The Emporia Gazette

November 8, 2009

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The possibility of government loans to rescue the sinking domestic auto industry was in flux late last week; it remains so today.

It’s a situation that worries Jeff Longbine, legislative representative for the Kansas Auto Dealers Association, who talked on Friday about the situation’s potential for widespread effects if a solution is not found quickly.

Longbine said that public opinion seems to be against helping the domestic automakers. He believes that many Americans do not realize the serious ripple effect that could engulf the country if a solution is not agreed upon soon.

Longbine, who owns Longbine Auto Plaza, talked about the rescue plan and the financial affects on the industry caused by forces beyond domestic automakers’ control.

On Friday, the Senate defeated a bill, on a 52-35 vote, that would have provided $14 billion in loans to the Big 3 automakers, General Motors, Ford Motor Company, and Chrysler Motors.

The Senate had pared down the House of Representatives’ rescue plan to provide $15 billion in loads — and that amount had been halved from the $30-million-plus originally requested by the automakers. The house voted 237-170 in favor of the bill.

The monies were to have been repaid, in contrast to the $700 billion bail-out Congress gave to the financial industry with no restrictions attached.

The Senate balked at the auto rescue bill because of its lack of concessions, primarily missing from the side of organized labor.

“The Senate Republican caucus wanted firmer agreements on concessions,” Longbine said.

Management, bondholders, and shareholders had worked with senators to make major concessions part of the rescue plan.

“Also, the United Auto Workers needed to give a specific date in the calendar year ’09 that they would make additional concessions to become competitive with the foreign transplants,” he said.

When union concessions, with dates and specifics in place, were not presented, the Senate voted down the rescue.

“So therefore, the majority leader (Sen. Henry) Reid offered a procedural vote which basically kills all legislative action on the subject,” Longbine said, adding that he believed the procedural vote surprised many involved.

Longbine identified three options that remain for domestic automakers:

F The Bush administration could use Troubled Asset Relief Program (TARP) funds, “which they’ve had the ability to do all along,” Longbine said.

F The domestics — one, two or all three — could be forced into Chapter 11 bankruptcy and receive government help to try to come out of bankruptcy.

F “If the government doesn’t care to do that, they can take no action and let the chips fall where they may,” Longbine said. “It’s extremely scary.”

Longbine said that the bankruptcy options essentially would ruin the the domestic auto industry.

“What does that do to consumer confidence and people’s willingness to invest in their products?” he asked, rhetorically.

He believes the buying public would not want to invest thousands of dollars to purchase a vehicle from a company that may or may not be in business to warranty the purchase.

Bankruptcy, and its effects, soon would affect the companies and employees that supply parts and other goods to the domestic automakers.

“If one automobile manufacturer declares bankruptcy, they will basically cripple all manufacturers ... and it will severely hurt the transplants because their supply network would cease to exist also,” Longbine predicted. “... Most of the major manufacturers in the world have plants here.”

Volkswagen, Honda, Hyundai, Toyota, Nissan and BMW are among the foreign automakers with plants in the United States. The industry jargon refers to those companies as “transplants.”

Longbine estimated that up to three million jobs could be at risk if the domestic auto industry is allowed to implode.

“One in 10 jobs in America is directly or indirectly related to the automobile business,” he said.

In Kansas, auto dealerships provide approximately 10,000 jobs. Another 15,000 Kansas workers are involved as manufacturers, vendors or suppliers for auto dealerships.

“The automobile business in Kansas generates $1.5 billion in annual payroll,” Longbine said.

New-car dealerships collected approximately 20 percent of all of the sales tax collected in the state, he added.

“So if you think past that, if the automobile business sales are down 50 percent, then you can assume the state, county, and city units (of government) will be down 10 percent” in tax collections.

Longbine said he did not believe that Emporia’s new-car dealers would be affected, if the domestic manufacturers decide to cut the number of dealerships across the country.

“The three dealerships in town, to my knowledge, are well-capitalized,” he said. “We’ve been here a long time.”

He estimated that the local new-car dealers employ between 125 and 150 people in Emporia.

Longbine said that there were four primary factors in play that took the domestic auto industry to the financial position it occupies now. One of the causes is considered short-term: a severe decline in the economy, provoking a drop in consumer confidence and spending, accompanied by a rise in unemployment. The economy created an especially harsh burden for domestic auto manufacturers.

“It always has a bigger effect on bigger-ticket items than it does smaller-ticket items,” he said.

The other three factors are long-term and need to be dealt with to resolve the situation.

Longbine cited labor costs as a primary reason for the financial decline evidence in the Big 3. The often-cited estimated overall costs of labor, including benefits paid to retirees, boosts the average cost per hour per employee to $65 to $70 for domestic automakers.

And, while transplants pay their workers several dollars per hour less, the transplants’ cost for health insurance and other benefits falls considerably short of the domestic automakers’ expenditures.

“General Motors has eight times more retired workers than active workers,” Longbine said. “...The transplants haven’t been here long enough to have retirement costs. But there will come a day of reckoning. ...

“Our auto manufacturers have to compete globally with a much higher cost due to our higher standard of living. It’s no doubt there is a difference between union wages and non-union wages.”

Longbine said that American car-buying habits also have affected the domestic manufacturers, as citizens become increasingly inclined to buy vehicles from transplants.

In other parts of the world, that trend is reversed, and Longbine finds it difficult to understand Americans’ reasoning.

“The reality of it is in worldwide sales, General Motors has been the leader for two of the past three years — including Toyota,” Longbine said.

“Another fallacy is that all import sales are produced in the United States,” he said. “That’s incorrect.”

Longbine said that government-imposed fuel-economy standards for all manufacturers have worked against domestic automakers, in large part because of the domestics diverse product lines.

Corporate Average Fuel Economy (CAFE) standards require manufacturers to achieve a mandated miles-per-gallon goal, with that average based on fuel economy of the entire line of vehicles manufactured. For transplants, which basically manufacture passenger and smaller trucks up to one-half ton, reaching that goal is easier than for the domestic manufacturers.

“The three domestic manufacturers are the only three full-line manufacturers in the world,” Longbine said, “and the products they offer are full-size trucks — three-quarter ton, one-ton ... — used by farmers that grow food, construction, service businesses.”

CAFE standards require the averages to reach 35 miles per gallon by 2015, he said.

The CAFEs “make it easier for the transplants to breach because they don’t build the full-size trucks,” he said.

In order to meet the CAFEs, domestic automakers have had to adapt their small-car line to offset the larger trucks.

“It has required manufacturers to produce vehicles that consumers may or may not want to be able to get to that minimum,” Longbine said.

The third major factor for the Big 3’s financial reversals has been the U.S. government’s free-trade policy.

“While all of the automobile manufacturers have plants in the U.S., a large percentage of the import vehicles are still imported with no tariffs,” he said. “The domestic manufacturers, because of taxes, are prohibited from selling in Japan.

“So the Japanese manufacturers get to bring their products in for free, and the U.S. manufacturers are shut out of Japan.”

Japanese and other foreign manufacturers also do not have the health-care costs for its employees, and also has a corporate tax rate “somewhere between 10 to 15 percent less,” Longbine said.

American industries, on the other hand, are “supporting a trillion-dollar deficit with our tax money.”

“Japan invests heavily, subsidizes with federal tax money, their manufacturing, so they’re getting government help and have been for a long time,” he said.

Longbine acknowledged that domestic manufacturers had gone through a period of time when there were problems with the quality of vehicles manufactured, “but those problems are ancient history,” he said, mentioning a recent J.D. Powers quality analysis report.

“Ford and General Motors are tied for first, including all the manufacturers, including Toyota Honda, Nissan,” he said. “The only quality gaps between the domestics and the imports today are in the minds of the consumers.”

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