Desperate times call for desperate measures. With General Motors seeking to merge with Chrysler, that is the biggest sign that for the American auto industry, survival is the only issue. And the key to survival seems to be staying solvent in the face of declining sales, and asking the US government for a bailout package.

The question resonating in the US media at present is whether the now-fabled Big Three of the US auto industry are actually worth saving.

In September 2008, Congress had approved $25 billion in loan guarantees for American automakers (See: US House of Representatives approves $25-billion loan package for American auto industry), with rules for their disbursal still in the making. 

However, the Big Three have added some urgency to the discussion, saying that the time for disbursal has already arrived. With their sales plummeting, GM, Ford and Chrysler are burning cash faster than they can make it back, and the credit crisis in the markets has sealed their borrowing routes.

Therefore, it comes as no surprise that the American auto makers would like to see more funding in a shorter time. Reports quoted White House spokeswoman Dana Perino as saying on Tuesday that the auto industry has spoken to the Bush administration about ''funding on a much broader scale'' than what had been approved as part of the two programmes by Congress in September.

However, the clouds of gloom continue to gather around the horizon for the automakers, with rating agency Moody's having downgraded Chrysler and GM debt for the second time in three months. It said that the companies could find it difficult to remain solvent through 2009.

The Big Three automakers together employ around 200,000 Americans, and collectively notch up around $400 billion in annual revenues. Though the prospect of their failure worries a number of people, considerable debate is on about what would be the fallout of their failure.

Rating agency Standard and Poor's has alrady forecast that falling sales and a slowing economy are likely to drive auto majors like General Motors Corporation, Ford Motor Co and Chrysler LLC into bankruptcy (See: GM, Ford may drive into bankruptcy: S&P)

Let them fail?
Analysts and economists are said to be divided over the possible scenario of letting them fail, with some pointing to a disaster scenario, and others foreseeing little more than a shift to foreign automakers such as Toyota and Honda, who in the first place make more fuel efficient cars than the Big Three can talk about from their own product line ups.

The spiking oil prices earlier in the year dried up sales at all three American car companies, and the financial crisis thereafter seems poised to sound their death knell.

Reports say some economists advocate that over a longer term, the US economy would be better off by moving on from auto manufacturing, and while their failure would be a huge economic hit, there is question about whether there is room for all three companies any longer. Still others point to the fact that since all three share suppliers, the failure of even one would be enough to paralyse the industry for the other two, with the consequential loss of thousands of jobs.

David Cole, chairman for the Centre for Automotive Research was quoted by the media as saying that if Ford or GM were to go down, it would mean a ''two million-job hit" with the shockwave dumping a few hundred thousand retirees on the federal Pension Benefit Guaranty Corp since estimates suggest that GM and Chrysler would foot around $90 billion in pension and health-insurance benefits by 2017.

Another large impact on the economy would be a hit of around two per cent on the gross domestic product of the US, amounting to around $300 billion.

American car makers have been losing market share since the 1990s. Presently, 51 per cent of the US sales are accounted for by foreign car makers, who also have manufacturing facilities in the US. Reports suggest that thus far this year, around 27 per cent of all cars bought in the United States were built in US facilities that are owned by foreign carmakers.

Meanwhile, GM announced midweek that its global sales dropped 11.4 per cent during the third quarter, providing the latest sign of its ballooning basket of problems, and creating further pressure on Washington to come up with an urgently applicable emergency aid package that is being demanded by the American automakers. GM said sales in the third quarter dropped to 2.11 million vehicles, as compared with 2.38 million in the same period in 2007.

The sales decline virtually ensures that GM would soon lose its title as the world's largest automaker this year to Toyota. GM sold 6.65 million vehicles during the first nine months of 2008, almost 400,000 lesser than the 7.05 million sold by Toyota. GM had a close shave with losing the title last year when it just about outsold Toyota by 3,000 vehicles to retain its number one status for a 77th consecutive year. GM lost $18.8 billion during the first six months of 2008.

To help support its proposed deal with Chrysler, GM has asked Washington to secure up to $10 billion in federal aid. However, its efforts at lobbying are yet to produce a bailout package from the Treasury Department or other agencies.

Nissan has an expansive operation in Tennessee, while BMW builds its vehicles for the American market in South Carolina. Both places are advantageous to the foreign car makers, since they provide cost advantages on account of inexpensive labour and the local laws make it difficult to set up unions. Detroit, on the other hand, has plants where labour costs a lot more, and the unions have been in place for a long time.

American auto no longer viable
Estimates now suggest that Japanese or European manufacturers who have bases in the US could make up the capacity lost by the closure of the Big Three in five years or less, suggesting that companies such as Toyota would quickly fill the void for supplier giants like Lear and Johnson Controls. They would be able to do that faster in case an economic recovery boosts sales to pre-2008 levels.

Also, the mobility of labour for laid-off autoworkers would take care of reemployment options, negating any impact on employment, at least in theory, after a brief period of turmoil or adjustment.

Other economists suggest that making cars in the US is no longer viable since they can be manufactured more efficiently in markets such as Mexico that offers semi-skilled labour. They say that apart from the severe short term impact on communities, the economy would learn to specialise on activities of higher value, as exemplified by Pittsburgh having reinvented itself after steel. They say that just as US bulk steelmaking surrendered to steel specialties, the automakers too would need to do the same in favour of cutting-edge vehicles such as hybrids and electric cars.

Reports suggest that some economist believe that bailing out any of the Big Three would be equal to ''pouring money down a hole'', pointing out that the fact of the matter is that the US economy no longer depends on cars, and that the only pertinent question is the quantum of pain to be endured during the transition.

The short term pain of GM or Chrysler going under would include tens of thousands of people out of work, endangered pensions, and potentially leaving taxpayers holding the bill. In the next stage, auto suppliers would default on their debts, and dealerships would wind up business.

Alternatively, if the two were to merge, even with some kind of government assistance, reports suggest that the story may have the same ending, since the merged entity would just about limp along, still laying off thousands of workers every few years, and then coming back once again, hat in hand, asking for yet another bailout. As evidence, they cite Chrysler itself, which was rescued by the government around 20 years ago, is back once again.

For a GM-Chrysler merger to work, reports say, the first thing the would need to do, apart from making cars that people want to buy, is do everything inexpedient, including win extra large concessions from the unions in terms of salary cuts and benefits, and lay offs that are large in numbers and short on timelines.

Most argue that had the companies done the above years ago, they would not need a bailout now, adding that the automakers would still be better off going through bankruptcy to shed costs and unviable labour contracts, rather than plod along on federal aid.