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GM-Chrysler Merger could hurt more than we thought

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KOKOMO, Ind. -- Chrysler's possible merger with General Motors could slam Indiana's industrial economy and shock this old automotive city harder than almost anything in its past.

Even though unemployment levels in this manufacturing center an hour north of Indianapolis are now typical of a recession -- 7.6 percent of the work force was idle in September -- things could get worse.

The town that avoided the brunt of the Great Depression -- both Chrysler and General Motors put big plants here in the 1930s -- is now hostage to the crisis gripping its largest employer.

If the scene unfolds the way financiers in New York want, General Motors could agree by a self-imposed Nov. 4 deadline to absorb Chrysler. Other players such as Nissan and Renault also could make a bid for Chrysler. But a GM-Chrysler merger could gut thousands of Chrysler's 5,400 jobs in Kokomo, slashing the $300 million annual payroll, and spread layoffs beyond North-Central Indiana.

Thousands of jobs are at stake in independent factories in Indiana that supply Chrysler with auto parts, analysts say. GM wants Chrysler for its $11 billion in cash, not its plants or vehicles, so a merger would trigger plant closings.

"There's going to be a bloodbath if it happens. The first step and the last step will be extreme cuts in capacity,'' said former automotive executive Gerald Meyers, who was chairman of the last big Detroit automaker to get swallowed up -- American Motors, in 1980.

While neither automaker has revealed any details about possible operating plans in the event they merge, analysts at the Center for Automotive Research, a think tank near Detroit, predict Chrysler could let go of at least 52,000 of its 67,000 remaining employees in North America.

Next to go would be workers in independent auto-parts plants that lost Chrysler business. Most of those plants are in the industrial Midwest, including about 70 in Indiana, according to a 2001 study by the Federal Reserve Bank of Chicago.

Owned by New York investor Cerberus Capital Management, Chrysler is the No. 4 automaker in the United States, and GM is No. 1. Together they account for a third of the U.S. auto market, but both companies are in deep financial trouble, hammered by the drop in truck sales. Alarmed by the downturn, Cerberus wants to shed Chrysler 16 months after buying control from Germany's Daimler.

"Cerberus doesn't want to be in the car business,'' said David Cole, chairman of the Center for Automotive Research. "They'd like to get out of the business with as much of their hide left on as they can.''

Cerberus appears to have prodded General Motors into merger talks with Chrysler, analysts say, using as leverage Cerberus' newly acquired influence in General Motors Acceptance Corp. GM sold off a major piece of its finance arm to raise survival cash. As GMAC tightened credit for potential auto buyers, sales volume fell at GM dealers.
Kokomo's pain

If Chrysler went out of business, Kokomo would feel the pain.

"It'll be a devastating effect on us,'' said Mike Cree, a retired Kokomo insurance agent. "Most of us feel helpless. We don't have any control.''

Home values in Kokomo already have fallen more than 30 percent in the national housing slump. Values would drop more as laid-off auto workers resorted to fire sales to rid themselves of mortgage payments.

Idled workers and others already pawn items to get by. Cash Loans & Security Pawnbrokers offers 50 cents for CD movies and $1 for the Walt Disney's Enchanted DVD that recently rested on clerk Jennifer Acord's counter.

"I don't see a big slowdown in the economy. On Friday nights, the restaurants are still filled,'' Acord said. "But we've seen people come in here and start to pawn little things'' for money to buy gasoline and cigarettes.

Much of the tension is below the surface. Kokomo has filled with retired auto workers whose pensions bring in more than $30,000 a year. Many worry about a Chrysler-GM merger.

GM shifted control of its pension fund to the United Auto Workers union as part of a survival tactic. In a merger, Chrysler's pension would most likely move to UAW control. But the GM stock that supports the pension has lost value; it is nearing $6 a share, compared with more than $39 a year ago.

"I don't see how the union is going to have enough money to pay out the benefits,'' said Terry Rust, a Chrysler Casting plant employee of 23 years who recently took a $70,000 retirement buyout. "My bigger concern is (Chrysler-paid) health insurance. Is anybody going to be able to cover it?"
Looking for solutions

Now, city officials are discussing ways to rev up a new economy.

Only a few years ago, the leading employer in Kokomo was Delphi, the auto-parts maker spun off by GM. But bankrupt Delphi has halved its work force in the city to 3,000. Now, Chrysler is on the line.

"In the short term, we do have a problem,'' said David Galvin, sustainability coordinator in Kokomo's Department of Development. "In the long term, we want to make the city the city of the future.''

Officials touted Kokomo at a recent heavy truck technology seminar in South Bend. The hope is to retrain auto workers. Officials want to latch on to new technologies and make Kokomo the center for production of hybrid electric systems and other green technologies such as wind vanes.

"If we didn't have plans to move Kokomo forward, to be ready and prepared for the new industries coming up, I'd say yes, we'd have a deeper problem,'' Galvin said.

Kokomo real estate developer Scott Pitcher, head of Fortune Management, agrees.

"Kokomo has a very experienced work force,'' Pitcher said. "It wouldn't take a lot of retraining for someone to come in here and get going. You could get up and running very quickly.''

Union leaders in Kokomo also look for signs of optimism. If the GM merger fails to take place, Cerberus could sell Chrysler to another automaker, such as France's Renault, Japan's Nissan or India's Mahindra & Mahindra. In that case, the new owner would most likely keep the transmission complex in Kokomo, analysts say.

Another positive sign comes from Cole's think tank. It figures GM would keep open Chrysler's minivan plant in Windsor, Ontario, and the Jeep complex at Toledo, Ohio.

Almost all the transmissions used in Chrysler, Dodge and Jeep brands are made in Kokomo. Because Jeeps and minivans account for about 20 percent of the production volume at Kokomo, at least 20 percent of the transmission jobs -- about 1,000 workers -- could remain in place.

GM might even shut its own transmission plants -- none are in Indiana -- and turn to Kokomo's modern plants for its transmissions. Analysts say GM will most likely compare its plants to Chrysler's and shut the least-efficient, even if they are GM's.

"We have Cerberus looking like they want to unload Chrysler. It's a shame. We have made impressive improvements in our quality and have got some pretty good product,'' said Jeff Everett, president of United Auto Workers Local 1166 in Kokomo. "I've been telling my people all along we're going through a storm. We just have to make it to the other side.''
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