Monday, June 04, 2007

Car Makers Will Play HardBall With Desparate Governments

Cerberus has taken Chrysler off the hands of Daimlerchrysler (NYSE:DCX). The big trick will be restructuring $18 billion in health care costs. UAW is about to enter into new contract negotiations and is warning its members of new realities. The guys on the shop floor and in retirement do not have $18 billion.

Ford (NYSE:F) and General Motors (NYSE:GM) basically have the same problem. Their guys on their shop floors and in retirement do not have the money to fix their problems either. Shareholders are uninspired and the car buyer does not want to pay exorbitant costs for healthcare.

State and local governments who traditionally fight for auto plant investments will be held to ransom to fund the problems. If politicians want a plant to open, remain or expand they will have to do more than just co-invest in property plant and infrastructure.

The $18 Billion under funded Chrysler health care bill is only $60 for every man women and child in a 300 million US population. (Make adjustments for states and local governments). New locations fighting for the first plant will only be too ready to help alleviate the problem in return for large scale employment and tax revenue commitments. In fiscal 2006 the state of Michigan spent approximately $45.1 billion on all activities.

Governments will need to protect and invest in their own revenue bases before someone eats their lunch. Politicians running for election will be very motivated to lock in prosperity. Politicians will make speeches about improved design and productivity and then simply write some big cheques. They cannot face the consequences otherwise.