David Cole: Bridge Loan Is Needed to Keep Automakers Afloat

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?

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.