[Fresh Ink] Auto industry collapse would crush U.S. economy: study

[Richard Menec]

<http://www.nationalpost.com/news/world/story.html?id=935684>

Financial Post                 November 5, 2008

Auto industry collapse would crush U.S. economy: study

Nicolas Van Praet,  Financial Post

A leading think-tank has drawn a doomsday picture for the North American
auto industry that shows that if Detroit's automakers shrink further - even
fail - the U.S. economy would suffer a crushing blow, losing at least 2.46
million jobs in the first year alone.

In a report released Wednesday, the Center for Automotive Research in Ann
Arbor, Mich., outlined what would happen in two separate scenarios if
General Motors Corp., Ford Motor Co. and Chrysler LLC were forced to scale
back or shut entirely.

If all three Detroit manufacturers were to cease operations, the U.S.
economy would lose 2.95 million direct and indirect jobs in the first year.
Governments would lose at least US$156.4-billion in taxes over the first
three years.

If Detroit cut output and employment by 50% to meet ever-shrinking market
share, which would mean contraction by two of the automakers, 2.46 million
jobs would be lost initially. Governments would lose US$108-billion in
revenue over three years, according to the analysis.

"The circumstances are such that either of these scenarios is possible, and
indeed one or the other is probable, within the next 12 months," the
non-profit think-tank said.

The report bolsters the case that the government of president-elect Barack
Obama needs to act decisively to speed up financial aid to the domestic
industry.

Its authors argue the newly-elected government of Prime Minister Stephen
Harper will also have to get involved if it wants to preserve Canada's auto
sector.

"The cost of a failure on a cash basis is a lot greater than the cost of
keeping these guys in the game," CAR chairman David Cole said in an
interview. "There is a real high sense of urgency in the middle of this. We
think that [lawmakers] will recognize that a failure here is something that
is just not good in any way shape or form for the economy."

U.S. auto sales have slid to lows not seen in 25 years, contributing to
combined losses totalling US$28.6-billion for GM, Ford and Chrysler in the
first half of 2008. The Detroit manufacturers have been hit worst as they
struggle to add more small cars and fewer big trucks to their lineups and
their financing arms scale back loans and leasing to customers. GMAC
Financial Services, GM's auto loans unit, on Wednesday reported a
third-quarter loss of US$2.5-billion.

GM's U.S. auto volumes dropped 45% in October. The automaker, burning
through more than US$1-billion a month, is in talks to buy Chrysler from its
owner, Cerberus Capital Management. Analysts estimate the automaker needs
US$10-billion to engineer a merger with Chrysler.

Chrysler U.S. sales fell 35% in October. It is "very likely" the company
will file for bankruptcy protection if it does not find a buyer or alliance
partner, consultants at AutomotiveCompass LLC said in a recent report.

Shares in GM rose as high as 7% in New York trading Wednesday from Tuesday's
close, to $6.12, on speculation by investors that Mr. Obama's administration
would push for an expanded loan program for carmakers beyond the
US$25-billion already earmarked to help them build more fuel-efficient
vehicles. Ford stock rose as much as 3% to $2.23 but shares in both
companies retreated by the close.

The president-elect said in a speech last month that aid to car
manufacturers should be on a "fast track" and that more funding should be
given if required.

"What we need is to make sure that a vital industry like autos... which is
such a big part of the overall economy, doesn't lead us into a deeper and
harsher downturn," John Snow, chairman of Cerberus, told CNBC. "The collapse
of the auto industry at this time would be devastating for a new president."

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