Q&A- Erich Merkle, auto industry consultant at Crowe Horwath



Q: Do you expect the government to step in with emergency aid?

A: “I think it’s going to happen. It has to happen. You just can’t let the industry go bankrupt. This is not a Michigan, Midwest issue. That’s what people don’t understand. This is a national macroeconomic issue. We cannot let the industry collapse over the next four weeks.”

Q: Will the U.S. automakers fall into bankruptcy eventually if no government funding comes?

A: Yes, there’s no question. GM and Chrysler will file for bankruptcy. When they file for bankruptcy, their dealers will go, their suppliers will go. Even if they could make cars, they can’t secure the parts any longer and they won’t have dealership networks to sell them through. When suppliers go down, there isn’t a supplier out there that does not touch General Motors. GM sells $31 billion a year to the supply base. So when you look at this thing, you have to keep in mind that when you remove GM, you’re taking away the entire foundation because the supply base will file for bankruptcy. The problem is that the suppliers won’t be able to get funding because the credit markets are frozen. If suppliers liquidate, you won’t have components any more. It’s not just GM, Ford, It’s Toyota, it’s Honda and it’s Nissan. There isn’t any supplier that does not touch GM. And that’s the real problem. GM, we can say what you want about the market capitalization, but at the end of the day they still sell $31 billion a year to the supply base. If you remove $31 billion a year you’re going to have hundreds of suppliers that will go out.

Q: What happens to the other automakers?

A: All of them. Toyota, Honda and Nissan. They will shut down their operations for an extended period of time because they won’t be able to secure components. Regardless of what happens regarding the government funding,political strategy, GM is still going to have to shut down for a period of time in order to get their inventory under control. The weakness in demand is not unique to GM. Ford Motor increased its market share last month, they increased market share. They were down 31 percent and they still increased market share. Think about that. Toyota, Honda were down more than Ford Motor. Toyota and Honda were in the high 30 percent range and Nissan was down 40 percent. This is not a Big 3 issue any longer. This is a macro issue that will take all of manufacturing here in North America.

Q: Are the UAW wages black porn too high?

A: There is no question that they have to come down to achieve parity with the “new” domestics; I think we have to take a harder look at those cartoon porn numbers in greater details than what was given to them in the last few days, that’s not an issue. What Sen. Corker worked out was really a very very good plan.

Q: What are the implications for the financial industry?

A:There is the connection of the auto industry to banking. This money that we’re so hard pressed to give the auto industry we’re going to have to put more into the banks afterwards. But I don’t know whether we could support banks after the collapse of the auto industry at that point. There’s just too much of debt outstanding. When we look at suppliers, automakers and dealerships, the banks cannot withstand. In the end, you’re supporting the financial institutions. When we take GM alone, somewhere $45-$50 billion that (banks) will have to write off. Big 3 alone, we’re looking at close to hundreds of billions anyway, that doesn’t include GMAC, credit arms, dealers. Our estimate is that it’s probably around $200 billion.


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