment Manufacturers Association. Ford, the second-largest U.S. automaker, wants to pare its global purchasing base to about 750 companies from 1,600….

Cutbacks already are being felt at railroads such as Norfolk Southern Corp., the biggest U.S. carrier of vehicles and parts. Auto shipments by rail are down 20 percent in 2008.

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  1. Anonymous

    Two family members dependent on autos already laid off/out of work; neither live in Michigan…

    One sold advertising to local radio stations; car dealerships were freezing up months ago.

    The other sold at a dealership (Toyota) in California. Couldn’t make the “monthly minimum” and the owners were ready to throw in the towel.. back in July. (He moved on to an RV dealership… that filed for bankruptcy, two months after he started.)

    The “lost decade” is upon us – Congress won’t let them fail, but there is no one buying.

    Which begs the real question: what will advertising sales people, auto sales people and financial services do in the “coming infrastructure boom”? For that matter, if you idle 15,000 auto workers (X 3?), are those skills really equivalent to the roads/schools construction crews that are said to be “in assembly” now?

    R in NY

  2. Marsha Keeffer

    Good point about skills matching the jobs the Feds will create. Sales and financial services people will probably retool themselves and do the office and project management work that is needed when big construction jobs are done.

  3. Anonymous

    34 Billion is just the tip of the iceberg, credit is going to be tight through 2010 and that means few consumers loans, especially car loans. They’ll be begging for billions more while firing more workers in 2009.

    What bothers me is that while people talk about the difference between banks being saved and blue collar jobs in the auto industry, the reality is neither are actually different in this case. Tens of thousands of white collar workers have been laid off despite the bailouts and the ones at the top of these banks refuse to trim their ranks.

    Companies can remain top heavy ONLY because of the government’s handouts. The SAME is happening with GM and Chrysler, they will fire thousands of factory workers, and none of the top bean counters or executives that got the companies into this mess. The idea of restructuring is a joke. If they really wanted to restructure they’d fire the guys at the top and hand over control of the company to the engineers who know they’ve been forced to cut corners and design crap products. Maybe letting them do their jobs for once without having to argue over using cheap substitute parts with bean counters will reverse the image these companies have gotten.

    Instead we’ve chosen to build a massive pyramid with a small foundation, and are propping it up with paper.

  4. Anonymous

    Firstly, welcome back Yves and hope your, Quote “face plant” was aimed at a soft pillow.

    The multipliers of this Economic mess are going to be HUGE I think. The further down the road we get the less this down turn has with the Great Depression. A hole new book needs to be written for this one and not just because it is global. America of the 20s and 30s was a completely different time and place in all aspects.

    So many fluffy jobs out their now like hospitality, domestic services and retail that depend on the happy spending of a small percentage of the over all population.

    Because the industry’s employees are among the best-paid in the U.S., the elimination of one auto worker amounts to erasing 1.7 jobs because of the loss of purchasing power, [economist Robert] Scott said…

    In this statement I read a worrying thought, how many at the top and middle of the food chain are slowly closing their purse strings to the many below them? The vine and all of its branches, will wither slowly until the stem and roots are to only thing left to treat, before they die. America is going to require massive re-engineering of its social classes and traditions, well here comes generational change at Stalin speed, just with out the force I hope. I point my finger of blame at Reagan and his “Happy Trails” Economic Deregulation/Law of the Gun vision. lets just hope the new administration has a long term vision and not just a bottle of magic water to pour on the wound (aka Rugby injury time out).


  5. yagij

    More anecdotal logs to put on the discussion fire by using my father as an example.

    My father has worked in car dealerships for almost 30 years. His kind are definitely a/the canary in the coal mine for the rest of myfamily. He is at the front lines of where we currently are and where we are going. He has seen his after-tax take-home go down 70% from Sept. 08 -> Oct. 08. On what was left, it has gone down another 30% from Oct. 08 -> Nov. 08. Putting some simple numbers to it: Sept. 08: $10k -to- Nov. 08 of $2k. Turning on a dime to the tune of 8k USD/month over the course of 60 days meant a personal budgetary cut of 33% as of Nov. 1, and I wouldn't be surprised if he turned that up to 50-65% by Jan. 1 if possible.

    As for the professional side, it is absolute carnage at his dealership, and they were one of the top selling dealerships of their brand in the entire state. They have gone from moving 500 units total as of August 2008 to moving 150 units total as of November 2008. Out of those numbers, 2/3 are new units. Out of the new cars being sold, they are lucky to make $11/unit before financing & insurance. Between the car maker trying to adjust via manufacturing and the dealership trying to adjust via retail, it is a train wreck of epic proportions. They are sitting on 750 new units across 3 large car lots, and the manufacturer is moving another 250 units their way this month. There is no where to put the new inventory, no way to finance the sales of the existing inventory, and basically no way to avoid the wreck unless you want to jump off of a runaway train going over a deep canyon (e.g. No jobs to replace the current job).

    From what I can tell, his management team is completely out of their league. There are so many forces against them in this unfolding script that I'm not sure if any dealership will make it in his market. There is little/no demand for the product and little/no financing for what demand that exists.

    There is so much more to this story, but I may be the next generation's job to chronicle it for future readers.

  6. spare some change?

    Depending on the industry, salespeople are either engineers, or blue collar workers, who don’t want to get their hands dirty.

    I think a surprisingly high percentage of salespeople under the age of 40 can transition back to the real jobs they were doing before sales.

  7. Anonymous

    Too bad those real jobs aren’t there right now. There are literally millions of jobs in America that can be made redundant with some creative thinking, firms that specialize in trimming companies will be doing as well as collection and repo agencies.

  8. purple

    There is massive overcapacity worldwide. Bubbles worldwide. The USA is the epicenter, and the shockwaves are just beginning to touch far off lands.

  9. eh

    You ain’t seen nothin’ yet. Governments who think they can stoke demand with all of these stimulus packages etc are just wasting money. And in the case of the US, it’s the money of future generations of taxpayers. Such is the lack of moral calculus in the US today.

  10. Anonymous

    Depending on whether the bailout is seen as protectionist then I would agree that the best outcome is going to be pretty grim. If it is perceived as protectionist then there is no reason why Nissan and Toyota and others should not protect their workers at home by closing US factories. This seems unlikely but I would not be surprised to see the French and Italians taking some sort of action against US exports as a result.
    Assuming the US government can persuade other countries that the bailout is within the realms that other manufacturers receive at home then at the very least production will be cut. Toyota’s manufacturing in the US is perhaps a good guide, with a complete restructuring of the supply chain and where models are built currently going on.
    Non of this changes the fact that where consumers typically had a little equity in their cars at the time they looked to trade they don’t have any now. With finance insisting that consumers share the risk with a small deposit, very few can afford to buy. It will probably take 3 years for demand to start to pick up, as consumers save the deposits and the second hand car market begins to get constrained. Non of this looks like being taken into account with the restructuring plans, with assumptions being made that better more fuel efficient models would sell in higher volumes.
    The most likely outcome is more restructuring in six months with more money. Once it becomes apparent that job losses in the US are exceeding those in other countries then the US could face difficulties financing all those bailouts and stimulus plans.

  11. Jojo

    @spare some change? at 2:46 AM said “Depending on the industry, salespeople are either engineers, or blue collar workers, who don’t want to get their hands dirty.

    I think a surprisingly high percentage of salespeople under the age of 40 can transition back to the real jobs they were doing before sales.”

    Having worked in technology sales before being laid off in the beginning of the year, let me say that sales jobs ARE real jobs! Don’t disparage sales people. You can have the best engineers, build the best product with the best features but it is of little value if you don’t know how to sell it or don’t have someone to sell it to. Without sales, there is no revenue.

    Yes, there are poor salespeople as well as good salespeople. There are also poorly managed revolving door companies where salespeople are recycled every 6 months or so. Sales is a hard business. But as the old saying goes, “nothing happens until the sale is made”.

    Tying into the auto industry, one of the problems auto manufacturer’s have always had in the USA is that dealerships are independent of the factory. The manufacturer has little real control over how products are sold, how dealerships are managed, the advertising message or how sales are made. I recall that Porsche tried to change this model sometime back (10 -15 years?) by making dealerships run by the manufacturer but were stymied by various state laws that made it difficult or impossible for the manufacturer to own dealerships, so they gave up on the idea.

    Perhaps the time is ripe to reconsider this independent dealership model? This would require law changes at the state level or an overriding law Federal law. I think that an integrated business model from design to manufacturing to sales would be more effective, more efficient and would save both the consumer and the manufacturer $$$.

  12. charlie

    Chrysler just fired 5000 salaried workers. Everyone is going to suffer.

    The issue with the auto industry is demand. We’ve moved from 16 million to 10 million sales a year. High profit vehicles have disappeared. It could get worse — to as low as 6 million. You only need a new car if you wreck the old one – and there are a lot of spare cars in the US. New drivers can wait a bit for a car: you don’t NEED one until you start working.

    A 6 million US vehicle sales a year, Honda and Toyota are going to be bloodied as well. They are too exposed to the US market. They may be better prepared, but Shelby and his republican buddies are kidding themselves if think the Japs won’t shut down their US plants. I think Toyota and Honda have three months of unsold inventory — and while that is better than detroit, those cars are not getting sold in this credit environment.

  13. Anonymous

    It’s one big house of cards isn’t it? One thing falls, it takes down something else, which takes down a couple more things…

    The best case scenario to me is that we gradually have cuts in pay implemented with small amounts of job losses and the UAW do the right thing for their workers and don’t stand in the way. A lot of benefits are going to be lost as well, but I think that is something that will happen across the American workforce for any industry that has to compete with foreign competition. It’s a kind of arbitrage of sorts.

    For those people that think America doesn’t need this type of work in our society and we can just buy cars or other manufactured items made in India or China or that we as one poster suggested just fire a couple million people and it’s no big deal, where do you seriously think people are going to get work at then? Healthcare? Bullsh*t. (and they’ve already started outsourcing the medical analysis and records part of that) Service? Yes, that’s the goal of every 10-year-old making A’s in school in the 5th grade, get a job that pays $5 an hour at JC Penney or Starbucks or tourism shop. Education? If there’s less places for someone to get a job that requires critical thinking, there’s less reason to have a grandiose education system.

    I’m not saying a guy on the Silverado line should make $50 an hour, but every person at the end of the day looks out for their own self-interest, and if we come to a work system where 15-20% of the population have the good jobs that prescribes them to elite status ad infinitum and the rest of us are either unemployed or toil in jobs where we’ll never make it above lower middle-class relative to now because we can’t raise wages past a certain point due to foreign competition, it’d lead to the workforce becoming static and not upwardly mobile. That’s not a very good system for a socially successful country to have. There are maybe 175-200 millionish Americans in this country of able body and working age, and for a country to be socially successful, you probably need 96% of them at a minimum to have jobs.

    I don’t know the answer to this question, but I’ve yet to hear anyone have a satisfactory answer either.

  14. Anonymous

    A general question. It is often stated that during the previous depression, the government work programs did not get us out the depression. Rather, it was WWII. It seems to me this was due to the USG adopting deficit spending and using inflation as a tool to stimulate ecomonic activity. Why does the President elect think that work projects will do the trick this time ? Or are the work projects just designed to prevent a civil breakdown while they look for the next way out?

  15. Bendal

    More anecdotal bad news:

    Car dealerships often are kept in families for generations, and sponsor all sorts of social programs in their towns. Each one that disappears is a blow to that social fabric, and has to either be made up by another business, government money, or not funded at all.

    Mid-priced restaurants are even being affected where I live now. The construction workers aren’t as numerous, and the high-end office workers are cutting back even more in anticipation of layoffs.

    As for the infrastructure stimulus package, I’m in the road industry and we’ve been told the money will be earmarked for projects that can be put to work quickly. That would be things like resurfacing, safety, intersection improvement projects, maybe larger projects if they are “ready to go” and were shelved for lack of funding.

    If a project will take a year or more to go to construction, it won’t be eligible. That right there would eliminate most major projects but a lot of bridge replacement projects might get funded quickly.

  16. Anonymous

    What a nightmare.

    Assume the bailout gets passed (today, tomorrow, Jan 21, whenever), what happens to the money?

    Do they set loan it to buyers (that don’t exist)?

    Do they pay factory workers to do nothing?

    Do they give employees a bunch of the money force them to buy a new car they’ve made?

    Do they prop up dealerships…for them to sit around / twiddle thumbs / tell dirty jokes?

  17. Bob_in_MA

    I feel for car dealerships, or any small business right now.

    But if something good comes of this, maybe it will be the demise of that ridiculous business model.

    There’s the retail price that no one pays, the invoice price which is clearly bogus since so many people pay below “invoice”. Then there is the price you are offered which seems partly due to the alignment of the planets. Five people can go in and get five different prices.

    Everyone feels they’re getting ripped off.

    We almost bought a new car a few months ago. We had the cash.

    But it then they start on with the bullshit and I couldn’t take it. We walked out the door.

  18. Anonymous

    Because the industry’s employees are among the best-paid in the U.S., the elimination of one auto worker amounts to erasing 1.7 jobs because of the loss of purchasing power, [economist Robert] Scott said”

    What wonderful logic. Since UAW makes 1.7 times average worker laying them off is worse then laying off an average paid worker.
    Then definitely we should keep high prices CEOs.

    Unless the UAW pay is scaled down to Toyota/Honda scale big3 can’t compete.
    Giving into UAW demands will come back to haunt Obama like Clinton and gays in the military. Big mistake

  19. Anonymous

    Jojo said: “But as the old saying goes, “nothing happens until the sale is made”.”

    I would vote to kill that meme. How about if people only bought things they absolutely need to live. In a real economy of intelligent people marketing and sales jobs that add absolutely no value to the product don’t exist. Marketing and sales is a big part of what got us into this mess… and sales based consumption is anti-humanity. We can’t afford it anymore.

  20. M.G.

    I wish Professor Krugman did say “disappear”, maybe he really thought it. It makes sense to restructure the economy towards less car less oil. Let’s invest in something else. I really wish the car industry would disappear, around Europe as well. Think for a moment how it would be without private cars. If you cannot imagine a world without private cars just imagine one with small and fuel efficient ones, trains, public transport, car-sharing, car renting, etc.

  21. melpol

    The trillion dollar infusion by Obama even if well meaning is just a delay of the inevitable. It is no different if an old man was pumped full of amphetamines. After it wore off he would still be an old man. The American consumer also gave the economy a burst of energy when given unlimited credit, but when unpaid it brought them back to a harsh reality. We have seen our heights and must settle down to what we can afford to spend.

    The West has lost its technical advantage. China and India are no longer industrially backward nations. They both have first world research and development abilities and have become players in a world of technical over capacity. The dream of the U.S. producing the only 21 century quality auto is admitted to be a fantasy by auto engineers. The best the U.S. can do is to be competitive in a world that shares its industrial know how.

    Consumer demand drives 75 percent of the American economy. We have been on a wild spending spree led by easy credit. Unfortunately the party is over and suppliers of the party goods are now going broke. Unless consumer demand is met in a more responsible way the U.S. will go into a deep depression. Trillions of government stimulation dollars can only give a jolt to an old man that has seen better days.

  22. bg

    Now that we are going to nationalize the car companies, we have lots of “shovel ready” makework to boost employment… make unwanted cars and dump them into the market.

    How do you think Japan will like that?

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