2009 January 11 Sunday
GM And Chrysler Seen As Insolvent

US government loans just keep GM and Chrysler on life support.

General Motors Corp. and Chrysler LLC technically are bankrupt and Chrysler is a step away from death, said Sean McAlinden, chief economist for the Center for Automotive Research in Ann Arbor.

"GM and Chrysler are insolvent. Without federal funding they are bankrupt," McAlinden said at a conference today at the joint office of The Detroit News and Detroit Free Press. If the government took half of all of the bailout money away, they would go back to being bankrupt, he said.

"GM will not meet the initial conditions of the loan. But the conditions will change so GM can keep them," McAlinden said.

This is why big cuts in UAW wages and benefits are necessary. Both GM and Chrysler need big reductions in their costs in order to survive. The only alternative is outright continuing subsidy by the taxpayers. Chrysler's loan isn't even big enough to pay for all it owes to its suppliers.

McAlinden said Chrysler needs $6 billion to pay its suppliers for last quarter's parts and he suspects the full $4 billion loan went towards these payments. Chrysler initially sought $7 billion from the government.

McAlinden said Chrysler may threaten to keep its factories closed longer as a bargaining tool in negotiations with the new Obama Administration.

But if Chrysler is allowed to go bankrupt that will pull parts suppliers that GM and Ford rely upon into bankruptcy as well. There's a big domino effect with the bankruptcies. Will a left-leaning Democrat Barack Obama force the UAW to offer concessions big enough to allow the US domestic auto industry to survive?

Chrysler needs to be freed from UAW work rules and UAW pension and wage and benefits costs. The Big Three are the UAW's bitches. Not only does UAW labor cost a lot but UAW work rules slow improvements in productivity and the bureaucracy around those work rules are an obstacle to continuous improvement. It isn't like unions shift money generally from management and capital to lower level workers. Read about The Aribtrariness of Wagner Act Redistribution (scroll down to find it).

Update: The unfunded pension benefits of the Big Three are far larger than the government loan amounts.

The outgoing director of the U.S. Pension Benefit Guaranty Corp. warned Friday that Detroit's Big Three automakers face a $41 billion pension shortfall.


In total, the Big Three pensions cover nearly 1.3 million people. If all three automakers were to collapse and turn their plans over to the pension corporation, the agency estimates it would pay out $13 billion of the $41 billion, because of limits set by Congress on how much the pension corporation can cover. The agency generally has a yearly cap of $54,000 in benefits for people who are 65.

So a bankruptcy would substantially cut the size of pensions received by retirees. The UAW could agree to cuts in salaries of current workers in order to free up more money to pay retirees. Or the UAW could agree to benefits cuts such as with health care for retirees and current workers. The UAW workers get medical benefits worthy of envy. How'd you like to have 95% of your medical costs paid for?

Share |      By Randall Parker at 2009 January 11 10:16 AM  Economics Transportation

Wolf-Dog said at January 11, 2009 1:05 PM:

Not only Obama must convince the Detroit car companies to reform their unions and pension plans, but more importantly, Detroit must be convinced to adopt a dramatic and revolutionary plan to switch to pure electric cars at once. THIS is being done in a few countries already (as well as Hawaii and entire Bay Area), with the intention to build the charging pods in every street, and the robotic battery swapping stations instead of filling a gas tank.

Here is a 40 minute video where the process is being described:


And here is the web site of the Bay Area company called Project Better Place which has raised $200 millions of venture capital to fully electrify the Bay Area. Please view the videos there.


The Detroit companies can easily adopt this business model of pure electric cars, because the Project Better Place has SEPARATED the cost of the expensive batteries that can get 100 mile per charge (200 miles for more expensive batteries), from the pure electric car. It turns out that the pure electric cars are actually cheaper to build than gasoline cars, it's the expensive battery that is the burden, which is the main reason Detroit compromised with the plug-in hybrids, which are still expensive, but cheaper than adding a $10,000 battery of 100 miles, and instead they added a smaller battery that yields only 40 miles per charge.

The business model of the Project Better Place is to combine the battery with the cost of charging the car: About 5 cents per mile for the cost of battery (a lithium-ion battery that gets you 100 miles per charge, can last 200,000 miles and costs $10,000, so that $10,000/200,000 = 5 cents per mile), plus another 2 to 3 cents per mile for the cost of electricity to charge the battery, so that the cost of driving the car (COMBINING the cost of battery and the cost of electricity) is about 8 cents per mile. Using the cell phone subscription model, this business model of Project Better Place, is actually acting as the middle man to service the batteries separately from the building of the pure electric cars, and this way sales cost of electric cars is LESS than the cost of gasoline cars (pure electric cars have a lot less components than gasoline cars), and the cost of driving this car is then about 8 cents per mile (when the cost of driving is calculated by combining the cost and life time of the battery together with the cost of electricity to charge the car). THIS business model is competitive, as long as the cost of gasoline does not decline too much below $2 per mile. Currently due to the economic recession the price of gasoline declined a little below $1.8 per gallon, but in general it is safe to believe that the price of gasoline will not be below $2 per gallon in the long run.

The obstacle with this business model was that most people will NOT buy a pure electric car unless there are enough charging pods in every parking space in every street, and also robotic battery swapping stations that exchange batteries in 3 minutes in reasonable distances in most regions at reasonable distance (for people who are traveling long distance below 100 to 200 miles who do not want to wait charging). The Project Better Place has been created for this reason, by the year 2011-2012 a few smaller countries like Denmark, as well as Hawaii, part of Australia, and the entire Bay Area, will have the entire infrastructure in every street, and the batter swap stations in enough places. Simultaneously, Nissan and Renault have agreed to mass produce the required pure electric cars by 2011. There is no reason Detroit cannot do this for the United States. The cost of installing this service infrastructure of charging pods in every street plus battery swap stations in ALL of the United States, is ONLY $200 billion, which is much less than the amount of oil we import for ONE year (peanuts compared to the $1 trillion we lost in Iraq and Afghanistan wars.) There is no question that Detroit can start mass producing pure electric cars by 2012.

Basically Obama CAN do is to take over the bankrupt Detroit companies (by buying these bankrupt companies at fire sale prices), and to retool them to build pure electric cars. PURE electric cars are much easier to build than hybrid cars and even gasoline cars, since pure electric do not require complicated transmissions, cooling mechanisms, exhausts, etc, and electric motors are more simple and more durable.

Some wordy bastard said at January 11, 2009 1:28 PM:

Wolf-dog proves that he is a fucking economically illiterate moron with his proposal for all electric cars ...

The generation and transmission losses, plus the environmental costs of the batteries are just staggering and have to be factored in.

Even if we had that really really good battery mentioned on Edge, we would still have to factor in the generation and transmission losses.

Talk about ignoring all the relevant costs.

Wolf-Dog said at January 11, 2009 2:08 PM:

It is estimated that if all cars were electric in the United States, the necessary expansion for the electric generation capacity would be about 6 % of the current capacity. I agree that this is HUGE, but since it will take until 2020 for everybody to switch to electric cars, just a 0.5 % increase per year in the electric generation capacity, is definitely feasible economically.

I agree that transmission losses become very important when the current is transmitted long distance, but we can add various power plants all over the United States.

The plug-in hybrids will basically do the same (if everybody buys a Chevrolet Volt, which gives you 40 miles of pure electric ranger for car, because 90 % of Americans drive less than 40 miles per day.) But Chevrolet Volt will cost $40,000 because it is more complicated, as it has both a gasoline engine and also an electric drive system, plus a high end battery that is also expensive. But pure electric cars that do NOT contain a battery, can be manufactured for about $12,000 because it is the battery that is the most expensive component in a pure electric cars, since there are a lot less components in such pure electric cars. While most people cannot afford to buy a $40,000 car, a $12,000 car that lasts more than 20 years due to low maintenance costs, is affordable for everybody (we are talking about the Renault-Nissan alliance that will build a 4 door sedan with 5 seats, as the lower priced base model, and later more luxurious ones also.) The only problem is the infrastructure that is missing, and this is being done in all of Bay Area, by 2012.

But separately here is another reason the U.S. has a good reason to switch to pure electric cars. Please look at this chart by Federal Reserve about the annual cost of imported oil and trade deficit which will soon become unsustainable:


In the latter chart above, it is shown that in the year 2006, the average monthly cost of imported oil (the oil component of the average monthly trade deficit in 2006) was $26 billion per month. In other words, for the full 2006 year, the oil component of the trade deficit was 12 x $26 = $216 billion, when the average price oil was about $30 per barrel only. Currently the price of oil did decline to $40 per barrel due to the economic recession, and I do agree that it may even decline further to $25 per barrel in 2009, but for the long run it is guaranteed that the price of oil will be above $50 per barrel, which means that the oil component of the annual trade deficit, will be at least $300 billion, and probably above $400 billion per year in the long run. But we are already sustaining a trade deficit of at least $600 to $700 billion per year, which is nearly 6 % of the GDP year after year. In the long run we will not be able to continue this, because such a trade deficit will ruin the US (ultimately nobody will accept our money for nothing in exchange.) Hydrogen cars, or hybrid electric cars will be too expensive to mass produce to make a difference before the US economy is devastated, only pure electric cars plus an electric grid expansion of about 10 % can be done by 2020, which is the deadline for the end of the United States.

Wolf-Dog said at January 11, 2009 2:53 PM:

Lithium, while it is expensive to mine, exists in large quantities in sea water (not factoring in rival batteries without lithium), and lithium in batteries is recycled easily. Lithium is not toxic like lead, and already all cars have lead-acid batteries. The issue is to recycle lithium when the battery is old, to make new replacement batteries from old ones, because this way, once every citizen has a lithium-ion battery powered car, then there should not be any reason to continue mining lithium. Although there is a lot of lithium in various parts of the U.S., the concentrated lithium resources are unfortunately mostly in Argentina, Chile, and China. But once enough lithium is mined, it can be recycled like lead, and there will be no reason to mine a lot more.

A Japanese university has already started extracting lithium from sea water, and they will soon commercialize this:

I have no idea about the final long term cost of extracting lithium from sea water, because this is new, but already it is known that the cost of extracting uranium from sea water is $200 per pound, which establishes a long term maximum on the price of uranium. But in the case of nuclear reactors, uranium is a consumed material that is not regenerated (only the nuclear waste can be recycled to make new nuclear fuel, but always 1 % of the uranium is destroyed into non-fissile materials), but lithium is just a charge holding medium that gets 100 % recovered when the battery is recycled.

Separately, if we rely on battery swap stations, the zinc-air batteries have a possible energy density that can be 400 Wh/kg, which is at least 2 times the current lithium-ion batteries, so that zinc-air batteries can give you a range at least 250 miles per battery swap for a 4 door sedan with 5 seats. I said only battery swaps, because zinc-air batteries cannot be charged very easily, the zinc-air battery gets "re-charged" by de-oxidizing the zinc electrically at a service station and then putting it back in the battery. This means in practice swapping the battery at a station, which requires upgrading ALL gas stations into battery sway stations, which will take more time but it is very feasible because in this case the range of the car will be 250 miles per swap, like a gas station. The advantage of zinc-air batteries is that these are much cheaper and much more primitive than expensive lithium-ion batteries, and zinc is abundant in many countries including the United States, and zinc gets recycled easily, without environmental damage.

In New York, a few years ago, a bus using zinc-air batteries was demonstrated, and on this occasion, the bus was used for 100 miles, with the air conditioner on, and full of people inside. The problem was that the bus requires swapping a battery instead of recharging, but once the battery swapping stations are in place, the result will be easy and durable forever. Here is the web site:


The zinc-air battery powered buses and trucks are a VERY good business area for Detroit cars, since the itinerary of buses and trucks is far more more predictable and pre-determined than cars, so that a lot less battery swapping stations need to be build for the bus and truck sectors. This would be a separate area of growth for Detroit, besides electric cars. If Detroit starts a standardized system of zinc-air battery powered buses and trucks, this can already make a major area of growth and employment in America, and dramatically cut the need for diesel fuel. (The U.S. Army will definitely need the diesel fuel, and confiscate all the remaining oil reserves inside the United States in a few years, for national security reasons, since electric trucks may not be enough for the military vehicles.)

Some wordy bastard II said at May 22, 2009 7:33 AM:

Wolf-dog, are you from the Bay Area? Is sure sounds like it. I grew up in the Bay Area and worked as an engineer in the Bay Area until moving to the Detroit area in the mid-nineties. I currently work in the automotive industry in Detroit and I can tell you that you do not know what you are talking about. It is not worth my time to refute your long diatribe and I just want to say Obama and Arny the Governator will save us!

Tombo said at June 25, 2010 7:49 AM:

I agree with Wolf Dog. It's a shame that Detroit, originally dubbed "The Motor City", is rapidly being left behind in the new age of the automobile. Instead of a new era of renewed growth for "The Motor City", it's just a continued slide downward, or at best sideways (eventually) in relation to Detroit's auto industry.

Tombo said at June 25, 2010 7:51 AM:

I agree with Wolf Dog. It's a shame that Detroit, originally dubbed "The Motor City", is rapidly being left behind in the new age of the automobile. Instead of a new era of renewed growth for "The Motor City", it's just a continued slide downward, or at best sideways (eventually) in relation to Detroit's auto industry.

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