I remember when I was in the third grade, my teacher asked our class, “How many of you have parents who work for the auto industry?” About 15 or 20 of my classmates and I raised our hands. At that point, the impact of the Detroit auto industry became clear to me. The Detroit Three, consisting of Chrysler LLC, Ford Motor Co. and General Motors Corp., are the engine of Michigan’s economy and the fuel for the success of the nation’s manufacturers. If the auto companies fail, the resulting domino effect would plunge the nation’s economy into a depression, the backlash of which would last for decades.
The sheer size of the Detroit Three helps demonstrate the severity of a possible collapse. In the United States alone, the Detroit Three alone creates more than 3 million jobs. The global output of the auto industry exceeds $2.5 trillion, which leads to $1.5 billion in tax revenues for governments around the world. The Detroit Three spend $100 billion annually on research and development, leading to job creation for many graduate students from the University and beyond.
So what would happen if the Detroit Three went bankrupt?
The ripple of failures would start with car sales. The central question here is “What consumer would buy a vehicle from a company that’s bankrupt?” Few, because people want the security that their warranties will be honored the next day. So sales would plummet and the name brands would vanish.
Next, Detroit Three suppliers would feel the blow. Since 2001, 25 percent of the largest auto suppliers have declared bankruptcy. This figure would skyrocket should the Detroit Three fail. Top suppliers would lose half of their volumes and be forced to significantly cut back on hours or shut down completely due to efficiency losses. The impact on the lower-tier suppliers would be immeasurable.
The crumbling of domestic suppliers would also hurt others in the global auto industry because Toyota and other automakers rely on many of the same suppliers as the Detroit Three. If other automakers lose a steady and secure stream of parts, they will have to pay premiums for extra inventory and supplier bailouts, which in turn would raise prices for the consumer. Demand for steel, glass, rubber, plastics and computer chips would decrease, leading to a far-reaching recession that would alter the state of the world’s economy for some time.
And do not forget the 2.5 million jobs. Should the auto industry fail, those 2.5 million people would not be able to pay their mortgages. They would cut back on spending, scaling back on cable television, going to the movies and everything else in their life.
And the ripple effect wouldn’t stop there. One estimate says that by the end of 2009, more than 2,000 dealerships would close. That would lead to hundreds of thousands of job losses. These auto dealers are significant employers in small towns and also frequently donate to local causes.
Overall, considering the failure of auto companies, suppliers and dealerships, the U.S. would experience billion of dollars in lost tax revenue, mandating further cutbacks in spending for national programs.
I must admit I am slightly biased. I am from Michigan and I have worked in the auto industry for three summers. My father and brother work for the automakers. Our extended family, all based in Michigan, has been gainfully employed by the industry as well.
But regardless of my personal connection to the industry, it remains clear that the Detroit Three have provided so much for the nation’s economy. What is hard to understand is Congress’s reluctance to give a $25 billion bailout to these companies when it readily doled $150 billion to AIG without asking for a plan. I understand I’ll be footing the bill on my taxes when I graduate, but I would happily pay the price for an ounce of prevention today than face the costs that would come with a collapse of the auto industry further down the road.
Brian Rumao is an Engineering senior