Automakers finish 2008 on a bleak note. Expect 2009 to be worse.

How Unions Stop The Cars

Shikha Dalmia , 12.12.08, 03:20 PM EST

Big Labor is a big problem for automakers' survival.

With the late-night demise of legislation containing $14 billion in emergency loans to Detroit's automakers, pressure is once again mounting on President Bush to step in. And he is reportedly thinking of doing just that. But the very thing that doomed this legislation will also doom any effort to rescue the industry: union intransigence. If Bush cares more about taxpayers than kudos, he should decline.

The legislation, backed by Sen. Bob Corker, a Tennessee Republican whose state itself is home to GM facilities, was the industry's best hope to return to health. It stripped some of the green baggage of the House bill that would have consigned Detroit to producing not cars that sell but what eco-warriors want. Nor would the legislation have handed quite as expansive powers of micromanagement to a car czar, forcing companies to obtain approval for basic product and capacity decisions.

Instead, it offered the automakers a way to restructure their massive obligations to labor and debtors, much like a bankruptcy court would do but without the stigma. Bondholders would have been required to accept a 70% loss--the remainder paid in stock, not cash. And Big Labor's main concession (besides accepting some stock instead of cash for its health care trust fund) was that it set a definite date for a pay cut next year.

At that time, its wages and benefits would fall in line with those that Nissan (nasdaq: NSANY - news - people ), Toyota (nyse: TM - news - people ) and other automakers pay their U.S. workers.

But the United Auto Workers reacted as if it had been asked to work in a Third World sweat shop and walked away. Sen. Debbie Stabenow, D-Mich., decried efforts to "sock it" to American workers. Never mind that labor costs make every car rolling out of Detroit $1,500 more expensive to produce than foreign cars made elsewhere in the U.S. Indeed, last year, GM and Toyota sold the same number of cars worldwide, but Toyota turned a healthy profit--while GM posted a $40 billion loss.

But the fact of the matter is that the wage cuts are a necessary condition to give Detroit a fighting chance for survival, but they're not sufficient. Indeed, that would require far more from unions.

Car sales next year are expected to drop 40%. This means that if auto companies are going to use any bailout money to restore viability, they will have to be able to shed some of its quarter-million-strong workforce.

However, if the UAW was unwilling to accept a pay cut, there is no reason to believe that it would compliantly accept such massive layoffs. More likely, it will use taxpayer money to keep every job alive as long as possible--and then return for more a few months later.

Beyond job cuts, the UAW will also have to agree to eliminate a whole host of exceedingly rigid work rules for its remaining constituents. Such rules, for instance, had historically made it difficult to train auto workers for multiple jobs to fulfill multiple needs. No less than labor's extravagant wage demands, these rules have crimped Detroit's adaptability.

Ford recently built a facility in Brazil where it can produce five different vehicle platforms at the same time, on the same line. What's more, many of its suppliers are housed in the facility as well, something that allows them to move parts to the assembly line at a moment's notice. Not only has this lowered Ford's production costs and boosted productivity, it has also given it flexibility to adjust its product mix to shifting market conditions. This is important at any time but is especially crucial now, when volatile oil prices are likely to produce abrupt shifts in consumer demand.

But union rules, with their featherbedding requirements and crabbed job descriptions, make it much harder for such a factory-of-the-future to operate in the U.S.

The irony is that foreign car makers are profitable in America--and the Detroit Three are profitable in every country but America. Only Big Labor can position Detroit carmakers for success in their own country. Bush shouldn't ask already-strapped taxpayers to make sacrifices to pull Detroit back from the precipice when its own key stakeholder won't.

Shikha Dalmia is a senior analyst at the Los Angeles-based Reason Foundation. She can be reached at shikha.dalmia@reason.org.

(CNN) -- There's no indication when -- or if -- the White House and congressional leaders will reach agreement on the Democrats' proposal to give troubled U.S. automakers a financial lifeline.

General Motors Corp. and Chrysler could get $15 billion in federal loans as soon as December 15, according to a working Democratic draft of proposed legislation and a senior Democratic congressional aide.

Meanwhile, one key GM official already is talking about the need for more help from the government -- even before this package's approval.

In an interview Tuesday on CNN's "American Morning," Bob Lutz, GM vice chairman of global product development, told anchor John Roberts that he expects the industry to go back to Washington next year for more money.

John Roberts: A lot of taxpayers are asking if you get this $15 billion collectively, what will you do to make sure your company won't fail?

Bob Lutz: Well, first of all, GM will only get a portion of that money and ... this is simply a bridge loan which will get us into the next administration, where we hope we can do something more fundamental. Because the main problem is the lack of liquidity and the lack of revenue flowing in as we're facing absolutely the lowest, lowest car market in history, and it's not just the domestics, the Japanese are all down 30 percent and 40 percent. Their inventories are piling up. You know, this isn't a question of Detroit is in trouble; the whole automobile industry is going to be in trouble

Roberts: You don't see Toyota and Honda coming to the government for a handout. But based on what you said there -- that this is just the beginning -- you're going to need more money next year?

Lutz: I think that's a reasonable assumption.

Roberts: How much more?

Lutz: At this point, you know, that's going to have to be discussed with Congress. We'll have to see. But this is definitely a bridge loan that will solve the immediate liquidity problem

Roberts: When you come to Congress next year and say, OK, you gave us $15 billion in December, now we need X amount of money, how difficult a sales job will that be?

Lutz: You know, I don't think anybody in Congress or the president-elect assumes that this is all the money that is going to be required to bridge this liquidity crisis that the American automobile industry is facing, and, again, it all depends on how fast we have an economic recovery. Again, let me restate this. At 10.8 or 10.5 million total market, we do not have a viable automobile industry in this country for anybody.
iReport.com: How is the automaker crisis affecting you? Should there be a bailout?

Roberts: Yesterday, you took out a full page ad in the Automotive News Journal; it was a big mea culpa. I guess on GM'S part. You said in part we acknowledge we disappointed you. We violated your trust by letting our quality fall and our designs become lackluster. You also laid out a GM commitment to the American people. First thing, you said specifically we're committed to producing automobiles you want to buy and are excited to own. There are many people who might think that's just a fundamental tenet of free enterprise, and why should that be revolutionary?

Lutz: It isn't. I think people were expecting this sort of message. What we're trying to do with an ad like that is live down this legacy of the '80s. Everybody agrees that American cars of the '80s were not very good and were not competitive with the Japanese. But that was a long time ago.

We've now equaled the Japanese in productivity and quality, and speaking for General Motors we got Car of the Year with the Saturn Aura, Car of the Year for Chevy Malibu, Truck of the Year with the Silverado, Green car of the Year with the Silverado hybrid, and on and and on. Car of the Year with the Cadillac CTS.

Roberts: One more question, Bob, certainly, as a condition of this bridge loan, the government is going to appoint a car czar to oversee what you do with it. They will talk about what kind of models you should build, fuel efficiency you should get. There will be a government approval of any vehicles you make. Who would you like to see as the car czar?

Lutz: Wait a minute. We don't know if it will be a czar or overseer. I doubt whether this person would dictate the product policy.

Roberts: Certainly an idea they are talking about. Who would you be comfortable with as car czar?

Lutz: I wouldn't even -- other than myself? Unfortunately I'm not available because I'm still gainfully employed.

Roberts: Some people [are] floating the idea maybe [that former Massachusetts Gov.] Mitt Romney would be a good car czar. He comes down hard on you guys. His father [George Romney] ran American Motors for a time.

Lutz: Well, I hardly think that the automobile business is a genetic trait, but he would probably be satisfactory as would many other people.

Wall Street had a strong start to the week, after President-elect Barack Obama outlined his economic stimulus plans and indications that Congress will help Detroit's automakers stave off bankruptcy.

Over the weekend, Obama outlined plans to invest in infrastructure, energy and construction projects to spur the U.S. economy out of its year-long recession and create jobs. The proposals came after the Labor Department said the economy shed 533,000 jobs in November.

The major averages started the day higher, as the Dow Jones industrial average gained 269 points, or 3.1%, to 8,904, shortly into the session. The Standard & Poor's 500 was up 31 points, or 3.5%, to 907, while the Nasdaq added 43 points, or 2.9%, to 1,553.

According to TradeTheNews.com, Democrats in Congress and the Bush administration have agreed to the framework of a deal that provide loans to General Motors (nyse: GM - news - people ), Ford Motor (nyse: F - news - people ) and Chrysler, but not nearly the $34.0 billion the companies requested. Rather, the package is believed to be worth around $15.0 billion, and would help GM and Chrysler hold off bankruptcy until at least March, but may require management change. Shares of GM climbed 62 cents, or 15.2%, to $4.70 early Monday, while Ford gained 31 cents, or 11.4%, to $3.03. (See "Promises Of Rescue Come With Demands For Change.")

Still, the news out of corporate America was not all good over the weekend and Monday morning. More job cuts are on the way, from companies like 3M (nyse: MMM - news - people ) and Dow Chemical (nyse: DOW - news - people ).

3M announced over the weekend that it would cut 1,800 jobs in the fourth quarter, and on Monday morning the diversified company cut its 2008 earnings guidance to reflect the global economic slowdown. Shares of the Dow component were up 22 cents, or 0.4%, to $60.07, during the broad rally early Monday.

Dow Chemical said it will lay off 5,000 workers and close 20 plants in "high-cost" locations as part of its accelerated restructuring plans. The news sent Dow shares up $1.03, or 5.4%, to $20.03.

The outlook is also uncertain for MetLife, after the insurance company trimmed its fourth-quarter earnings guidance and said it could report a loss for the period. MetLife (nyse: MET - news - people ) still managed a $1.19, or 3.9%, gain, to $31.95.

AOL Autos) -- You don't have to look too far into the past to find a time when automakers didn't see car safety as a "selling point." But over the last 30 years, car safety has become a prime factor in the minds of car buyers.

So, automakers responded -- and as a result, cars and trucks are much safer today than they were 30, 20, even 10 years ago.

One car segment that has especially benefited from this overall improvement in safety is the sub-compact category. And it's a good thing, too, because as gas prices have soared in the last two years, more buyers are turning away from big trucks, monster SUVs and gas-thirsty muscle cars in favor of smaller, more fuel-efficient vehicles.

Indeed, the small-car category is the fastest-growing segment in the U.S. auto industry, with sales increasing by 12 percent this year, and everyone expects that growth to continue as long as gas prices keep rising -- or even if they just hold steady and don't drop. That's why many automakers have even more sub-compact models in their product pipelines.

So, as Americans' buying preferences have shifted to smaller vehicles, the old debate about the safety of small cars has ignited anew. Some drivers who've been in an SUV for the last six years have been apprehensive about not being surrounded by a massive steel structure and a few dozen feet of sheet metal.

But those who have been forced to "go small" for economic reasons can take comfort in the fact that small cars are much safer today than they were just a decade ago. AOL Autos: Cars with the lowest ownership costs

According to the most recent available data released by the Insurance Institute for Highway Safety (IIHS), the death rate in the smallest cars on the road has dropped to 106 per million registered vehicles, a significant drop from the 165 per million in 1996.

And today, 14 of the 17 top-selling small cars receive good frontal crash test ratings from IIHS, says Adrian Lund, IIHS president. A decade ago, none did. "That's obviously a huge improvement," stresses Lund. "Small cars are indeed much safer now than they were just a decade ago."

The IIHS is a non-profit group, funded by auto insurers, that conducts research on "how to prevent damage and injuries and deaths" in auto accidents, says Lund. AOL Autos: Most popular fuel-efficient cars

"There have been many new technological developments over the last 10 years, and all small cars now have front air bags, many of them have side air bags with head prevention, and many are getting electronic stability control," Lund continues.

"Plus, due to the crash testing conducted by us and by the National Highway Transportation & Safety Administration (NHTSA -- a division of the Department of Transportation), many of the automakers have improved the structural design of the passenger compartment -- which means there is less 'intrusion' into the compartment than there used to be if a crash occurs."

Here are six of the safest small cars on the road, according to NHTSA, which gave all six a frontal-crash-test rating of five stars, the organization's highest rating. AOL Autos: Safest small cars

Ford's small-car entry, the Focus, followed right behind these models, as far as NHTSA is concerned, with a four-star frontal-crash-test rating.

IIHS uses a different system of rating vehicles' crash-test results than NHTSA. And to illustrate the improvement in small-car safety, IIHS compared some current models to older models from the same car maker.

The current Chevy Cobalt, for example, got a "good" overall frontal-crash test rating from IIHS -- the organization's highest rating. Comparatively, the old Chevy Cavalier, which was produced from 1995 - 2005, received a "poor" overall frontal-crash rating. AOL Autos: Four fast cars for under $30,000

"The overall frontal rating," explains IIHS spokesman Russ Rader, "is based on the individual scores for each of the parameters we measure in the test -- such as the performance of the vehicle's structure; injury measures to the head, neck, chest, legs and feet, and the dummy's movement during the test."

Meanwhile, the old Dodge Neon (1995-'99) received a "poor" overall frontal rating, while its replacement, the current Dodge Caliber, scores a "good" rating from IIHS. AOL Autos: Best-selling small cars

And according to IIHS results, the Ford Focus's frontal-offset crash-test results have remained steady -- it received a "good" rating in that category from 2000-'08, although its 2000-'07 models received a "poor" rating when it came to side-impact tests when tested without the optional side airbags.

One car company that has emphasized the safety of small cars in recent years is Honda, which launched its "safety for everyone" initiative in 2003. As part of this initiative, the company announced the development of Advanced Compatibility Engineering (ACE) body structure, which bolstered occupant protection.

"The 2009 Fit will be the latest small model to get ACE when it goes on sale in the next couple of months," says company spokesman Chris Martin. "With the intro of the new Fit, over 94% of Honda's sold in the U.S. will have the Advanced Compatibility Engineering technology."

A couple of years ago, automakers also adopted an initiative that will improve the safety for small-car drivers by agreeing to build trucks and SUVs with lower front ends.

"This should address the incompatibility between cars and trucks, says Lund. "Trucks have always ridden higher than cars -- which makes them inherently more dangerous to drivers of smaller cars in the event of an accident. So, by next year, we'll be seeing light trucks with lower structures," says Lund.

"In the event of an accident, that means that the front end of the truck will hit the bumper or door sill of the car, instead of hitting the car higher up, like in the passenger compartment, which in the past, has made drivers of small cars much more vulnerable to injury."

But, even though small cars have made big safety gains, it is true that big vehicles are still safer than small ones.

"The risk of dying in the smallest car, compared to the largest car, is still 2-to-1," says Lund. "But, now that people are being forced to make the switch to smaller vehicles due to economic considerations, with fuel prices being so high, it's a comfort for them to know that the smallest cars are so much safer than they were 10 years ago."

The current trend toward buying smaller vehicles also prompts Lund to point out that, "if you do want or need to go with a smaller car, it is important to pay attention to its crash-test ratings."

Top Republican senators said Sunday they will oppose a Democratic plan to bail out Detroit automakers, calling the U.S. industry a "dinosaur" whose "day of reckoning" is coming. Their opposition serious raises doubts about whether the plan will pass in this week's postelection session.

Democratic leaders want to use $25 billion of the $700 billion financial industry bailout to help General Motors Corp., Ford Motor Co. and Chrysler LLC.

Sens. Richard Shelby of Alabama and Jon Kyl of Arizona said it would be a mistake to use any of the Wall Street rescue money to prop up the automakers. They said an auto bailout would only postpone the industry's demise.

"Companies fail every day and others take their place. I think this is a road we should not go down," said Shelby, the senior Republican on the Senate Banking, Housing and Urban Affairs Committee.

"They're not building the right products," he said. "They've got good workers but I don't believe they've got good management. They don't innovate. They're a dinosaur in a sense."

Added Kyl, the Senate's second-ranking Republican: "Just giving them $25 billion doesn't change anything. It just puts off for six months or so the day of reckoning."

House Speaker Nancy Pelosi, D-Calif., said over the weekend that the House would provide aid to the ailing industry, though she did not put a price on her plan.

"The House is ready to do it," said Democratic Rep. Barney Frank of Massachusetts, chairman of the House Financial Services Committee. "There's no downside to trying."

But Democrats have only a narrow majority in the Senate and President George W. Bush opposes the idea. That raises the possibility that any help for automakers will have to wait until 2009, when Barack Obama takes office and the Democrats increase their majority in the Senate.

At least two Republican senators support an automaker bailout -- George Voinovich of Ohio and Kit Bond of Missouri. But if the Republicans are seen as neglecting an industry that inevitably collapses, they risk lasting political problems in Midwestern industrial states that can swing for either political party.

Obama won most of the manufacturing states in the presidential race, including Ohio, a perennial battleground, and Indiana, which had not voted for a Democrat for president since 1964. Obama easily won Michigan after Republican John McCain publicly pulled out weeks before Election Day.

Sen. Carl Levin, D-Mich., said automakers are working to adapt to a changing consumer market, but they need immediate help to survive the nation's current economic crisis.

"This is not a Big Three problem alone," Levin said. "This current crisis is a crisis in the economy where there is no credit available to purchase, and where people are not buying cars because they are afraid."

The companies are lobbying lawmakers furiously for an emergency infusion of cash. GM has warned it might not survive through year's end without a government lifeline.

"It's not the General Motors we grew up with. It's a General Motors that is headed down this road to oblivion," said Shelby. "Should we intervene to slow it down, knowing it's going to happen? I say no, not for the American taxpayer."

Obama said he believes that aid is needed but that it should be provided as part of a long-term plan for a "sustainable U.S. auto industry" -- not simply as a blank check.

"For the auto industry to completely collapse would be a disaster in this kind of environment," Obama said in an interview on CBS's "60 Minutes" that was set to air Sunday night. "So my hope is that over the course of the next week, between the White House and Congress, the discussions are shaped around providing assistance but making sure that that assistance is conditioned on labor, management, suppliers, lenders, all of the stakeholders coming together with a plan -- what does a sustainable U.S. auto industry look like?"

Automakers say bankruptcy protection is not an option because people would be reluctant to make long-term car and truck purchases from companies that might not last the life of their vehicles. But lawmakers opposed to the bailout say Chapter 11 might be a better option than government loans and they cite the experience of airlines that have gone through the process of reorganization.

Shelby and Levin were interviewed on NBC's "Meet the Press" and Shelby also appeared with Frank on CBS' "Face the Nation." Kyl spoke on "Fox News Sunday."