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Study Examines Short-Term Economic Impact of Worst-Case Scenarios for Contraction of Detroit Three

Carcontraction
Projected job losses—direct, indirect and spin-off—under two contraction scenarios. Click to enlarge. Data: CAR

Researchers at the Center for Automotive Research (CAR) in Ann Arbor, Michigan, estimated the short-term (1-3 years) impact on the US economy would be substantial were all—or even half—of the three Detroit-based automotive manufacturers’ US facilities to cease operations. CAR has carried out the majority of national level automotive economic contribution studies completed in the United States since 1992.

The immediate impact to the economy would be felt well beyond the Detroit Three companies, negatively impacting the US operations of international manufacturers and suppliers as well. Nearly 3 million jobs—239,341 jobs at the Detroit Three; 973,969 indirect/supplier jobs; and more than 1.7 million spin-off (expenditure-induced) jobs—would be lost in the first year if there is a 100% reduction in Detroit Three US operations, according to the study.

The 100% contraction scenario also results in a reduction of US personal income by more than $150.7 billion in the first year, and generates a total loss of $398.2 billion over the course of three years.

Our model estimates that a complete shutdown of Detroit Three US production would have a major impact on the US economy in terms of lost wages, reductions in social security receipts, personal income taxes paid, and an increase in transfer payments. The government stands to lose on the level of $60 billion in the first year alone, and the three year total is well over $156 billion.

—Sean McAlinden, CAR chief economist and the study’s leader

CAR modelled two scenarios: the Detroit Three automakers ceasing all operations in United States (100% contraction scenario); and a 50% reduction in overall Detroit Three employment and production in the US economy, an event that probably would involve a contraction by two of the domestic automakers. The circumstances are such that either of these scenarios is possible, and indeed one or the other is probable, within the next 12 months, according to the study.

The researchers generated the estimates of economic impact through the use of an economic/demographic forecasting and policy simulation model constructed by Regional Economic Models, Inc. (REMI). The model captures three types of employment impacts: direct, indirect and spin-off. The model was calibrated using public and proprietary data on automotive industry employment, wages, price and capacity. Simulations estimating economic impacts on the US economy were run for three years after the assumed initial change in Detroit Three operations.

The contraction scenarios explored in this memo should not be interpreted as representing the economic activity that would be lost if the automotive industry never existed in the United States. The two scenarios represent short-term shocks that would affect all auto producers in the United States and that would be mitigated over time by gradual increases in domestic production by international automakers and surviving Detroit Three capacity.

—CAR Research Memorandum

The CAR authors assume in the 100% contraction scenario that not only does domestic production by the Detroit companies fall to zero in the first year, but that domestic production (in the US) by the international producers also falls to zero due to a major wave in supplier bankruptcies (“supplier shock”). The collapse of a domestic market for suppliers coupled with the reality that few auto suppliers serve export markets would result in manufacturing utilization rates below 50%, forcing suppliers to restructure or liquidate, according to the report.

The scale of the contraction of the Detroit Three would overwhelm any attempt by the international producers to keep their existing suppliers in business or to find alternative suppliers, here or elsewhere. US consumers would be forced to rely on only imported vehicles as a source of new vehicle purchases in the first year. However, we do not assume that the international automakers in the US lay off their employees at any time. We also assume that by the third year, the international producers are back at full operational capacity and have expanded to at least take up some of the lost Detroit Three production (20 percent of former Detroit output).

For the second scenario, CAR assumes that Detroit Three production and employment falls by 100% in the first year but recovers to 50% in the second and third years. CAR assumes essentially the same first year supplier crisis for all automakers in the United States, with production by the international automakers falling to about 50% in the first and second years. CAR also assumes that the international producers would recover fully by the third year and that the surviving Detroit companies would restore production to 50% of the former combined level by the second year and maintain this level in the third year.

The 50% scenario results in a first year total employment impact of a loss of nearly 2.5 million jobs in the US economy, comprising 239,341 jobs at the Detroit Three; 795,371 indirect/supplier jobs; and more than 1.4 million spin-off jobs. The employment picture recovers in 2010 (1.5 million lost) and 2011 (1.0 million jobs lost), due to the resumption of US production by the surviving Detroit Three producer and international automakers, and the process of dislocated workers finding new employment.

In economic terms, the 50% cut in Detroit Three US operations would reduce personal income by more than $125.1 billion in the first year, with a total loss of $275.7 billion over the course of three years.

Debate over the shape of a bailout package for the Detroit Three began this week in Congress.

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Comments

jv

Same nonsense as the global warmers spew out. All based on conjecture and simplistic models of one variable and denial of all other factors. Crap.

Chapter 11. Let the the need 3 car companies go to bankruptcy court and dump existing debt, investors, and contracts and reorg. It will be an expensive, painful disruptive mess for a couple of years and only the best parts that can be save will be saved. Radical cancer surgery with radiation and chemo and all your hair falling out comes to mind. But the patient has a chance to live -- think Lance Armstrong.

Pick one -- Socialism with nationalized industry that bleeds the taxpayer for years to come based on climate change models or painful reorganization where everybody tries to save the best aprts and let new industry spring up around what is left.

d burgdorff

Obviously this is some UAW related organization trying to save union contracts. Or perhaps company executives are trying to save their bloated paychecks. Bankruptcy would not result in the auto industry ceasing operations. GM must become viable. This cannot happen without bankruptcy. Public money would be waisted.

Mark_BC

yeah .. Pick one -- left wing government socialism, or right wing corporate socialism where you are forced to buy what the oil companies, through their intricate web of patents and corporate influence, decide you should be buying. $300 a month, thank you very much.

I hate to say it but I agree the auto companies should be bailed out. Rather, I see it as an opportunity to force them to do what everyone wants -- to produce some good EV's. Provide the money, but do so with with a long line of strings attached.

I don't buy this argument that because of right wing economic "theory" we should let the auto industry die and put 100's of thousands out of work and hurt our economy for several years, because we believe it's for the "greater good", or part of a necessary collapse to start out all over again, or because they need to be punished. That was the mentality of the Great Depression. This isn't kindergarten. We have a functional auto industry right now -- let's use this as an opportunity to get the power out of the hands of the corrupt CEO's and start doing something constructive for the world.

Nick

@Marc_BC:

I'm with you, in general. What we need are some of the benefits of Chapter 11 (replace upper management, re-work labor contracts, focus plan on building the cars we actually need going forward) while preserving jobs as possible.

Mr. Environment

It doesn't matter whether they "produce some good EV's" or not. When the AVERAGE auto worker's pay, including benefits, is $71/hour, or almost $150,000 per year, the vehicles will NOT be worth what they cost. Therefore, they will not sell. Either quality will have to be lessened or the price will have to be too high. The unions MUST be broken and reasonable, living, wages, paid to assembly people.

Mark_BC

holy cow, is it that high? That beats my $30 an hour engineer's salary.

DieselHybrid

Amen- Mr Environment!

A combination of legacy costs, crippling unions, and poor management (in that particular order) have ailed the big 3 for years.

When more $$$ is spent on healthcare and retiree benefits than the raw materials required to build the vehicles, something is woefully wrong.

The unions' appetite for bloated paychecks and benefits clearly puts the Big 3 at a competitve disadvantage.

Wagoner + Lutz should have been fired years ago. As good as Mulally was at Boeing, he can't resurrect Ford. And Cerberus management realized they were in far over their heads and can't wait to unload Chrysler...

In sharp contrast, notice the relative success of NON-union Toyota, Honda, Hyundai, BMW, etc plants here in the USA. Granted, every auto manufacturer is bleeding now- but relatvely speaking, the US-built "imports" are in much better health than GM, Ford, or Chrysler.

I say no to another hand-out/bail-out and yes to Chapter 11. This painful yet invasive route will:
1. Drastically reduce legacy costs. 2. Quickly achieve crucial Union concessions. 3. Provide a timely appointment of new, effective management teams who will lead by example and forgo excessive bonuses/compensation until health is restored.

Take your $30/hr salary and add in all your benefits (Healthcare, dental, life insurance (AD&D, Basic), vision, short term disability, long term disability, 401K matches, pensions, bonuses, holiday pay, paid sick days, paid vacation days, etc).

Unless you work for a really crappy company (as far as benefits go) you are probably making closer to $45/hr with benefits included.

HarveyD

Nick & Mr. Environment:

I agree with you. An in depth major chock treatment is required to put the Big-3 on the right track.

On the other hand, how can you get rid of the non-performing managers + spoiled $71/hour union members without forcing the Big-3 in full bankruptcy?

Letting the Big-3 go out of business would not be the end of the world. It would not even create a major shortage of vehicles. Ten + other world size manufacturers could easily increase their production to fill the gap. Many of the unemployed Big-3 workers could find a job at Honda, Toyota, VW, Hyundai and other auto plants.

It would also create a window of opportunity to finance the transition to hybrids, PHEVs and BEVs with the $50+ B saved by not pouring $$ B in the Big-3 bottomless pockets.
Let's hope that the new adminstration will not fall in their (Big-3 + auto unions) trap.

Joseph


The average auto workers pay including all benefits for

Toyota Kentucky plant - $43 an hour
General Motors - $72 an hour

It's time for UAW to pay the piper. If we just give them money, nothing changes and they will be back in 2 years wanting more. Let them file chapter 11 and reorganize.

tom deplume

With top executives being paid, not necessarily earn, thousand of dollars per day can kind of skew those averages. The Detroit 3 have as many non-union white collar employees as they do UAW members many of whom are paid much more than UAW members. The UAW has agreed to having new hires being paid only half that of veteran workers.
Toyota's lower average pay rate does not included the pay of executives in Japan which skews the figures.
The failure to have universal health care means Detroit's health care costs per employee are double those just across the river in Windsor, Ont

GreenPlease

I say save the $$$ and spend it on building a new auto industry centered around BEVs and PHEVs. Give the cash to:

1. A123
2. Toshiba
3. Toray
4. Tesla
5. Aptera
6. Fisker
7. GE+Siemens
8. Ricardo


Tell them all that they have to use the loans to build/buy facilities in the vicinity of existing Big 3 facilities. This will keep the workers employed but give us a new and vibrant auto industry that gives us cars that will get us off of foreign oil.

Will S

Just so we can all be on the same page, what reliable source do people get $72/hr (w/benefits) from? It wouldn't surprise me in some situations, though wages had taken a hit a few years ago, and that number may need to be updated.

Andrey Levin

Mentioned 73$ Big3 spends per hour of assembly worker consists of about 40$ actual pay (including benefits), plus legacy costs of about 33$ for retirees.

For non-UAW assembly plants (Toyota, Honda, etc. in « right to work » states), it is something about 35$ per hour and something 5$ legacy costs (they do not have many retirees – yet).

Nate H.

I dont know about anyone else, but I am fed up with the Big 3's no-change attitude.

Has anyone seen Alan Mulally's interview on CNN American Morning today? Its on CNN.com. The whole time Mulally just defends Ford to the end. He said they 'have been better than Toyota and Honda in fuel economy.' That is just crap.

Heres the thing I would have put to Mulally: "Why aren't you striving to be WELL ABOVE the competition on fuel economy? This whole "we get 1mpg better on two of our models" is nonsense. Or even better: Mulally said "Americans love the (F)150...a leader for 34 years." A leader in what? Sales!?!

Things are changing and the Big 3 goofballs refuse to change with the wants of Americans.

In this day of economy crapola, wouldn't you think Americans would want their $400, $500, and $650 car payments going toward something that MATTERS!? How on earth will a NEW 2009 REDESIGNED F150 matter when gas is back to $4.50 in a few years?

These guys have their heads so far up their hinies, they are totally clueless.

The bailout will never be paid back. This whole event they are going thru is going to make the consumer FLEE the Domestic's Showrooms. I know one things for sure: If GM, Ford and Chrysler have nothing spectacular to sell anyone in the next year or so (which they don't) what are they going to do with $12Billion (GM) or $8 Billion (Ford) or $7 Billion (Chrysler)???

This money wouldnt be enough to get them through a few months like October was. They will be right back with their hands out just like now. And REFUSING to get better fuel economy and pumping out the Behemoth guzzling, expensive, gangly, outdated products.

Gosh I feel better venting all that!

Nate H.
Dover, Ohio

T2

This is just shameful. Anyone else sense the implicit tone of blackmail here ?

"If you don't give us, The Detroit Three, $25B then we'll damn well throw 2.2 Million out of work."

These are failed corporations. Consider GM, where the Board of Directors supported their man even though the share price dropped to a quarter of what it was when they appointed Rick Wagoner as the CEO over six years ago. What service was that to their stockholders ?

Then Chrysler has those arch capitalists at Cerberus.
Isn't this the "Greed is Good - Greed Works" Wall Street crowd. They thought they could show Ford and GM how to run a domestic car company. Late this evening there on the tube, at a Senate hearing, was Nardelli saying that the global financial meltdown was the cause of his company's troubles. As if.
Don't see Honda or Toyota with their hands out. Sorry boys but privatising profits and socialising losses won't cut it any more with these lawmakers.

Of the three I see only Ford, now positioning itself with fuel efficient European models while removing the focus of the marketing strategy away from pickup trucks, most likely to survive.

I just don't subscribe to the idea of the working class as indentured slaves that their taxdollars need be distributed among these incompetent but well heeled Captains of industry. In fact I would prefer taxpayers dollars not to go to even well managed companies. Moves like that thwart the intent to evenly tax society. If our taxes are redirected to companies we may just as well cut out the government, as the middleman, and pay tithes to any company that deems itself worthy !

The fear I have is that if these companies don't get their way they will see to it that they can cause as much deliberate damage to the economy as they can.
T2

Joe S

"America is like a healthy body and its resistance is threefold: its patriotism, its morality, and its spiritual life. If we can undermine these three areas, America will collapse from within."

--- Joseph Stalin

Lennin

Muuahaha....

Hollywood has killed morality.
George Bush has knifed patriotism.
Spiritual life next.

Wonder if they'd like to drive a Lada.

Mark A

I say NO to the bailout of the "Detroit three". Very strongly NO. Let them reorganize after bankrupcy, which they will. And they will come out stonger because of it. But it will be like someone said, cancer surgery with chemo afterwards. But it is certainly a guarantee that the automakers will live!!!!!

I didnt say "big three", as that would have had to include Toyota. Toyota, and the other non-domestic domestics have to jump through hoops to satisfy some requirements. For example, if I understand this correctly, Toyota must "ship", by truck or train, all the trucks made at its San Antonio Texas plant, near where I live, to Houston Texas to get some sort of "Port" sticker or certification classifying is as an import, or some silly reason. EVERY TRUCK must be shipped there if I understand correctly!!!! I see big trucks loaded with new Tundras passing by the freeway as I eat my dinner, sometimes 6-10 at a time each loaded with I think 6 trucks. They probably come back the next day going the other way. I also see many trainloads of vehicles pass through, carrying what I assume are Tundra trucks, again to the port city of Houston. Can we afford this waste, if it is true?????

Lets level the playing field. Get the Detroit three out of their bloodsucking contracts through bankrupcy, and create common sense requirements for "non-domestics" domestics and let them compete on a level playing field. Losers and winners, with the losers failing as the system corrects itself, as it should in our great experiment called free market enterprise. No nostalgia, reverence, romance, or tears need to be displayed for those that cannot compete, head to head.

Geoff T

They need help but don't give them a bailout per se- instead help them with health care:
A Much Better Bailout Plan
For years now, the Big Three automakers have been unable to produce cars competitively, largely because they have to buy their employees’ and retirees’ healthcare through private insurance, whereas workers in all other industrialized nations are covered by cost-effective national healthcare plans. Even the foreign manufacturers who produce here undercut Detroit by recruiting a younger, healthier workforce.
Now that the bottom has dropped out of the market for SUVs and light trucks, the Big Three are facing certain bankruptcy and need a bailout, possibly for loans to fund the $51 billion they owe to the VEBAs they promised to set up for their retirees’ healthcare. However, the VEBAs will purchase health insurance through private, for-profit providers, which skim off up to 30% from the top, as compared to Medicare, with only a 3% overhead. It would be far better for Congress to allow the UAW workers and retirees to be the first to enroll in a program based on the Conyers-Kucinich Bill (H.R. 676), an expanded Medicare with no premiums, no deductibles, no co-pays, and no hassles. Like Social Security, the H.R. 676 program would be funded by a payroll tax of 4.5% from employers and 3.3% from employees.
Will this save money for Detroit? You bet. If we’re going to bail out the Big Three, let’s do it in a way that solves a real problem that is strangling U.S. manufacturing: the burden of private health insurance

richard schumacher

The straight-forward way for the "Big Three" to get out of their contracts with bloodsucking car dealers (1) and others is through bankruptcy reorganization. Most businesses continue operating during bankruptcy proceedings, and the majority of people now working in the US auto industry will continue working there. There's no need to pour money into a "bailout" hole.

(1) Note that GM has about 3100 car dealers in the US, while Toyota manages to sell as many cars through about 1700 dealers. Car dealers long ago lobbied most states to make it very difficult for manufacturers to escape from their monopolistic distribution contracts. Bankruptcy would cut through that crap.

And if there must be a bailout, the sensible way to do it is as Geoff T wrote: by assuming the Big Three's healthcare expenses. We're going to have some form of universal health care within a few years anyway.

HarveyD

The general consensus seems to be that a GM-Ford-Chrysler bankruptcy is required (even essential) to get rid of the accumulated excess weight and force those three to produce more efficient vehicles.

Instead of throwing $$ B at them with a very high risk of having to give them more every year to continue making gas guzzlers, why not let them go bankrupt and sell the properties to others to produce electrified higher efficiency vehicles.

Of course, governments should help the laid off workers with extended unemployment insurance + retaining assistance and moving to new jobs locations with other manufacturers such as Toyota, Honda, Hyaundai, Vw, Telsa and new electrified vehicle poroducers. etc

Part of the $50 B should go to local advanced battery manufacturers to set up affordable mass production units.

Pumping $50 B to $100 B into outadated inefficienct tenchologies and overpaid workers is not the right thing to do.

Bob Tasa

The bailouts are a total failure and we should
take back as much of the money as we can salvage.
Since the bailout the markets have fallen over 40%.
Banks have failed because of statements made by Paulson. Scandals have erupted because of misuse of
fund by companies that are squandering the funds they were given. It proves that blank checks dont work.
The entire management team of big three if given a dime should be forced to resign and the UAW forced to give back many of the things they hold dear and as a give back to the UAW the Big Three should be forced to move back to the USA all of its manufactureing operations.
NO more MEXICO, INDIA and China. We need the work they need the money.. OK lets trade.

HarveyD

Bob Tasa:

I doubt very much that anybody can stop the progressive move to more affordable production places.

UAW's $71/hour and bad managers make your suggestion impractical, if not impossible.

The movement will probably be accellerated with the electrified vehicle era. Many countries can produce e-vehicles and advanced batteries for much less than half the USA price.

Look what happend to the TV, PC, Telephone, radio, GPS etc market and you will get a good idea of what is coming to the e-vehicle market.

One way that GM could survive may be to close shop in USA and produce elsewhere.

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