Auto Industry Running on Fumes

From the April 2006 Trumpet Print Edition

For the American auto industry, things just keep getting worse. Last November, General Motors Corporation announced plans to cut 30,000 employees, a whopping 14 percent of its workforce, in an effort to cut losses and return to profitability as soon as possible. Then, on January 23 this year, Ford Motor Co. announced that it also plans to lay off up to 30,000 North American workers over the next six years so it too can return to profitability.

These cuts represent up to a quarter of Ford’s employees, of which the first 4,000 were to receive their pink slips by the end of March. As a result, Ford representatives expect vehicle-manufacturing capacity in North America to drop from 4.55 million units to 3.35 million by 2008.

Spurring Ford’s cuts was the $1.55 billion in losses its North American operations suffered in 2005.

Ford’s chairman and chief executive Bill Ford stated, “We will be making painful sacrifices to protect Ford’s heritage and secure our future …. Going forward, we will be able to deliver more innovative products, better returns for our shareholders and stability in the communities where we operate” (Associated Press, January 23).

It is fine that Mr. Ford is looking out for the shareholders’ returns and the investors that lend Ford money, but what about the “returns” for his employees? How will 30,000 workers losing their jobs bring “stability” to the “communities where [they] operate”?

More layoffs look to be on the way. The day after Ford’s announcement, Daimler-Chrysler declared that it would also be cutting 6,000 employees. Although a number of Daimler-Chrysler’s cuts will probably be overseas, some will be American too.

Will these cuts do the trick and jumpstart the American automotive industry? In Ford’s and GM’s case, Wall Street doesn’t think so. After getting a glimpse of the automakers’ restructuring efforts, Standard & Poor’s Corp. and other rating agencies cut their credit ratings deeper into junk-bond status. Ford and GM shares, which trade on the New York Stock Exchange, are also cascading in value.

However, one famous investor—Kirk Kerkorian—who recently purchased 9.9 percent of GM, seems to think that at least GM can be rescued (Wall Street Journal, January 26). This is a big challenge, considering that GM is $278 billion in debt—an amount greater than Australia’s public debt! Ford too has massive debt, owing more than $154 billion.

American vehicle manufacturers are definitely in trouble. It seems that profits accumulated during their golden years have been squandered. Today they produce inferior vehicles (or so is the perception in many cases), profits are falling, foreign competition is intense, and the debt, healthcare and retirement liabilities are massive.

The atrophied American automotive industry is just one symptom of the overall sickness in the U.S. economy. Over the past few years, much of America’s manufacturing capacity has closed up shop, moved out or gone bankrupt. America as a nation is on a rapid decline that is visibly worsening.