2007 July 04 Wednesday
Recession Could Push Chrysler Into Bankruptcy?

Chrysler is starting out financially weak but this might help it against the United Auto Workers union.

The new Chrysler is getting its first taste of life without parent Daimler. The sale of Chrysler (DCX) to private equity giant Cerberus Capital Management hasn't gone through yet, but Standard & Poor's and Moody's Investors Service (MCO) have already rated the soon-to-be independent carmaker's debt as "junk," or below investment grade.

That's not all. Standard & Poor's ratings essentially say that Chrysler could be a recession away from bankruptcy. S&P analyst Gregg Lemos-Stein said that if the U.S. car market were to weaken furtherówith sales dropping from this year's pace of 16.3 million vehicles to 15.5 million vehicles next yearóChrysler could be in default by 2010.

I think the financial position into which a bunch of capitalist financiers have placed Chrysler is great news for the US auto industry. The UAW has been able to very slowly run the auto makers down for years secure in the knowledge that the car companies are not going to go bankrupt immediately. The car companies have been caught in the UAW's grip for decades slowing getting sapped of financial strength. But all the Chrysler UAW workers are now at substantial risk of either a total company shutdown or a bankruptcy that would allow the company to break its UAW contract and kick the union out of Chrysler plants entirely.

In the next round of contract negotiations the UAW is going to need to make major concessions. If it fails to do so then one or more of the big (but shrinking) 3 will eventually end up in bankruptcy court. Chrysler might go first followed by Ford. GM could probably survive the longest.

The UAW's leadership must know just how precarious the union's existence has become. The UAW just took a huge cut in pay for Delphi workers as part of the Delphi reorganization.

The agreement, which runs until September 2011, calls for Delphi to offer wages of $14.50 to $16.23 an hour for all current workers. New hires would make $14 an hour. The agreement also calls for four UAW-represented plants to remain open. The rest will be sold, closed or taken over by GM.

Workers who began their employment with GM or who were hired before the lower- tier wage for new hires went into effect earned about $27 an hour.

About 4,000 of the 17,000 remaining Delphi UAW workers were making the higher wage. Delphi offered buyouts, early retirements and "flow backs" to jobs at GM last year.

The car companies and UAW aren't just threatened by Japanese makers and the next recession. If we are near a world oil production peak (a.k.a. Peak Oil - see Stuart Staniford's Hubbert Theory says Peak is Slow Squeeze and Extrapolating World Production) then the US auto industry will get hit especially hard by rising oil prices. The US makers will need to shift very rapidly over to making diesels, hybrids, pluggable hybrids (PHEVs), pure electrics, and other high fuel efficiency vehicles and that will cause a lot of their existing designs and tooling to become obsolete.

Share |      By Randall Parker at 2007 July 04 04:40 PM  Economics Transportation


Comments
Wolf-Dog said at July 5, 2007 6:36 PM:

Even if the next recession does not demolish Chrysler (and the other Detroit automobile companies), the new Chinese made cars that are about to be exported might, in a few years. Of course, in order to survive, Chrysler and others are trying to cut a deal with Chinese companies in order to import Chinese cars disguised with the Detroit trade marks to pretend these are American cars, the net result will still be the displacement and dispossession of the American laborers overall. In other words, these Detroit cars might survive as shell companies with rich CEOs, but the good old days of middle class American laborers is disappearing into oblivion.

Kenelm Digby said at July 6, 2007 4:15 AM:

I read recently that Chrysler has signed an agreement with China's Chery Motors to market Chery cars (built in China) under the Dodge badge in western markets.
Perhaps Chyrsler's strategy is simply to act as marketer of Chinese cars (perhaps with some technical/design input) and by-pass the fraught issue of car-making in the USA (and the UAW) altogether.

Kenelm Digby said at July 6, 2007 4:22 AM:

Another point - We don't hear much about the excellence of Japanese industry these days - due to the avalanche of news from China, but despite the claims of the ignorant at the Wall Street Journal and elsewhere, Japanese industry is ticking over just fine upshifting in the past decades to high tech and high value added (eg Toyota Prius), this is how they have coped with the cheap labor steam-roller of China and definitely NOT by importing unskilled immigrants as the American political class vehemently strives to do.
In case you haven't noticed Toyota is the world's biggest and mos profitable auto-manufacturer, although because it doesn't suit the Neo-Con agenda, you never hear about it.

Wolf-Dog said at July 6, 2007 5:20 AM:

But it thus seems that the current trend towards the weakening of the U.S. is not so much because of the predatory pricing of the Japanese products to gain market share, but due to the fact that we are not competing well and we are not disciplined. Of course, I am against the draconian and ruthless treatment of Japanese children who believe that death is preferable to the humiliation of getting a low grade in high school, but unless we do something seriously aggressive to get organized, even the strategic survival of the United States will be at risk in the future.

Anon said at July 6, 2007 5:23 AM:

And the Toyota is building factories in the US, while the Big 3 shutter theirsThey don't have to worry about unions either, yet they manage to build a great car. Interesting too is where Toyota chose to build their new production lines here in the US, but no surprise when you look at it.

Randall Parker said at July 6, 2007 7:32 PM:

Kids,

Toyota built US factories in Right To Work states. i.e. States where it is hard to organize a union.

Toyota enjoys a $30 an hour advantage in worker labor costs in the US as compared to the Big Three (or Shrinking Three). Toyota also enjoys more flexible work rules.

The UAW is killing the US auto industry. GM, Ford, and Chrysler have done a fairly good job given how hobbled they are.

Also, Toyota, Honda and the other Japanese manufacturers enjoy a Yen-Dollar exchange rate which cheaps the Yen weak to help exports.

purenoiz said at July 7, 2007 11:18 AM:

Just remember folks

When a company is struggling it's due to the Union.
When the company profits, it's due to the CEO.

Having worked in a several unions I would like to see one thing changed. Pay based on company performance. It seems only fair when the upper echelons(the minority) get huge bonuses that the majority of the employees (the grunts) get them as well. A system of collective compensation due to performance, with boundaries put in place to allow for the company to re-invest back into itself and grow. This way everybody wins, and your pay could be determined quite honestly by your performance.

Seniority systems allow for the slothful to be slothful without consequence. I don't buy for a minute that it "promotes laziness". I have seen it time and time again where people with good skills and initiative get the shaft, and I have seen them get promoted as well.
Meritocracy promotes success and ingenuity. But it also leaves open the door for managers to do stupid things, like fire, punish or interfere with good workers because the manager is on a power trip. Seniority nullifies the ego problems of middle/lower management. No system is perfect, but for heavens sake when you see the CEO of Northwest airlines raking in Millions of dollars, not because the airline is actually performing better in the marketplace, but rather they can crush their employees into concessions it just doesn't make any sense. The employee's have more at stake than a CEO, they should be rewarded in a fashion similarly to them. On a different scale maybe, but in a fair market way.

Let's not even get into how companies get tax right offs and then abandon those communities at the first golden opportunity.

American workers may have pride in their work, but management undermines the pride that supports a "hard, smart" working individual. It seems to me, that conservatives (financial ones) hate the American workers. And common Americans as well.

Mark said at January 26, 2008 5:51 PM:

Toyota built US factories in Right To Work states. i.e. States where it is hard to organize a union

Indiana is not a Right to Work state but SIA (Subaru Indiana) located in Lafayette, Indiana has partnered with Toyota and are spewing out Toyota Camry's as we speak. The days of 26.00 an hour~fuLL benefits~full pension with only 25% productivity are over. Just visit any American Japanese owned auto~plant like Toyota or Honda and then visit a Chrysler plant, even a child can see the difference.

mike said at February 7, 2008 7:18 AM:

What ever you people think about foreign cars and buying them - it affects all americans not just the people who work in the factories - but all the american people here in the US that build parts for the factories and all the business that depend on the parts makers and factories to help their business stay open - you keep supporting forgeign cars and trucks it affects all Ameicans sooner or later - Americans must supports American Jobs - not Foreign Countries - If every american bought an Amercian made car or truck - Amercians would be better off as an results - REMEMBER THIS - remember our great grand fathers and grandmothers who helped get these results and what our country is today and how far we have come as a nation - You turn your back on US American made products you will get the end results - GO GET A JOB AT WAL-MART - live in the streets in a card board box -SUPPOPRT AMERICA - SUPPORT AMERICAN JOBS - God Bless America.

Do Not But Japenese Cars or Truck or ALL Americans will hurt in the end - WAKE UP PEOPLE !!!!

James Lehan said at October 21, 2008 9:32 PM:

Nobody wants to buy these bloated gas hogs! That is the reason they are going under. Gas prices high and their vehicles are bloated sods! I won't buy this garbage! Chrysler 23mpg is the best they can do, Chevy-25mpg, Ford 25 mpg. The Japanese are stomping their butts. Put these bloated cars in a scrap heap and get them remade into Hondas and Toyotas.



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