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David Cole: Bridge Loan Is Needed to Keep Automakers Afloat
Loan would cost taxpayers less than automotive industry collapse, expert says
Charles J. Murray, Senior Technical Editor -- Design News, November 19, 2008
While the Big Three CEOs pleaded for aid on Capitol Hill yesterday, Design News talked to Dr. David Cole, chairman of the Center for Automotive Research about the possible effects of domestic automaker bankruptcies on the engineering community. Cole, considered one of the preeminent automotive consultants in the world, is a former professor of engineering at the University of Michigan, has served on the board of directors for the Society of Automotive Engineers (SAE) and was previously the director of the Office for the Study of Automotive Transportation at the University of Michigan. He holds a Ph.D. in mechanical engineering and is a recognized expert in internal combustion engine design.
Design News: If there is no bailout or bridge loan, how would bankruptcies of domestic automakers affect the engineering community?
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Cole: We'll see quite a shockwave. What we're concerned about is the very tightly knit fabric of the industry. If you take one of the major (auto) companies out, it could take the whole supply base out. It's a problem because the industry is so weak right now. The sales we're seeing are not recession-level sales; they're depression-level sales. We're now down in the area of 10 million (annual vehicle sales). The cash drain is overwhelming. The industry is in a very fragile state and if we don't do something now, I'm not sure it can be reversed. It would be like someone who tries to commit suicide deciding half-way down that he's changed his mind. Once you jump, it's over.
Design News: Why should taxpayers lay out their money to save the domestic automakers?
Cole: It's a pure cash-flow argument. As a taxpayer, I'm a shareholder of the national economy. So I need to ask, which option is going to cost me less? The answer is the collapse of a major industry would cost far more than a bridge loan.
Design News: How many engineers would be affected by an industry collapse?
Cole: There would be a cascading effect with multiple bankruptcies, so you'd see tens of thousands of technical people affected. There are tens of thousands of engineers at GM and Ford, less at Chrysler. But you'd also have the supplier engineers, too. The cascading impact is very, very large.
Design News: Describe what you mean by the "cascading impact."
Cole: You have to look at this in terms of economic value. The value of an automotive manufacturing job per hour of work is about three times that of an average job. One of the reasons for that efficiency is that you have this tightly woven fabric of suppliers who distribute their components to other manufacturers. It's really a very efficient system, but it's also a very fragile system. When a major customer shuts down, it impacts the suppliers. And that starts the cascading series of events. When a couple of key suppliers shut down, then the remaining automakers have to try to get their components from other places around the world. They start transferring tooling. The disruption to the economy is enormous. It starts to impact the surrounding communities because the income generated by those automotive jobs is lost. It affects the corner gas station, the clothing store, the beauty parlor, the restaurant. They're all affected.
Design News: But if the automakers get a bridge loan how do we know they won't go bankrupt in two years anyway?
Cole: We're looking at the possibility of a pretty dramatic turnaround in the mid-term. With today's horrifyingly low sales, we're creating pent-up demand. We're all putting miles on our cars. It's hard to say when (the economy) will come back, but as long as people keep running up the miles on their cars, the pent-up demand is building. Secondly, the domestics expect to see a kick-in of the benefits of the most recent labor contract. For GM, that will amount to about $1,000 per car. Third, we're going to go from a buyer's market to a seller's market. The industry has had over-capacity for a long time, and it's beginning to remove that over-capacity. So the mid-term opportunities for these companies are good if they can live that long.
Design News: Let's look at the long-term for a minute. How will all this affect high school and college students who are studying, or considering studying, engineering?
Cole: Because of the low birthrates in Germany and Japan, there's actually going to be a great future here for engineers. No matter what happens to the automakers here, foreign companies will still have facilities here and they'll have to recruit their engineers here because we have a much higher birthrate. Also, with the boomers emptying out, the opportunities for advancement have never been better. If I'm a college student, engineering is still going to be a career path that will allow me to get a job.
Design News: Many people believe the Chevy Volt represents the future of GM. The problem is, GM won't make money off the Volt for years. So can we expect to see GM stick with the Volt even when it's struggling to stay alive?
Cole: Before the Volt is introduced, this issue will be settled. If GM is still here in a couple of years, it will be well on its way to healing, and the Volt will still be there.
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Bridge to what? The auto industry has bought congressmen for years and willfully worked their way into the bind they find themselves in. It would cost less to allow the the auto industry to fail and target funding toward venture capital for start up companies fully committed to bringing energy security to this country.
An auto bailout is akin to buying toxic securities. Now one knows where the bottom is. Better to provide liquidity to clean, unencumbered and clearly defined initiatives. It would be more honest to give them money. Why would we expect them to be able to pay it back?
The auto industry song of a few years ago was "we are only competitive on full sized vehicles". Let me buy an imported Fiat "Cubo". That should be OK if Apple Computers come from China.
I agree that health care costs hurt our industries and keeps many over 50 year old engineers unemployed, healthy or not, because, actuarially, they are a worse risk than new graduates. The best way to fund clean energy is with a carbon tax. Everything else is just talking the talk and funding studies.
We don't need stimulus packages, we need to address a serious lack of development. The car has not brought freedom to urban life. It belongs in the rural areas. Engineers might work new projects involving trolleys, ships, maglev trains, and mechanized buildings. We can't save the economy with hybrid powered road barges or reduce our foreign debt by building bridges to no where and widening rural highways.
Jeff Tischler - 2008-21-11 05:17:40 EST -
A major problem the auto industry has is enormous health care insurance costs while their competitors in Japan have their costs subsidized by their government. I propose that an easy, logical solution to leveling the playing field would be for the USA government to subsidize the health insurance of auto workers and amortize the cost by a sales tax on ALL cars, domestic and foreign.
You will be doing our country an enormous favor if you get congress to do this because our auto industry is enormously important to our military security. Losing our factories is not so bad. We can replace them in a year or two if we last that long in a major war. But there is no possible way to replace a million engineers and machinists in a year or two.
Sincerely, Charles Weber
Charles Weber - 2008-19-11 23:15:07 EST
