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Does Detroit Deserve a Bailout?

A Big Three collapse could cripple many small businesses with ties to the automotive industry. We asked several Inc. 500|5000 CEOs for their opinions about a possible bailout and how it may affect their companies.
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Auto industry executives came to Capitol Hill last week asking for a bailout, only to leave empty-handed. Leading Senate Democrats call for part of the $700 billion already approved for the financial industry opened up to American automakers and parts suppliers. Republicans and the White House oppose such a measure. Now, after a pair of hearings during which they came under heavy fire from lawmakers, the CEOs of General Motors, Ford, and Chrysler must come up with specific explanations of how the $25 billion emergency loan would help them. But aid for Detroit seems unlikely to come until January when the new Congress convenes -- which may be too late for at least one of the Big Three.

General Motors says that without federal assistance, it could be out of cash by the summer of 2009. If that happens, the company faces bankruptcy: either Chapter 11, which would allow reorganization and a chance at survival, or Chapter 7, meaning complete liquidation. Execs from Ford and Chrysler joined GM CEO Richard Wagoner in his appeal to Congress for help, saying they also face possible insolvency.

Many U.S. businesses have ties to the automotive industry -- from auto parts suppliers to car wash owners to consulting groups. The consequences of a Big Three collapse are uncertain, but would be far-reaching. To get a better sense of the impact of a meltdown in Detroit on America's automotive industry, we asked several Inc. 500|5000 company executives what they think of the possible bailout.

What do you think of the idea of a bailout?

Greg Chaney, Manager, Chacon Autos, Dallas-based owners of eight automotive dealerships: I believe that the U.S. auto industry needs some sort of help. There are quite a few things that have come together to create a perfect storm that could put them out of business. If there is to be a bailout, I think there should certainly be strings attached, as the status quo is not working. They must present some sort of business plan to a board created by the government prior to any money being lent. We should limit what the money could be used for. It should not be used for increased dividends, executive bonuses, stock buy-backs, and only used to acquire another company if approved by the board. I think a heavy emphasis should be put on new alternate fuel vehicles or high fuel efficiency vehicles. And they should improve the quality of their fleet of passenger cars.

Ken Murer, Co-founder, APC Direct, a Chesterfield, Mo.-based advertising firm that creates direct-mail campaigns for car dealerships: With the exceedingly expensive costs of unionized labor, it's impossible to compete with the import companies from Europe and Asia, whose employee costs are significantly lower. The auto industry is crucial to the economy because of all the independent mom and pop suppliers and dealerships that depend on it. They need to consider what they can do to change labor costs so that the bailout can work.

Andre Gist, CEO, Manufacturer's Industrial Group, manufacturers of welded assemblies and fabricated metals for the auto and construction industries based in Lexington, Tenn.: As much as I don't think it's fair, I think it's needed to help the entire industry. We're tied together and bankruptcy would destroy a lot of suppliers that are not at fault. They have to make cost saving internally the same as suppliers. Too much pressure to control cost is pushed down to suppliers. There should not be any raises or bonuses until the loan is paid back. Everything launched after 2012 should make 40 mpg at a minimum.

Roger Layne, CEO, East Tech Company, a Chattanooga, Tenn.-based maker of high-tech machinery for the automotive and construction industries: I agree with the bailout. I don't think there is another option.

Jeff Probst, CEO, Blue Sun Energy, a Golden, Colo.-based integrated agricultural-energy company that makes biodiesel: It is important that the automakers are not given a bailout, but rather a loan that needs to be repaid. When the banking system is not there with credit, the government may have to be the lender. Tough loan terms will motivate the Big Three to do what they must to repay the loan.

Geoff McCollom, Co-owner, Dutch Valley Auto Works, a collision-repair shop in Lancaster, Pa.: Generally speaking, I'm in favor of the free market taking its course. So if some have to declare bankruptcy, so be it. Someone will fill that gap, whether a leaner and meaner GM or Ford or their competitors. If there are cars that want to be bought, someone will get that sale. A Toyota or Honda or Nissan would expand their operations if factory space suddenly became available. But it would be painful either way -- restructuring, shrinking, and cutting jobs would hurt.

What impact would the collapse or bankruptcy of one of the Big Three have on your business?

Greg Chaney: We would most likely see much less of a demand for their vehicles. We would be wary of selling or buying any vehicles from that manufacturer, and we would most likely shift much of our inventory to the more stable companies and to the imports.

Ken Murer: A total collapse would be catastrophic for all the dealers that have invested all their time and energy in building a nice business. And they are powerless to make changes at the factory.

Andre Gist: It would have an effect on me because a lot of my suppliers will be tied up, if not shut down if they cannot be paid. The banks may also decide to cut out of current financing if they're concerned about getting their money back. The banks could shut us all down if they get nervous.

Roger Layne: The impact would not directly affect East Tech. Indirectly, it creates a larger work force unemployed and that may spread further panic among Americans already afraid to spend money. We are cutting back on everything we can.

Jeff Probst: A collapse would negatively impact the economy, and indirectly via a weaker economy, our business. Since our biodiesel fuel can run in any diesel, however, having a particular brand or model of vehicle is not required.

Geoff McCollom: The biggest thing is parts availability. Say if GM collapses and their dealers go out of business, there will be no more parts available. We'll have to go to junkyards or aftermarket parts. And using aftermarket parts is its own can of worms. The parts are off -- they just don't fit as well. So if you came in with a fender dent, the insurance company would total the car, because the parts weren't available and so they couldn't fix it.

There are a wide variety of theories about how the Big Three reached this point: expensive union benefits, stagnation and a lack of innovation, foreign competition. What do you think?

Greg Chaney: I think there is plenty of blame to go around: the management, the unions, and bad timing of this economic mess. For years the Big Three have relied heavily on and became complacent with the sale of trucks and SUV's, because that's where the money was. Consequently, their innovation, quality, and development of passenger cars suffered. Now that people want passenger cars because of lower prices and better fuel economy, the Big Three are caught off guard. Additionally, their cost structures are terrible. With so many expenses under the previous union contracts, retirement health care, and other labor costs I think it is a miracle they have been able to make it this far. If we had that type of labor relationship and costs at our business we would have been forced to shut down long ago.

Ken Murer: The American auto makers have been asked to create smaller, more fuel efficient cars, make electric cars, and increase quality. They've moved down that path, and now the credit crunch has made customers feel not credit worthy, like they can't buy a car. So right as they should be recouping costs, retail sales are down. It's a perfect storm.

Andre Gist: All of the Big Three have small vehicles today. The problem is, not enough of us want them. Americans seem to love larger cars and trucks. They have not tried hard enough to make SUVs and trucks get over 30 miles per gallon, or 40 to 50.

Roger Layne: I think the unions are a big part of the problem. If production slows down at a Big Three plant, unemployed workers still receive full pay and benefits. No one in the private sector can afford this. I think retiree benefits are draining the companies of cash. Unions pick one of the Big Three at contract time to consider striking, to finalize their demands. If the unions joined together, they could shut down the Big Three. All foreign automakers manufacturing in the United States are profitable. None of these plants have unions.

Jeff Probst: The Big Three need to innovate. Consumers are demanding more fuel efficient and environmentally responsible cars while maintaining performance. This includes more energy efficient solutions.

Geoff McCollom: The unions have a huge impact. When the foreign makers came in and built non-union factories, unions refused to give during negotiations. They said to the Big Three, you are making the money, you can afford these demands. The company ultimately has to survive, that's their first priority. Pension benefits are a biggie. Ultimately, the salaries are pretty high for unskilled labor, never mind the middle and upper management. It'll all work itself out, there're just a lot of tough decisions to be made. If you do loan money, then the problem is where do you draw the line? I'm glad I don't have to make that decision.




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