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Edited by Christian Lowe | Contact

The Big Three/National Security Risk Myth

humvee-damage.jpg

There's been a lot of talk about the impending collapse of "the big three" automakers over the last two weeks -- of course, what people really are talking about is GM...but panic sells better, right?

One angle we've explored at Military.com is the effect a collapse of one or more of the American automakers would have on the defense industry...specifically military vehicles like Humvees, Medium trucks, Strykers, tanks and Bradleys.

The answer from our sources: "not much."

Now, I have a lot of respect for Sen. Karl Levin, the Democratic icon and chairman of the Senate Armed Services Committee. But his pandering to the panic and his Michigan constituents about how GM's failure would put American national security at risk just isn't supported by the facts.

Former NATO commander Wes Clark tried to tie the two together the other day with an oped in the New York Times where he said stuff like this:

In a little more than a year, the Army has procured and fielded in Iraq more than a thousand so-called mine-resistant ambush-protected vehicles. The lives of hundreds of soldiers and marines have been saved, and their tasks made more achievable, by the efforts of the American automotive industry. And unlike in World War II, America didn’t have to divert much civilian capacity to meet these military needs. Without a vigorous automotive sector, those needs could not have been quickly met.

Huh? AM General makes the Humvee and isn't part of the big three domestic market except for its "Hummer" line of vehicles. The armor innovations didn't come at all from GM, Ford or Chrysler. MRAPS aren't made by them either. Where does Clark come up with this?

And even the $3,000 watch-wearing, private jet flyin' CEOs are claiming the Pentagon will suffer if there are no more Suburbans made.

Chrysler's chief executive, Robert Nardelli, told the Senate Banking Committee on Tuesday that a crippled auto industry "would undermine our nation's ability to respond to military challenges and would threaten our national security."

My sources are telling me -- and others -- that the Big Three pulled out of the defense market a long time ago, not seeing it as a profitable, stable market for their goods. In fact, none of the JLTV downselectees have any ties to the domestic auto business -- how's that for innovation Wes?

Levin has spread his fear dust all over the country, claiming: “This is a national security issue as well as an economy issue,” Levin said. “But first and foremost, it’s a jobs issue," according to a report on Crains Detroit Business.

Surely, there could be some downside to the crisis for suppliers to the defense industry. But another source of mine said he's done some preliminary searches of DoD contracts and couldn't find a single instance where "this just jumps out at you." He mentioned that "you need to go way down the supply chain for some widget to find a connection"...but that is very preliminary.

Yes, a collapse of one of the Big Three would suck. But a "national security issue?" That's a stretch...

-- Christian

Comments

"Because of the unions greed the big 3 are going bankcrupt buying out their employees (like the $80/hour older workforce and cushy medical benefits) and we're supposed to fund a "bail out" so they can continue to drive escalades while they have a HS degree and turn a screwdriver all day? "


Again, get your facts straight.

Line workers simply did not make "Escalade" money, and do not now.

Some skilled trades folks (machinists and toolmakers - both skills with considerable apprenticeships, followed by journeyman status) could get close if they had tons of overtime in a given year, but the guy turning screws never did.

The non-skilled assembly workers were pulling in a little bit under $60,000 a year (until the new contract). An Escalade goes for better than $60,000.

The "cushy medical benefits", as you call them are now the responsibility of the VEBA, and no longer the Big 3's.... and I never personally knew an HMO was "cushy" btw...


It's fairly obvious that you've got a whole bunch of venom built up for the UAW. A lot of venom backed up by very little real information.

Just do the world a favor, go read. Go read what the UAW gave up in 2005 and 2007.

Learn about what in the world you are talking about before you make a fool of yourself again.


I'm white-collar, btw... an engineer. I've had my fair share of anger at the UAW, but the fact of the mter is that they have stepped up to the plate here and probably will some more.


Lastly, don't let your ignorant prejudice result in a contribution to the emasculation of the nation's industrial base. Like it or not, and in direct contradiction of the article, we NEED a viable automobile industry to have a viable defense industry.

Everybody in the country can't be a lawyer or a banker or a stock broker.

Somebody has to actually DO something and MAKE something or we're screwed.

Posted by: PacerX at November 24, 2008 11:43 PM


Ok, with your new info let me rephrase my rant.

Why should we pay for the unions PREVIOUS overburden on the American auto industry? Because of the unions greed the big 3 are going bankcrupt buying out their employees (like the $80/hour older workforce and cushy medical benefits) and we're supposed to fund a "bail out" so they can continue to drive escalades while they have a HS degree and turn a screwdriver all day?

The unions are the ones driving the companies out of the country with their demands. There was a time and place for unions, but it is not here and not now.

Posted by: JEFF at November 24, 2008 05:22 PM


Ah, the other completely wrong assertion:

Detroit's unionized workers make $80 an hour.


They do not.


New hires come in right around $14-$15/hr (same as the Hyundai worker). Anyone making more than that, or with better benefits than those in the south are rapidly being retired out. Let me say that again: THEY ARE BEING RETIRED OUT.

That was the whole point of the 2007 negotiation!!! Those are what the concessions won by the companies with the union were about in 2005 and 2007!!!

1) Bring wages in line with what is being paid down south.

2) Transfer the retiree health care obligations (which were killing the Big 3) to the Union through VEBA.

Again, I can only implore you folks to get your facts together. The issue IS NOT wages or benefits any more - certainly not like it was.

It's the fact that the economy crashed, and NOBODY can get an operating loan (even companies that make clear profits CANNOT GET LOANS). The banks are hoarding money to protect themselves from their own mistakes in MBS's.


Finally, and get this through your heads:

People in Mexico make ~$3/hr for automotive assembly. You "pure capitalists" are going to push OUR industrial wages all the way down to that point if you do not change your viewpoints and wake up to what is going on.

Well, you might say:

"But I have an education, so I don't have to worry."

There are Mexican engineers and business people who would be happy to take your job at ONE THIRD your wage, right now.

They are every bit as smart and hard working and educated as you are. They'll just do everything you do for a THIRD of the wages.


You don't even want to know what an engineer in China makes...

Posted by: PacerX at November 24, 2008 02:01 PM


Why should we pay for the bad business practices of a company that is riddled with an overpaid unionized work force?

If the companies fall then so be it. It will create an opportunity for somebody else to come in and use the work force for something new, they just have to tell the unions to F off or get no jobs period.

Move the companies to the South like the Germans and Japanesse are doing. Mild weather, cheaper (but just as skilled) workforce, and state/local gov'ts that actually want your business here.

The Rust Belt is dying with their unions, don't tax me because these people are getting paid $80 an hour to turn a screw while my neighbor is getting $45 an house and is happy turning the same screw on a Hyndai.

Posted by: JEFF at November 24, 2008 12:01 PM


Couple of points to hopefully dispel some of the gross errors in the commentary and article:

1) The supply base is depends on the Big 3 to stay alive. A Chapter 7 or Chapter 11 by any of the Big 3 would torpedo the supply base. In either, the Big 3 stop paying their bills and the supplier is left holding the bag.

2) Chapter 11 is not possible for the Big 3. The reason is that you have to get financing to file for Chapter 11. NOBODY can get a loan right now. Healthy companies cannot get loans right now, let alone struggling ones. SO, any bankruptcy action would be Chapter 7... liquidation.

3) AM General, and the other ground vehicle OEMs for defense depend on automotive to keep costs down and provide inexpensive components for their vehicles - like diesel engines, for instance... or fuel injectors... or powertrain control modules and other electronic components... If the supply base dies, then those defense OEM's are in BIG trouble.

4) The income from the Big 3's operations to the Federal budget in terms of taxes is staggering compared to what they are asking for.

5) GM is the largest PRIVATE provider of health care in the United States. If they declare bankruptcy, guess what happens? All those people go right to... Medicaid/Medicare/state-funded programs. The pressure on the health system at that point would be huge.

6) The US steel industry depends in large part on... you guessed it... the US automobile industry. They'll get hammered next. YOU HAVE TO HAVE A STEEL INDUSTRY TO HAVE A DEFENSE INDUSTRY.

I am saddend at the venom and ignorance displayed by the commentary here. It seems as if many of you are actually gleeful at the idea of fellow Americans suffering - and believe you me, it's going to hit you too, no matter what you do, if the Big 3 fold.

Furthermore, I'd like to point out a few things:

Japan has been subsidizing their automotive industry for decades. They used a similar methodology to wipe out the British motorcycle manufacturers... and many of you are cheering them on.

The State of Lower Saxony in Germany owns a large part of VW. The State of Bavaria owns a large part of BMW. The point? Our global competitors are no strangers to protectionism and governmental investment in their industries. They know they need it.

Only here, in the United States, will you find a society joyous about the idea that we are surrendering our markets, and our own livelihoods to foreign interests.


Karl Marx didn't get much right, except for one thing...

Karl Marx once said:

"A Capitalist will sell you the rope with which to hang him."


Guys, in the name of "Free Global Trade", we're selling the world rope. They're smart enough to protect themselves, but we'll fall on our own swords in the name of free trade, kill off our own industries, and thereby our own standard of living and defense industry.

At the very least, it is time that we took, as a reasonable minimum, the protectionist provisions our competitors globally give their industries and give them to ourselves. Otherwise, all they have to do is wait for a down cycle like now, weather it through intervention, and kill off our industries.

And when they are gone... they are gone forever.

Posted by: PacerX at November 24, 2008 11:24 AM


Correct, the tier one companies of suppliers are the automotive industry that does the production and development - the big three (OEM) are only the brand companies that market, integrate and assemble the hardware.
And the automotive suppliers were certainly heavily involved in the MRAP programs because companies like force protection don't do much more than the OEMs do as well.
The real know-how and production base are the suppliers.

The tier ones are very international, though. A tier one can easily supply most of the great automotive brands at once with different parts. It's imho unlikely that many tier ones would die if the big three died. There are too many foreign brand assembly plants in the U.S., big three assembly plants could be bought by other companies and too many components are being shipped to overseas.
It would be very tough, though.

Posted by: Sven Ortmann at November 23, 2008 08:14 PM


Wes Clarke is just a political animal putting his spin on things. Don't take him seriously.

Posted by: Tad at November 22, 2008 07:01 PM


The H1 plant depends on Pentagon spending and is one of the things that any congressman from the area must keep funded. Prior to Iraq the H1 plant turned out massive numbers of vehicles and was parking them all over town. Their lot is relatively empty now simply because the Pentagon orders are down. The H2 and H3 lots are also pretty empty. The things aren't selling and haven't for a year now. GM was stupid to invest in the new plant when gas prices were going up. The two lines are separate but adjacent. They feed off of different supply chains. The slowdown by GM might actually help the H1 side if AM General is not affected by their stake in the H2/H3 plant.

Posted by: TOP at November 21, 2008 12:52 PM


First of all, I live and work in the suburbs of Detroit and work in the defense business. I agree with many people there are many reasons why, looking at the way these companies are run, the American auto industry should not be bailed out. But I also know there will be a huge negative impact. I also believe that the industry is starting to turn around and just needs some help. At least Ford and GM seem to be making improvements that I see as promising. Chrysler is another story. Also, the biggest impact IS going to be in the suppliers. Though it won't affect our ability to defend ourselves, it will affect the defense industry too. The land vehicle sector of defense is very close to the auto industry, at least in this area. we leverage off the auto industry to allow us to buy cheaper parts, to borrow design ideas and concepts for our vehicles, and utilize their talent in recruiting engineers with their expertise. Remember military parts cost much more than automotive, because we don't buy as much, but when we buy automotive parts as we do so often with electronics at least, things come much cheaper. And you can't prop up a supplier that is failing due to the loss of the auto industry. Not when the customer base just dropped off. Its going to lead to a shrinking supplier base for the defense industry.

I don't like the idea of giving out all this money to prop up failing companies, but in this economy it needs to be done. Hopefully the big 3 have learned from their thrashing this week by congress and wise up. Taking three separate private jets in to a meeting to beg for money was pathetic, but it doesn't surprise me. How many of the banks are giving their execs bonuses from the money they've been given? And hopefully we don't have too many more industries coming in and asking for a bailout. We can't bail out everybody. This one is needed though. 25 billion isn't even 5 percent of the 700 billion already alotted for bailouts. And isn't this 25 billion supposed to come out of the 700 billion, not add to it?

Posted by: Greg at November 20, 2008 09:34 PM


Take out one of the "Big 3." I am pretty sure Chrysler fits the bill. Dodge and Jeep will do fine. Ford and GM need to get their heads out of their asses and start a huge marketing push. Like fuel efficiency. Or even new deals on cars and better lease deals.


And national security? Eh, the Senator is just trying to keep his job by keeping other people's jobs. This doesn't really surprise me. It politics 101. Personally, does anyone remember AMC or American Motor Corporation? I didn't think so.


Oh and btw, what about other car companies, not just GM? Other commentors - please include this in your comment. The world is not just GM, sorry.

Posted by: Nuke It at November 20, 2008 07:16 PM


Wes Clark, the Democrat General

heh

Posted by: Wes at November 20, 2008 05:22 PM


You respect Carl Levin so much you spelled his name wrong.

Posted by: D at November 20, 2008 04:42 PM


To Moose:

I don't doubt that's the case, but won't it be more effective then to prop up these suppliers?

Posted by: SamFisher at November 20, 2008 04:41 PM


Well, it's all a lot more complicated than just giving GM and the rest $25billion to do with as they please. Congress is talking about attaching some big strings. The strings attached to Chrysler's bailout back in the day eventually led to the government actually making a profit on the deal. So let's do that again.

Right or wrong, GM employs a heck of a lot of people, and keeps a heck of a lot more employed indirectly. Management certainly gets a failing grade and they deserve to go through bankruptcy reorganization. The resulting company probably will be smaller, leaner and meaner and still unrelated to the defense industry. But if they can survive the reorganization process then a lot of regular joes will still be bringing home a paycheck and paying taxes. That seems like a good thing.

Problem is, if you file for bankruptcy, no bank will give you a dime until you can prove you can make a profit again. So how do you make payroll while the lawyers and judges decide what part of your company is worth saving (Saturn? Opel? Pontiac but not Chevy? etc.)? That's where the need for government aid comes in. A big chunk of that $25 billion request is a bridge loan (not a handout, a loan) to allow the company to pay cash for the metal and tires and such, and to make payroll, during the bankruptcy process. Assuming everything works out and they start making money again, the government gets paid back first, with interest. So the taxpayer ultimately isn't harmed. If things work out the way they're supposed to, which they did for Chrysler.

We just gave $100 billion to AIG, a single insurance company. Will we be paid back? I have no idea. But $25 billion for the big three is small potatoes in comparison.

Posted by: Foraker at November 20, 2008 02:59 PM


Bankruptcy doesn't mean GM vanishes. It means they reorganize, shedding many liabilites (like insanely over-generous pensions) or somebody buys their assets. The end result is a smaller, leaner company with less baggage.

The bailout is just a payoff to the Dems union supporters. Like guys paid $40/hr to sit and do crosswords in "job banks".

It's corruption plain and simple. Political payoffs.

Posted by: jim at November 20, 2008 02:18 PM


Jerry, aren't the majority of Japanese cars actually built in the US, in places like Alabama? There's your capability and capacity.

Posted by: Simon at November 20, 2008 02:16 PM


I don't understand this country. Its ok to bail out banks, but let the last of our industry die? So I guess you guys don't care if nothing is made in America. I don't understand why we are having this conversation about 25 billion for the auto industry when we gave over 100 billion to aig. It makes no sense, we need tangible industries. If anything we need to invest more in this country and produce more. I guess that doesn't matter as long as the military has weapons? As others have mentioned, if the big 3 close how will the auto parts suppliers stay in business. I guess our next tank will be Japanese. Where is our pride these days?

Posted by: Greg at November 20, 2008 02:00 PM


I think you might be focusing your study too small -- the problem isn't specific contracts, the problem is lack of capability and capacity. Why are people worried about the lack of shipbuilding capacity in the United States? Not because of ships now, but because the USN might need more ships later. Same issue here.

JGH

Posted by: Jerry at November 20, 2008 01:39 PM


Byron,

the reason Stryker is made in Canada is because it was developed in Canada, London, ON for Canadian Forces even before US wanted to use one. Stryker/LAV III design is based on Swiss Mowag Piranha.

More info here -> http://en.wikipedia.org/wiki/Stryker

Andre

Posted by: Andre at November 20, 2008 01:38 PM


+1 on Moose's comment. Where are the JLTV/MRAP parts coming from? Where are they going to come from?

Downselecting a "lead systems integrator" is all well and good, but who's going to do serial production on JLTV, or a Humvee replacement?

Are we going to buy them from China?

Apart from that, IIRC, part of the Dodge/Chrysler bailout was the contract for the (often maligned) M880 CUCV. So, we've turned auto industry bailouts into procurement scams before.

Should we do it again? That's a whole other question.

Posted by: demophilus at November 20, 2008 01:30 PM


Good Morning Christian,

Great symbolism in the picture you posted, the right front tire is flat. It must be a GM product.

Since GM's big Defense Contract of late was the Stryker and they chose to manufacture it and service it in Canada, where is the National Security issue here?

Economics fact: as I write this an 10:18 PST the sock of Ford was selling at $1.16 and GM was at $2.26 or combined total of $3.16. Yesterday I paid $3.49 for a Big Mac. Me thinks I will being wearing evidence of the Big Mac long after these two companies are a memory.

ALLONS,
Byron Skinner

Posted by: Byron Skinner at November 20, 2008 01:22 PM


It's the suppliers.

If the Big 3 go down, parts/component suppliers across the nation will fold, some have already started:
http://trollerbk.com/portal/?module=intro&c;=2DB6F168-EBAA-6A39-6A479BA7606BDD44&showcase;=1
Many of those same suppliers, and the raw materials industry which depends on their business, are heavily involved in the defense market. If we lose the big 3, the ripples spread out.

Posted by: Moose at November 20, 2008 01:21 PM


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