CNN viewers asked us about the proposed rescue of the auto industry. Here's what you need to know.
Given the amount of money needed to keep the Big Three automakers afloat, it's a lot more efficient to simply lend them the money rather than to spur sales through an incentive program.
American consumers also don't like to be told what to buy. A rebate program would have to specify that they purchase a vehicle from General Motors, Ford or Chrysler, limiting their choices to the Big Three. Consumers and foreign-based manufacturers would likely pressure the program to open up to at least all cars made in the United States.
Also keep in mind that the government isn't giving money to the automakers - it's lending it to them, with the intention of getting it back in a few years. Rebates are not loans, and consumers could not be expected to pay them back.
The pension funds of the Big Three are in relatively good shape, so it's not likely that the government will be stuck with a large unfunded obligation.
But some workers, who retired from the automakers in their 50s, could see their benefits cuts if the pensions are taken over by a federal agency. The government doesn't promise to pay the same level of benefits for those who retire before 60.
It's not certain they'd see a benefit cut - it will depend upon the value of the pension fund assets and obligations when the government takes over the pension funds. But a benefit cut is possible.
Very few experts expect Chrysler to survive as an independent company. As the weakest link of the Big Three, it could use help in some very specific areas of the business.
First, Chrysler doesn't have as much of an overseas presence as GM or Ford, so its health is more reliant on the U.S. market.
It could also use help making competitive small cars. Chrysler's strength is in trucks, vans and big cars. It's already formed alliances with other manufacturers: Chrysler has a deal with Nissan, which will build a small car for it. In return, Chrysler will build a truck for Nissan. Chrysler is also building a minivan for Volkswagen.
The benefits of GM or Ford merging with another company are less obvious. Both are international in scope, which have helped buffer the impact of market share losses at home, at least until recently.
Like Chrysler, GM and Ford could use assistance building a stronger line-up of small cars, but merging with a domestic automaker with the same problem wouldn't help that much. Besides, Ford and GM already have plans to sell some of their European small cars here.
One real benefit of a domestic merger would be to reduce each company's output to its current market share without having to go out of business. It would result in a "controlled contraction." This would also give the combined company greater power in negotiating new contracts with unions and suppliers for additional cost savings.
But closing excess factories and car dealerships takes a lot of cash up front. So any kind merger in the short term is less likely because of the current credit crisis.
You can't. There is no way to make absolutely certain that a crisis like this will never happen again. But what can be done is to help the industry change so that it can better compete against foreign automakers who have lower costs.
That will likely mean painful sacrifices for industry stakeholders like auto workers, retirees and auto dealers, not to mention those at the auto executives themselves. But an industry failure would be far worse.
Still, there is a chance we will face this decision - whether to bail out the auto industry - again. But some economists argue that even the cost of repeatedly bailing out the industry will be less than the overall cost of allowing it to collapse.
They may not, at least, not all of them.
Chrysler's Bob Nardelli and Ford's Alan Mulally really can't be blamed for any serious hole-digging. They've only been on the job for a couple of years and the problems were pretty serious before they arrived. Mulally even deserves some credit for the fact that Ford says it isn't in imminent danger of collapse and probably won't need to tap the bail-out line of credit it is requesting.
GM CEO Rick Wagoner may be asked to leave his job as part of a loan package. But the industry's fundamental problems predate his 2000 promotion to the top job. GM has made changes in recent years to move away from over-dependence on SUVs and trucks, and it has also negotiated new union contracts that will bring the company's labor costs more in line with those of foreign-based competitors. But Wagoner could be blamed for not making these changes soon enough.
Given GM's untenable costs and increasing foreign competition, some argue that Wagoner was like a mutual fund manager in a bear market. Success may have been too much to expect. He could be credited for keeping the company alive prior to the recent collapse of the nation's overall economy. But, with calls for someone's head coming from Congress, Wagoner's neck seems to fit the guillotine best. It may be time to see if someone else could do this difficult job better.
They get asked that question every time there's a new round of union negotiations. Up until recently, the answer was usually "No, we won't." In 2007 negotiations, the union agreed to major concessions and just recently, it said it was willing to consider more.
But the real problem for carmakers isn't the workers in the factories. It's the retirees. Before the 2007 negotiations, domestic automakers paid more than twice as much per worker hour in labor costs than Japanese competitors making cars here. But the actual hourly pay for workers was very nearly the same.
Domestic manufacturers have been making cars here much longer. That means they have many more retirees. The cost of health care for them is a big part of what drives up the overall hourly cost. And having been here longer, the Big Three have more experienced workers who command the top pay range.
In the 2007 round of contract negotiations, retiree health-care costs were shifted to an outside fund so that after 2010, those costs will not be reflected on the automakers' books. Carmakers are now also allowed to pay new workers a lower hourly rate than current workers. That will save substantial costs in the future, with more future savings with further concessions.
If a Detroit automaker does go out of business, it's likely there will be some kind of warranty coverage for people who bought one of their cars in the past or who buy the remaining inventory. But the nature of that warranty is not certain.
This is a key argument for why bankruptcy wouldn't work. Even if the automakers give assurances that warranties will be covered by a third party, consumers will be nervous, making it more attractive to buy from a strong foreign automaker that can still stand behind its cars.
The bailout plan contains provisions for government oversight. Whoever oversees the companies that borrow money will have powers similar to a bankruptcy judge with the ability to negotiate conditions on outside creditors, unions and other parties. That could spark some painful but necessary changes for long-term survival.
Regarding electric cars, new Corporate Average Fuel Economy rules have already been passed that call for big overall fuel economy increases for all manufacturers. GM, Chrysler and Ford are working on new hybrid and electric cars in part to comply with those future requirements, but also to change the public's impression that they are technologically lagging.
When we're talking about business survival, though, it's important to remember that hybrid and electric cars are unlikely to be very profitable, or profitable at all, for years to come.
By Peter Valdes-Dapena and Chris Isidore, CNNMoney.com senior writers
http://money.cnn.com/galleries/2008/autos/0812/gallery.auto_bailout_questions/index.html
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