At what point does the pit become bottomless?
The auto industry's financial struggles have begun to amount to a financial sinkhole, and both General Motors and Chrysler are now back in Washington seeking more federal assistance in their struggle to stay afloat. GM Corp., critically important to Western New York, says it will run out of cash in March if more help isn't forthcoming.
But GM already has all but burned through $13.4 billion -- $6.2 billion of it in the past three months -- and expects to spend $14 billion more than it makes this year, after posting a loss of $30.9 billion in 2008. The key question for the Obama administration is whether to pour much more taxpayer and borrowed money into a sinking industry, or to risk the loss of tens of thousands of jobs in an already deep recession by adopting a sink-or-swim attitude.
The answer is this: Lend the money and save the jobs, but only if the industry takes strong steps to turn itself around. Aggressive turn-around plans have been submitted; GM and Chrysler must carry them out if they expect the additional $14 billion they've requested. That's not yet happening.
This is critically important to this region, which has thousands of auto industry-related jobs and can ill afford major hits to such a key part of the regional manufacturing economy. But bad management got the industry into this fix, and good management must be a prerequisite for additional funding.
GM's plan is indeed aggressive -- including 47,000 job cuts even with the additional money. Chrysler, which already reduced its work force by 25 percent last year, plans an additional 3,000 cuts. Brand names will disappear, and more union concessions are needed. Ford, which expects to be able to survive this year without federal help, just reached an agreement with the United Auto Workers that allows funding of the union-managed health care trust fund with company stock as well as cash.
The UAW is expected to follow suit with GM and Chrysler. But to meet the federally imposed goal of making the Big Three competitive with Japanese makers that have plants in this country -- but, because they are newer, have far fewer retirees and far lower retirement obligations -- such concessions are critical to job preservation.
The union also has promised to work with the companies toward eliminating the "job banks" that paid laid-off workers most of their wages and benefits, ostensibly so they could be called back at short notice if there were a surge in auto demand.
Obama's newly named auto task force should take a hard look at progress on the turnaround plans before making any new loans. And it must also weigh the financial risk to the economy of failing to make those loans -- estimates of the cost of bankruptcy, expected to be swift because no refinancing will be available -- at $45 billion to $100 billion for GM, $25 billion for Chrysler.
More loans still may be the best taxpayer bet -- if the companies restructure quickly, reshaping the industry for a future with car production geared toward public demand for less dependence on expensive fuels -- the "retooled, reimagined auto industry" Obama demanded in his State of the Union-like address this week. Given that help, GM estimates it can reach positive cash flows by 2012 and repay all its loans by 2017. That looks highly optimistic; the record is clear and the direction is frightening, with taxpayer dollars at risk.
Washington has poured far larger amounts into the financial industry than the total of $39 billion received or sought by the auto industry. That's understandable, given the underlying, fundamental role the financial industry plays in the entire economy. But the auto industry is the heart of the manufacturing sector of the economy, and its collapse would have national security implications as well as catastrophic economic impacts. Only if the industry shows it can perform, is the money an acceptable risk.