Auto Bailout Caps Flawed Relationship

As posted by: Wall Street Journal

The news of the once-mighty Big Three auto makers getting a financial lifeline from the federal government is a fitting climax to the long and rocky relationship between Detroit and Washington.

Detroit's car makers helped America win World War II by churning out tanks and planes. They then powered the rise of the blue-collar middle class. More recently, General Motors Corp. helped jump-start the U.S. economy after the Sept. 11, 2001, attacks by promoting zero-interest financing on cars and trucks -- though that move artificially boosted sales, which forestalled painful restructuring moves and left executives unprepared when market conditions contracted.

Over the years, Detroit's auto makers also irritated powerful Washington constituencies by fighting efforts to boost fuel efficiency and vehicle safety, and resisting calls to do more about climate change.

Now, the companies may have no choice but to focus on smaller, more fuel-efficient cars and alternatives to gasoline-fueled motors, as a condition of their rescue by Washington. President-elect Barack Obama, whose administration will pass judgment on GM and Chrysler LLC's restructuring plans, shot a warning at Detroit's management on Friday following the announcement of President George W. Bush's rescue plan.

"I do want to emphasize to the Big Three auto makers and their executives that the American people's patience is running out, and that they should seize on this opportunity over the next several weeks and months to come up with a plan that is sustainable," Mr. Obama said. Mr. Obama has long been a supporter of shifting Detroit's emphasis toward alternative fuels and more efficient technology.

How Detroit's auto makers will be able to stabilize financially in the short run is unclear, since it takes years to redo their product lines. The fastest way to profitability for the Detroit Three, beyond giving haircuts to bondholders and slashing workers wages, would be to take advantage of falling gas prices to sell more of the gas-hungry sport-utility vehicles and large pickup trucks that Mr. Obama and congressional Democrats don't like.

The public ups and downs overshadow a more complex interdependence that has contributed to the troubles now faced by GM, Chrysler and Ford Motor Co.

The Detroit Three's post World War II business strategies -- which relied on large, powerful cars built by richly paid union workers -- were doomed from the day in 1982 when the first Honda Accord rolled off a nonunion assembly line in Ohio. Since then, in good years and bad, the companies missed opportunities to overhaul themselves.

Washington's policies, and the way the government exerted regulatory control over the auto makers, often worked against the profound changes the companies needed to make to compete with foreign makers.

Consider GM Chief Executive Rick Wagoner's concession in recent congressional testimony that GM has "made mistakes," and that one of them was relying for too long on sales of comparatively gas-thirsty pickup trucks and sport-utility vehicles.

Up until this year, Detroit had few reasons not to lean on trucks and SUVs for profits -- and government policy all but invited them to do so. Since the 1980s, Washington's de facto energy policy has been to keep gasoline prices, and gasoline taxes, low. By contrast, European nations for years have boosted fuel prices to around $6 a gallon through taxes, which pushed consumers toward small cars.

The result: U.S. consumers gravitated toward ever larger and more powerful vehicles because the costs to fuel them were relatively low. In 1987, the average American vehicle got 22 miles to the gallon, weighed 3,221 pounds and accelerated from 0 to 60 miles per hour in 13.1 seconds. By 2007, the average car weighed 4,144 pounds, accelerated to 60 miles per hour in under 10 seconds -- and averaged 20 miles per gallon.

Federal fuel-economy rules allow car makers to average the fuel usage of most of their products. They could sell fuel-efficient small cars and trucks at little or no profit to make up for the high-profit, gas-hungry luxury cars and big SUVs they promoted.

Federal tariffs imposed on imported trucks and other quirks in Washington's fuel-economy regulatory scheme also encouraged U.S. auto executives to push trucks and SUVs.

In recent years, GM, Ford and Chrysler made money on trucks -- with profits of as much as $8,000 a vehicle -- and lost money on cars. Detroit made enough money to forestall painful reckonings with spiraling health-care and pension costs.

Federal rules caused Detroit "to cede the car market and make all their money in trucks," said Mike Jackson, chief executive of AutoNation Inc., the nation's largest dealership chain. "If they had been forced to compete up front much sooner, they would not have become overdependent on trucks."

Some in Detroit had misgivings about a strategy that relied on relatively inefficient vehicles. In late 2000, Ford Chairman William C. Ford Jr., great-grandson of automotive pioneer Henry Ford, addressed top executives at the company's product-development center. The topic: Why Ford should invest in hybrids and other fuel-efficient technology to prepare for an era of high oil prices.

Mr. Ford opened the floor for questions, and received just one from the cadre of executives, according to a person who attended the meeting: How could Mr. Ford justify spending billions on unproven technology amid healthy profits in trucks, SUVs and new, powerful luxury brands? Japan's Toyota Motor Corp. and Honda Motor Co. had hybrids on the road, but gas prices were only about $1.50 a gallon and Ford has just posted a profit of more than $7 billion in 1999. The group chuckled.

Mr. Ford briefly reiterated his vision and, after a long silence, left the room.

A Ford spokesman wouldn't confirm the meeting and declined to comment further.

Now, Ford's current chief executive, Alan Mulally, is aggressively trying to shift Ford's lineup toward smaller, fuel-efficient cars, despite the recent slump in pump prices.

"We adopted a point of view that fundamental demand for fuel would outstrip capacity," pushing gas prices up long term, Mr. Mulally said in a recent interview. Unlike GM and Chrysler, Ford said it doesn't need immediate government aid.

Warner Pulls Music From Youtube

As posted by: Wall Street Journal

Warner Music Group Corp. said it began removing its songs and videos from Google Inc.'s YouTube videosharing site this weekend, after the two sides failed to renegotiate a licensing deal.

For now, the decision doesn't appear likely to escalate into a broader battle between YouTube and the music industry, as people close to the other major labels said they didn't anticipate taking down their content in the immediate future. Still, the dispute reflects frustration within media companies over how little ad revenue is generated by their deals with YouTube.

Warner, like two of the three other major-label groups, Vivendi SA's Universal Music Group and Sony Corp.'s Sony BMG Music Entertainment, licensed its recording and music-publishing catalogs to YouTube shortly before the site's acquisition by Google in 2006. EMI Group Ltd. reached its own deal in 2007. In exchange for the use of their music videos and songs, the companies are paid a share of revenue generated by ads displayed alongside their content.

Warner executives have privately expressed frustration with the amount of money they receive from YouTube, saying the site's payment levels are below those of competitors like Time Warner Inc.'s AOL or News Corp.'s MySpace. (News Corp. also owns Dow Jones, publisher of The Wall Street Journal.)

Like Warner, Universal and Sony BMG are both renegotiating their YouTube licenses, which are up for renewal in the next few months.

While Warner says it removed the content on its own, a statement from YouTube implied that the Web site, not the record label, may have made the decision to remove the content from YouTube.

The dispute suggests that YouTube still isn't generating revenue as fast as some media companies would like. YouTube depends on agreements with these media companies to avoid copyright-infringement lawsuits and to draw professionally produced content to the site, which in turn helps attract users and advertisers. YouTube gives the majority of the ad revenue covered by these deals to the companies that own the rights to the content, people familiar with the matter say, although the splits vary.

Analysts estimate YouTube in 2008 will generate revenue of $200 million or less, from selling advertising displayed alongside videos; Google doesn't break out those figures.

Google has made selling more advertising on YouTube one of its priorities this year, and has in recent months launched a number of new ways to advertise on the site. A YouTube spokesman said in an interview Saturday that the new offerings were "starting to show results."

In the wake of Warner's move, people close to the other major labels said they didn't anticipate taking down their content in the immediate future. These people say they are discussing new, more lucrative ways to do business with YouTube. The four music companies don't necessarily have the same terms with YouTube, which could explain the discrepancy in their stances.

It similarly isn't clear whether other media companies will follow in Warner's footsteps. A number of them, including CBS Corp., have recently broadened their partnerships with YouTube, suggesting they are pleased with the results. YouTube has struck a number of similar pacts with a range of companies, including movie studios.

Warner's record labels, including Atlantic Records and Warner Bros., have 21% of the U.S. recorded music market, and distribute current and classic artists including Led Zeppelin, Linkin Park and Aretha Franklin. Its Warner/Chappell division is the third-largest music publisher in the U.S. A Warner spokesman said in a statement: "We are working actively to find a resolution with YouTube that would enable the return of our artists' content to the site." A posting on YouTube's company blog said: "Sometimes, if we can't reach acceptable business terms, we must part ways with successful partners."

GM Prepares Ground for Post-Holiday Talks With UAW

As posted by: Wall Street Journal

DETROIT -- General Motors Corp., while holding preliminary discussions now with key constituents, is expected to wait until early January to begin deep talks with the United Auto Workers union, bondholders and the coming Obama administration, in an effort to work out agreements to comply with the terms of the bailout President George W. Bush announced last week.

GM and Chrysler LLC are supposed to get $13.4 billion in coming months, but are required, among other things, to cut labor costs and reduce their debt. If they make progress on their restructurings, they could get an additional $4 billion in February.

Following the Bush announcement, the two ailing auto makers got another shot in the arm from north of the border on Saturday, as the Canadian government and the province of Ontario said they will provide at least US$3.29 billion in loans to the Canadian units of GM and Chrysler.

Canada and Ontario had been poised for more than a week to provide an injection of cash once the U.S. government took action, and were promising to provide loans totaling 20% of whatever the U.S. offered.

"We cannot afford, in the United States or Canada, the catastrophic short-term collapse of the Big Three auto makers. The U.S. has signaled that they are not going to allow these companies to fail, and we will do our share of the North American package to see that this doesn't happen either," Canadian Prime Minister Stephen Harper said at a news conference on Saturday.

After spending the last several weeks lobbying Congress and the White House for bridge loans, GM officials got a breather over the weekend. This week they'll begin "brief and high level" talks with the UAW, bondholders, banks and suppliers, although it's unclear how much progress they can make with the Christmas holiday coming on Thursday, according to several people involved in discussions.

GM expects to receive its first round of loans from Washington by Dec. 29, the company's chief financial officer said on Friday, just in time to fund $6 billion to $8 billion in payments due to thousands of parts makers at the beginning of January.

Throughout the nation, UAW officials began bracing GM workers to make what they called "unpopular sacrifices." In a letter to assembly-line employees in Texas, the leaders of UAW Local 276 said that "strict conditions associated with the loans are non-negotiable and must be met by the stated deadline," which is March 31. The officials warned UAW workers that they may not hear any updates from the union's leadership in Detroit until after the holidays.

Brett Hoselton, a senior automotive analyst at KeyBanc Capital Markets, said in an interview that GM and Chrysler are likely headed for some tough talks with the United Auto Workers union, and must come away with significant cost cuts quickly in order to qualify for a second round of loans in the first quarter.

"Concessions need to happen, and happen soon," he said. "Because you're basically back to square one come February or March."

GM and Chrysler are likely to seek the complete elimination of the so-called Jobs Bank, a controversial program in which laid-off workers continue to get paid even when their plants close and they no longer report for work. UAW President Ron Gettelfinger has said the union will suspend the Jobs Bank.

GM is also being forced to cut about $40 billion of its $60 billion debt load, or $10 billion more than the auto maker was willing to cut under a plan it submitted to Congress in early December.

Pat O'Keefe, president of O'Keefe & Associates Consulting, a turnaround firm in Bloomfield Hills, Mich., said the auto makers can use the specter of bankruptcy to prod creditors into accepting new terms that help the auto makers.

"Bankruptcy is a failed negotiation," he said. "If they're unable to get a deal on a negotiated basis, they will use bankruptcy to push the parties that can't seem to come to the table."

On Friday, GM Chief Executive Rick Wagoner told reporters that government assistance is expected to give GM time to put together a plan that doesn't require a bankruptcy filing.

As it dives into negotiations with unions and investors, GM is keeping a close eye on developments at its lending affiliate, GMAC LLC, which won't receive any of the funds slated for GM's bailout. GM relies on GMAC to make loans to most of its dealers and a substantial chunk of GM car buyers. The firm, however is facing a liquidity crisis and is working with federal regulators on a plan that would allow it to become a bank holding company, and therefore separately tap the $700 billion in funds originally intended to bail out the finance industry.

Without that designation, GMAC is likely to collapse. The lender currently owes GM up to $1.5 billion in delayed payments related to wholesale financing for auto dealers, and that money is due Dec. 30. GM needs the money in order to pay its suppliers in early January. It is unclear what will happen if GMAC is unable to make that payment.

GM executives expect to resume discussions with President-elect Barack Obama's transition team shortly after the New Year. Mr. Obama is currently vacationing in Hawaii, and GM officials haven't been as closely in touch with his aides as they were when the auto maker was in discussions with Congress earlier in December about a bridge loan.

Even as it lobbied for White House aid, GM's management team was beginning to build contingency plans in the event it had to file for Chapter 11 bankruptcy protection. Many of the advisers it has been working with, including high-profile bankruptcy attorneys, are expected to continue working with Mr. Wagoner's management team in coming months.

Ford Tallies Potential Losses

As posted by: Wall Street Journal

The debate over the job loss attached to the potential failure of Detroit's Big Three auto makers took another turn as an internal document from Ford Motor Co. showed thousands of workers in every state could be at risk.

The state-by-state tally detailed the number of workers directly employed by Ford, the number of auto parts suppliers who work with the company and the amount they spend to support their business. To demonstrate the far-reaching tentacles of the industry, Ford also outlined the number employed at its dealerships and the total amount of health care spending related to those who work for the nation's second largest U.S.-based auto manufacturer.

According to the analysis obtained by The Wall Street Journal late Monday, 25 states could lose 3,000 Ford-related jobs or more if the auto maker were to disappear.

A discount is posted on the windshield of an unsold 2008 Explorer sitting at a Ford dealership in Denver on Sunday, Nov. 9, 2008.

To be sure, the job loss would be felt most acutely in the nation's Rust Belt. In Michigan, Dearborn-based Ford employs 38,380 auto workers and relies on 3,111 auto parts suppliers, according to the document. In Ohio, the numbers are also high, with 8,540 workers at Ford. But a state like Kentucky would also feel the pain, with 5,615 employees working directly for Ford. Thousands more employees who work for suppliers and dealers at Ford would only add to the potential job loss.

The tabulated data is part of a concerted and intense public relations effort before the chief executives at General Motors Corp., Ford and Chrysler LLC testify in front of Congress Tuesday in support of a proposal to extend $25 billion in low-interest loans to the ailing auto makers. After skepticism voiced by some U.S. representatives and senators from outside the states where Detroit's Big Three reign, GM, Ford and Chrysler launched a broad media campaign to prove to a national audience that their survival is key to the nation's economic health.

It was unclear late Monday whether the analysis compiled by Ford would be presented to members of the Senate Banking Committee, the first of two congressional committees to explore the crisis in the auto industry at hearings this week.

As part of the public relations blitz, Ford Chief Executive Alan Mulally is expected to make his case in half-dozen separate national television appearances Tuesday, according to those familiar with the matter.

After years of restructuring that has closed dozens of plants and shed thousands of workers, Detroit's Big Three auto makers are now turning to governments around the world to fund a vast downsizing of their industry. The companies' poor earnings posted earlier this month make it clear Ford and GM are running out of money to finance their Michigan-based businesses, with GM the sicker of the two. Less is known about Chrysler, which is privately held.

At Ford, the auto maker hopes to improve its cash position with or without additional governmental loans. It said it will boost its position by between $14 billion and $17 billion by the end of 2010, through a mix of job cuts, reduced benefits, lower capital spending, selling assets and new financing measures. GM also announced it would bump up its plan for $15 billion in liquidity initiatives outlined in July 2008 by another $5 billion of incremental actions.

More worrisome than the crippling, billion-dollar losses posted by GM and Ford earlier this month was the greater-than-expected cash burn at each company. Ford plowed through $7.7 billion, seeing its liquidity position plummet to $18.9 billion.

Ford said the cash outflow has been greater than anticipated, but Chief Financial Officer Lewis Booth told reporters earlier this month the company is "comfortable with its liquidity position." The company expects the amount of cash burn in the fourth quarter to be less than the third quarter. GM on the other hand has said that it could run out of the funds it needs to operate the business as soon as the end of the year without a massive infusion of cash or a radical improvement in auto sales.

Critically, Ford also has available credit lines of $10.7 billion to supplement its gross cash of $18.9 billion at the end of the third quarter. Mr. Booth has said Ford doesn't expect to tap the loan revolvers, noting that the company will continue to aggressively reduce costs and manage cash with discipline.

Ford is in a better position than its rivals in terms of liquidity in part owing to a decision in late 2006 by Mr. Mulally, who had just recently joined the company, to raise more $23 billion in debt using almost all the company's assets as collateral. Despite those moves, Ford has registered $24 billion in net losses since the start of 2006, and its stock price has traded at multidecade lows in recent months.

All auto makers have been stung by a steep decline in demand from consumers grappling with mounting economic woes and reduced availability of credit in recent months. For much of the year, Ford and its peers were hurt primarily by the sharp decline in sales of trucks and sport-utility vehicles as fuel prices hit record highs. But just as fuel prices started receding, the financial crisis sent consumer confidence reeling, keeping potential buyers out of showrooms entirely.

Auto Rescue May Be a Bridge to Nowhere

As posted by: Wall Street Journal

Sometimes, hard choices have to be forced. That is a beauty of bankruptcy court, where a judge can require investors, creditors, employees and management to reach difficult compromises.

The U.S. government has chosen a different route for General Motors and Chrysler, extending $17.4 billion in temporary assistance, or bridge loans. Washington hopes to coax agreements needed to restructure the companies.

While the aim of buffering the U.S. economy from auto-maker bankruptcies may be laudable, it could prove tough to achieve.

General Motors Corp. CEO Rick Wagoner smiles during a news conference at the company

One potential stumbling block: getting bondholders to convert two-thirds of their debt to new equity, as called for under the aid plan. Such concessions are standard in bankruptcy, but outside court they can't be unilaterally imposed.

So some bondholders may hold out for better terms. Others might refuse altogether because they feel bankruptcy is inevitable, meaning any new stock will prove worthless. United Auto Workers protests of concessions being asked of them may only underscore to bondholders that they too should balk.

A GM spokeswoman said the company recognizes that bondholder concerns will be an issue. But since "the goal is for a stronger, more viable company," many bondholders are likely to agree, she added.

Holdouts may be subordinated by new bonds issued under a debt-for-equity swap. Yet some could decide this isn't such a risk, since their claims will remain whole and the company may be on a sounder footing.

There is an added wrinkle. A clause in indentures to some GM bonds mandates that, under certain conditions, liens on domestic manufacturing assets given as part of new debt issues require that existing bondholders receive similar security. This could potentially turn unsecured bondholders into secured lenders, giving them less incentive to take a haircut. How that will play out is unknown.

What is clear is that the loans are no guarantee these companies will survive. The assistance may end up being a bridge to nowhere.

Detroit's Return on Capitol

In a classic Monty Python sketch, a shifty pet-shop owner attempts to distract John Cleese from the fact that his parrot is dead by pointing out the deceased bird's "beautiful plumage."

Similarly, the debate on bailing out Detroit's three auto makers often seems to play out in a theater of the absurd. Senior industry executives make a great show of driving down to Washington in hybrid vehicles -- "beautiful plumage" indeed, but that is all.

The threat of bankruptcy, meanwhile, is dismissed by many as untenable, despite the fact that it provides the ultimate leverage over existing shareholders.

Assume Detroit gets its bailout. An important question then is: Who sacrifices most? One answer: Who has the most to sacrifice?

General Motors, the biggest and hardest-pressed of the three, aims to roughly halve its effective debt burden to $30 billion. Currently, it owes $20 billion to a voluntary employee-benefit association in return for offloading retiree health-care obligations. Secured creditors are owed $6 billion, while another $36 billion is due to unsecured lenders.

There are infinite scenarios regarding which side takes the biggest hit, but Chris Ceraso, analyst at Credit Suisse, posits three. All assume secured creditors are made whole. Union members originally took a 28% haircut on outstanding liabilities when the VEBA was agreed. Under Mr Ceraso's central case, they would lose another $10 billion, or take it as equity, making the effective haircut 50%. That would leave unsecured lenders having to forgive almost $22 billion, giving them 41 cents on the dollar.

The challenge of getting agreement on that is why Thursday's Senate hearings were laced with talk of appointing a federal overseer. As Brian Johnson, analyst at Barclays Capital, points out, this would borrow from the 1979 Chrysler playbook. Government would be the bad cop, withholding the lifeline until stakeholders make big sacrifices.

That is why it is counter-productive for some senators to simply dismiss the bankruptcy threat. After all, fear of bankruptcy focuses minds. Union members know VEBA agreements are likely to be changed in Chapter 11. Bondholders, meanwhile, never relish working through a bankruptcy, even those that scooped up GM's debt for less than 20 cents on the dollar.

The executives, having sacrificed their salaries, have only their jobs left to give.

And shareholders? Chrysler's private-equity shareholders look exposed politically and because there is skepticism that the smallest of the Detroit three really is too big to fail.

GM's and Ford Motor's combined market value is less than $10 billion. Their shareholders have comparatively little to give. Yet they will probably have to give virtually all of it anyway in a debt-for-equity swap or dilutive equity increase. On that basis, the fact that these stocks still command several dollars each is the final absurdity.

BREAKING NEWS: MSU awarded $550M research facility

EAST LANSING -- Michigan State University has beaten out Argonne National Laboratory for a $550 million nuclear physics research project, a project that many say could transform mid-Michigan’s economy over the next decade.

Estimates say the project will bring $1 billion in new economic activity and $187 million in tax revenue over 20 years; 300 jobs for scientists and facility staff; 5,800 one-year construction jobs; 220 spinoff jobs.

The Facility for Rare Isotope Beams will be a next-generation facility, housing a superconducting linear accelerator 1,000 times stronger than the machines currently running at MSU’s National Superconducting Cyclotron Laboratory. In some cases, 100,000 times stronger.

It will allow MSU to stay at the cutting edge of rare isotope research for decades to come. If the project had not gone to MSU, the cyclotron laboratory likely would have been closed within the next decade.

And when the news arrived that MSU had won the day, a shout of joy rang out down the halls of the lab.

“I feel like I have to go into an emotional downstate just to survive the day,” said cyclotron lab Director C. Konrad Gelbke, speaking by phone from Washington, D.C. “It really is an important development that there is a path forward for something we’ve worked on for a decade.”

MSU scientists had been active in advocating for the necessity of a project like FRIB for years and had hoped to win an earlier version of the project called the Rare Isotope Accelerator, which was shelved by the Department of Energy in 2006.

“The exciting thing, of course, is we’re going to build it and we’re going to become a science center and a world leading facility for 20 years or more,” Gelbke said. “There is a long-term trajectory that is absolutely exciting.”

MSU had put forth a massive effort to win the project, gathering an advisory committee that included dozens of political, business, labor and educational leaders from around the state and even rallying students who didn’t necessarily understand the fine points of nuclear physics, but understood the potential and prestige of a facility such as FRIB.

MSU President Lou Anna Simon described that effort as “a classic MSU approach.”

Rather than designing an entirely new facility, MSU officials created a proposal that built on the existing lab and its equipment, only “augmented with the new $550 million from the Department of Energy to turn them into a 21st century world-class facility,” she said.

The cyclotron lab is already the country's leading research facility for rare isotopes - atoms that exist at the far edges of the nuclear landscape, so unstable that they often exist only for fractions of a second.

Its primary focus is on fundamental questions: the structure of matter, the origin of the elements in the cosmos, the nuclear processes that take place inside stars.

But the work there has applications in nuclear medicine, airport security, even in dating ancient works of art.

And it was such applications, the potential for spinoff companies, the pull that massive federal investment can have on private dollars, that were on Lansing Mayor Virg Bernero’s mind this morning.

“You talk about a rare isotope accelerator, this is going to be a business accelerator,” he said. “It is going to be an economic development accelerator. If properly marketed, and it will be, this is great, great news in terms of that high tech sector that we have been working on.”

And the project could mean great things for one company that’s already in Lansing: Niowave, which manufactures parts for superconducting particle accelerators like the one that will be at the heart of FRIB.

“It’s going to open up a lot of work for local industry,” said Terry Grimm, the company’s founder and chief executive officer. “The equipment you use in high-tech manufacturing in the auto industry is much the same as what you use to build these superconducting particle accelerators.”

Grimm’s company now employs 33 people. To do the work for FRIB, he said, “We would team with local industry, and there would probably be 150 to 200 employees,” a split between engineers and skilled machinists.

Plans for the new facility, which are still subject to DOE approval, call for it to be built largely underground, extending from the current cyclotron lab on the south side of Shaw Lane eastward past the northern face of the Wharton Center.

Gelbke said building onto the existing lab will allow scientists to begin using some of the new equipment from FRIB before the facility as a whole comes online around 2017.

Construction of the new facility likely wouldn’t begin until 2013, but, after negotiating a cooperative agreement with the DOE, MSU will have access to some money for design and other costs, probably soon after the first of the year.

A statement released this morning by MSU’s competitor, Argonne National Lab outside of Chicago, said, in part, “We are disappointed in the decision not to site the Facility for Rare Isotope Beams at Argonne National Laboratory. Argonne has been a pioneer in accelerator physics for decades and much of the science for FRIB was developed here at the laboratory.”

But a statement released by the DOE said MSU’s application “was judged to be superior based on the merit review criteria” and on such factors as “provision of a proposed budget that is reasonable and realistic, giving substantial confidence that MSU can establish the FRIB within the cost limitations of the FOA.”

MSU’s victory, said Sen. Debbie Stabenow, D-Lansing, “could not come at a more critical time for us.”

“When you look at the fact that the politics are such that the new president comes from the state where their competitor was, the fact of the matter is this was not about politics, it was about merit,” she said. “My understanding is that their budget was stronger, that the site visit was fantastic, that, in every aspect of their proposal, they were superior.”

Dow Renegotiates Venture With Kuwait

Dow Chemical Co. renegotiated a deal to split off some of its chemical plants into a joint venture with Kuwait Petroleum Corp., accepting a lower price for the assets it will contribute.

While Dow Chemical will get about $500 million less than it originally planned, analysts expressed relief that the deal is going through at all, given the turmoil in the chemical industry.

Dow will use the $9 billion in cash generated by the asset sale to expand its higher-profit specialty chemicals, in part through its planned $15.3 billion purchase of Rohm & Haas Co., which makes coatings and electronic materials. Investors had worried that the latter deal would be derailed if the Kuwaiti joint venture fell through, but Andrew Liveris, Dow's chief executive, said he expects to close the acquisition early next year.
New Environment

Chemicals producers have been battered this year, first by soaring oil prices and then by the global economic slowdown. Kuwait Petroleum said last month that the Kuwaiti government asked it to review the terms of the joint venture, which involves 15 production locations, scattered in North America, Latin America and Europe. The companies originally announced plans for the venture last year.

Under the new terms, Dow will get a total of $9 billion -- about $500 million less than it originally planned. Of that total, $7.5 billion will be in a direct cash payment. In addition, both Dow and Kuwait Petroleum, as shareholders, will also receive a special cash contribution of $1.5 billion. The money for the cash contribution, which wasn't part of the original deal, will be borrowed by the joint-venture company.

The reduced price, approved by the Kuwaiti government last week, reflects the turmoil in the chemical industry as the global economic slowdown dries up demand for chemical products, Mr. Liveris said in an interview Monday.

"The economic recession that's in place means that it's going to be tougher for this business in the next few years," he said.

"In this environment, it's a positive that they were able to complete any kind of transaction," said Frank Mitsch, managing director of BB&T Capital Markets in New York.

The joint venture is a major part of Dow's effort to shift its operations away from manufacturing low-margin basic chemicals, a business that requires a steady supply of low-cost oil and natural gas. Also, the deal with Kuwait is expected to give Dow preferential access to feedstock for new projects the two companies work on together in the future.

Dow and Kuwait Petroleum will each own 50% of the joint venture. The joint venture, which will be called K-Dow Petrochemicals, will begin operations by the start of 2009.

The companies said the Dow businesses going into joint venture had a revised enterprise value of about $17.4 billion, down from $19 billion.

Among the plants Dow is putting into the joint venture are those that produce polyethylene, polypropylene and polycarbonate, commodity chemicals that have come under intense competition from producers in energy-rich developing countries.

Under the revised deal, K-Dow will also include two existing joint ventures between Dow and Kuwait Petroleum's subsidiary Petrochemical Industries Co.: MEGlobal, which makes ethylene glycol, and Equipolymers, a supplier of PET (polyethylene terephthalate) resins. That will push the venture's expected annual revenue to $15 billion, up from $11 billion under the original deal.

Amid a steep selloff on Wall Street, Dow shares slipped 62 to $17.93. Overall, demand for chemicals is waning as manufacturing-intense economies, such as China's, slow down. Chemical giant BASF said last month it planned to temporarily close 80 plants world-wide and cut output as much as 25%. Dow has said it expects weak demand to continue at least until the second half of next year and is reviewing options to cut costs.

What's Good for GM Could Be Good for America

Rick Wagoner, this could be your moment.

When you appear before Congress later this week, you will no doubt have left behind the Gulfstream jet that attracted so much unwanted attention the last time you testified as chairman and chief executive officer of our nation's largest car company, General Motors.

You know that corporate jets are among the least of Detroit's problems. You know too that among the greater threats to your industry are the overly generous health-care promises made by various managements and union leaders to their workers and retirees. Most of all, you know that these promises will not be kept, for the simple reason that there isn't enough money to fund them.

Given this reality, Detroit needs two things today. First, it needs a restructuring that would allow auto workers to own their own health care -- and take it with them if they leave. Second, it needs someone like you to stand up and say so.

It would take guts. After all, senators and congressmen view hearings like those they will hold this week as opportunities to hop on the populist train and take a few corporate scalps on camera. That, of course, will do nothing to address the costly and unfair system of health-care coverage that makes American companies less competitive and leaves American workers more vulnerable. If you would only use your platform to point out how Congress could change this by making our tax laws more equitable and our nation's health plans more portable, you'd be worth a whole fleet of Gulfstream planes.

Now, health care is not the only reason Detroit is in trouble. But you have rightly noted that it's a big contributor. GM, for example, provides health benefits for a million people today -- only a fraction of them actual workers. Three years ago, you told GM shareholders that these health-care expenses added $1,500 to the cost of every GM vehicle. Which explains the old joke that GM is no longer a car company that provides health benefits, but a health-care company that happens to make cars.

In the past, efforts at reform foundered because workers with employer-provided care had an interest in preserving advantages that gave them more generous health coverage. But today's economy may be testing that proposition. In 2005 and 2007, these same workers watched as you reached deals with the United Auto Workers union (UAW) to cut back on GM's health-care obligations.

In other words, whatever the old health-care plans might say on paper, you know the reality is a future where the Big Three's workers will be renegotiating givebacks with a gun pointed at their heads (the threat of their company going bankrupt). Retirees will have even fewer options as they find themselves paying more than originally promised.

Mr. Wagoner, you could point to a better way forward, one that helps both companies and workers. Thanks to reforms pushed by this president, Americans can now own health savings accounts they can use to build savings and cover day-to-day expenses. Used in combination with a catastrophic health plan, they would also be protected from financial ruin.

For companies, such an arrangement would help shift the responsibility for health care from employers to employees. And because these plans give health-care consumers more control over spending decisions, they also help restore some price-discipline to the market.

For employees, benefits that might not have been as obvious when times were fat are now easier to see. A worker who owned and controlled his own plan would not be trapped at a job simply because of its health benefits. A worker who owned and controlled his own plan would not be at the mercy of business managers and union leaders who agree to cut health benefits as part of a corporate rescue. And a worker who was unfortunate enough to be laid off wouldn't have to worry about his family losing their health coverage along with his job.

For too long, much of Big Business and Big Labor seem to have shared the assumption that the "solution" to the health-care mess is to dump their problems on the American taxpayer. This in fact has long been the message of Lee Iaccoca, the business leader who was so successful in lining up Chrysler for an earlier bailout. So it will be interesting to review the fine print of any bailout to see how much American workers who have no health-care coverage at all will be taxed to fulfill the generous promises made to the UAW.

Mr. Wagoner, if you were the voice that prodded Congress to eliminate the perverse incentives eating away at the benefits of both GM workers and their company, you'd be a hero. At a time so many are singing the death of capitalism, Americans could stand to hear from a corporate chief singing a different tune.

Chrysler Hires Law Firm Jones Day as Bankruptcy Counsel

Chrysler LLC has hired the prominent law firm Jones Day as bankruptcy counsel, according to several people familiar with the matter. The firm was hired several weeks ago to help the ailing auto maker prepare for a possible Chapter 11 bankruptcy filing.

A Jones Day spokesperson declined to comment. A Chrysler spokeswoman couldn't be reached.

Chrysler's move suggests the auto maker is preparing for imminent financial failure should its efforts to persuade Congress to deliver federal rescue funds fall short. Chrysler, which is majority-owned by private-equity firm Cerberus Capital Management LP, says it needs a $7 billion capital infusion before year end.

Detroit's three auto makers have lobbied Congress for some $34 billion in immediate financing amid the deepest recession since the Great Depression. General Motors Corp. says it needs $4 billion by the end of the month. Ford Motor Co., which has a slightly better cash position after mortgaging nearly all its assets in 2006, is seeking a $9 billion line of credit it hopes it won't have to tap.

Jones Day co-head of restructuring Corinne Ball is handling the case, said the people familiar with the matter. She has worked on other automotive bankruptcies, such as that of auto-parts supplier Dana Corp., and many cases involving the United Auto Workers union. She represented GM in its acquisition of Korean auto maker Daewoo.

Reached by phone Friday afternoon, Ms. Ball declined to comment.

Chrysler has been seeking mergers or other alliances in an attempt to rationalize its cost structure. The company engaged in preliminary merger discussions with General Motors, but the talks were put on hold as the recession worsened and GM's cash position became dire. In testimony before a Senate panel Thursday, Chrysler Chief Executive Robert Nardelli said he would accept a forced merger with GM as a condition for a federal bailout.

Lawmakers skeptical of providing rescue funds have asked Mr. Nardelli why Cerberus won't inject more of its own cash into the auto maker.

Mark Zandi, chief economist at Moody's Economy.com, told senators Thursday the total payout could rise to $125 billion to keep Detroit's car companies out of bankruptcy for two years.

The auto makers have encountered skepticism on Capitol Hill after a big infusion from a recently passed financial-rescue package into banks and other financial firms has failed to unfreeze credit markets and has angered lawmakers' constituents. Auto makers have been forced to submit detailed restructuring plans and cut executive pay in an attempt to win aid.

Congressional Democrats have urged the White House to use money from the $700 billion Troubled Asset Relief Program, or TARP, but the administration has resisted, saying the funds are only intended for financial firms. Others have suggested using money from an Energy Department program intended to help auto makers retool to make more-fuel-efficient vehicles, but Democrats have largely balked at that idea.

Michigan Malpractice

One reason we know about the great silicosis legal scam is that a Texas judge was brave enough to expose doctors who'd been paid by tort lawyers to gin up phony diagnoses. So it is encouraging to see a Michigan judge now helping to expose evidence of similar medical fraud in asbestos claims.

This action is taking place in the courthouse of Wayne County Circuit Court Judge Robert Colombo, Jr. Asbestos defendants have been attempting to disqualify Michael Kelly, a physician who appears to have falsely diagnosed thousands of people with asbestos-related disease. Judge Colombo recently gave them an opening, which is already having a dramatic effect on state asbestos claims.

Michigan is one of the last state holdouts against asbestos tort reform. Texas, Ohio and Mississippi have passed laws or created court procedures to clean up their dockets, and new asbestos filings are declining nationally. But they're still climbing in Michigan, the venue for nearly 14% of U.S. asbestos suits and No. 1 in 2007 for new filings (996).

Enter Dr. Kelly, who is behind many of these cases. The Lansing physician is neither a radiologist nor a pulmonologist. In 1989 he failed the federal test that certifies doctors to read X-rays for lung disease. Yet according to Michigan state records, over 15 years Dr. Kelly has reported 7,323 cases of asbestos-related disease. Lawyers paid him $500 per person screened.

Unlike the silicosis doctors who did their own phony work, Dr. Kelly made the mistake of sending his clients to a hospital for X-rays. Under hospital procedures, staff radiologists read the X-rays first. When asbestos defendants obtained the plaintiff medical records, the hospital findings were included. In 88% of the 1,875 cases in which plaintiff X-rays were reviewed both by Dr. Kelly and hospital radiologists, the hospital readers found no evidence of disease. The medical records also showed that the vast majority of the lung-function tests Dr. Kelly performed failed to meet accepted standards.

Of the 91 asbestos cases Judge Colombo was set to oversee this month, Dr. Kelly provided a diagnosis in 80. In addition to giving the judge a broad picture of Dr. Kelly's work, defense attorneys also retained two respected pulmonologists to review specific cases. Jack Parker, who spent years at the Centers for Disease Control, provided the court with a blind study in which independent X-ray readers found an abnormality in only one of 68 (1.5%) X-rays that Dr. Kelly read. Dr. Kelly had found abnormalities in 88% of those X-rays.
Michigan Medicare may cover the price of X-rays.

Judge Colombo, who has been the state's asbestos judge since the early 1990s, initially balked at diving into this medical evidence -- suggesting he preferred a quick and easy settlement. But in the face of evidence that up to 90% of the cases in front of him were fraudulent, he ultimately relented and last week agreed to a hearing on Dr. Kelly. At which point something astonishing happened. Within 24-hours of the judge's decision, the plaintiffs attorneys voluntarily pulled all but one of the suits. They clearly have no interest in subjecting their "doctor," and his methods, to judicial scrutiny.

Judge Colombo should do it anyway, and get to the bottom of Dr. Kelly. It's always easier for judges to orchestrate quiet settlements than to preside over trials, which take time and effort. But the reason so many asbestos defendants have pre-emptively settled over the past 20 years is because court rules have been stacked against them. Now that they've finally cracked the lid on this diagnosing for dollars fraud, courts have a responsibility to investigate.

Borders Shares Fall Ahead of Earnings Report

Deepening concerns about holiday book sales and third-quarter earnings pressured Borders Group Inc. Friday as its stock dipped below a dollar during trading before rebounding slightly.

The number of customers walking into bookstores has fallen sharply in the past month and investors are concerned that Borders will show further signs of weakness when it reports quarterly results Tuesday. The book retailer is expected to post a loss of 50 cents a share, according to analysts polled by Thomson Reuters.

Borders' quarterly results follow Barnes & Noble Inc., the nation's largest bookstore chain by sales, which Thursday released disappointing third-quarter results and lowered its full-year earnings forecasts.

In 4 p.m. composite trading on the New York Stock Exchange Friday, shares of Borders, based in Ann Arbor, Mich., fell 19% to end at $1.11, after earlier slipping to 72 cents. Borders, which enjoyed a 52-week high of $13.23, had a market capitalization at day's end of $83 million.

Borders in March surprised publishers and investors by disclosing a possible cash crunch and putting itself up for sale. Borders has since sold off most of its foreign assets and reduced its debt, which totaled $465.7 million at the end of the second quarter ended Aug. 2, according to a Securities and Exchange Commission filing.

Borders' remaining international assets includes its U.K.-based Paperchase stationery business. Under terms of a deal struck earlier this year, Borders' right to compel a sale of that property to its largest shareholder, Pershing Square Capital Management LP, for a price estimated at $65 million, ends Jan. 15. Pershing Square is headed by activist investor William Ackman.

Despite investors' concerns, several publishers said on Friday that Borders is paying its bills. "They are paying us on time and we are shipping them books," said David Steinberger, chief executive of Perseus Books LLC, a unit of Washington private-equity firm Perseus LLC.

A spokesman for Bertelsmann AG's Random House Inc. declined to comment except to note that Random House continues to ship Borders new titles. Brian Murray, CEO of News Corp.'s HarperCollins Publishers, said Borders is paying its bills on time but noted that HarperCollins is being "prudent" about volume. "We are very aware that consumers aren't spending as they once did. We've reduced the quantities of our printings and are relying more on just-in-time resupply." News Corp. also owns Dow Jones, publisher of The Wall Street Journal.

Automotive Suppliers Take Steps to Conserve Cash

U.S. auto suppliers are scrambling to extend their holiday-season shutdowns, shedding workers and developing contingency plans to deal with a potentially devastating failure of some of their biggest customers in Detroit.

The moves come as General Motors Corp. on Friday announced more production curbs and lawmakers in Washington began hashing out conditions that the Big Three auto makers -- GM, Ford Motor Co. and Chrysler LLC -- will have to meet before Congress will consider giving them a $25 billion emergency cash infusion. Many suppliers are counting on a federal bailout to rescue their big customers -- and, by extension, themselves.

Auto suppliers are developing contingency plans to deal with potential fallout in Detroit. Above, a Ford Dearborn, Mich., plant.

In the meantime, suppliers, still unsure of what will happen to the nation's car makers, are conserving cash by shifting to shorter workweeks, canceling capital-spending plans and accelerating layoffs. Problems in the supply network have the potential to spread pain to a wide swath of the U.S. economy. Auto suppliers employ more than 730,000 workers in the U.S., about three times more than the Big Three.

Nescor Plastics Corp. in Mesopotamia, Ohio, which makes plastic parts such as cup holders, in the past month has shifted to a four-day workweek, implemented an across-the-board salary reduction and canceled costly machine upgrades planned for the company's normal two-week holiday shutdown. The company also has added a week both before and after its two-week shutdown in which it will operate at only partial strength.

Like many auto suppliers, Nescor doesn't sell directly to the car makers. Rather, its plastic parts are sold to larger suppliers that assemble modules that get fitted onto cars on the assembly line.

"Over the past 12 months, we had three customers file Chapter 11 on us, so we know what it means when you suddenly aren't getting receivables you're counting on," says Darrell McNair, the company's president. The company has cut back on purchasing materials.

Angell-Demmel Managing Director Richard Anglin says the main survival strategy for suppliers like him is a tighter credit policy. Two years ago, Angell-Demmel began shifting away from allowing customers to pay bills 60 or 90 days after they take delivery. It is now 30 days, or, in some cases, payment in advance. The Dayton, Ohio, company, which makes decorative metal parts and many of the nameplates used on cars, now relies on an outside insurance agency to rate the credit risks of customers.

"I'm not sure what would happen if a GM would go into bankruptcy," he says. "I'm just not sure how you plan for that, other than what we're doing now."

Many suppliers would like to cut their exposure to the Big Three, but that is difficult to do at a time when the entire industry is in a deep swoon. GM's sales were off 45% in October, for instance, compared with a year earlier. Most analysts expect the slide to continue.

"The biggest problem facing suppliers right now is that they still don't know where the bottom of this market is, because it just keeps falling," says Kimberly Rodriguez, an auto expert at consulting firm Grant Thornton LLP.

Ms. Rodriguez estimates that a third of U.S. auto suppliers are in danger of insolvency and this number would spike in the event of a bankruptcy-court filing by one or more of the Big Three producers.

Ms. Rodriguez says that many suppliers that normally would have already filed for bankruptcy protection themselves have resisted doing so, in part because the financing necessary to conduct a restructuring under Chapter 11 of the U.S. Bankruptcy Code is no longer available to them because of the credit crunch.

U.S. Auto Makers Look to Federal Sales Incentives

As executives from the Big Three auto makers prepare to make a second pitch for a federal bailout, concern is rising in Detroit that it will be difficult to show lawmakers how they can return to profitability with sales at their current depressed level.

Their solution: Get Washington to help them sell more cars.

General Motors Corp., Ford Motor Co. and Chrysler LLC may go back to Washington and urge Congress to take measures to spur consumer demand, in addition to providing the $25 billion in loans the auto companies seek.

"There is no way any car company can make money at the current demand level," said a key executive at a Big Three auto maker. "The government has to get credit flowing so that the market goes back to at least 14 million to 15 million [vehicles].... We can figure out how to survive at that level."

On Monday, Sen. Charles Schumer (D., N.Y.) plans to send a letter urging the Federal Reserve to make financing available for the auto companies' lending arms, which would allow them to offer more auto loans, a spokesman for the senator said. The letter will also ask the Treasury to speed approval of GMAC LLC's request to become a bank holding company.

Vehicle sales are tracking at such a low level right now that most or all auto makers are losing money in North America. Globally, Toyota Motor Corp., Chinese car makers and even Europe's normally recession-proof luxury auto makers are struggling to stanch losses, the executive of the Big Three firm said.

In October, auto sales were running at an annualized rate of about 11 million vehicles a year, well below the level of 16 million the industry considers healthy.

Congress last week rebuffed the pleas from GM, Ford and Chrysler for a bailout, telling them to return by Dec. 2 with credible blueprints showing how they would use taxpayer dollars to become "viable." Top-level auto executives worry they will have a tough time doing that.

As part of its push to Washington next week, GM is working to renegotiate some of its financial obligations, including terms of debt and money it owes to the United Auto Workers union, according to a person familiar with the plan. GM's board, which is open to considering all options for GM's survival, will be meeting several times this week to review the company's pitch to Washington, this person said.

Ford and Chrysler executives also said Sunday that their companies are developing plans.

While the chief executives of GM, Ford and Chrysler were testifying before the Senate and House last week, auto dealers and a few members of Congress called for tax incentives or other measures designed to boost car buying.

In an interview over the weekend, Michigan Gov. Jennifer Granholm, who is serving as an economic adviser to President-elect Barack Obama, said she is working with the auto makers to craft a "definitive plan" to present to Congress on Dec. 2.

Congressional Democrats have urged the Bush administration to provide loans for the auto makers from the $700 billion Troubled Asset Relief Program, but the White House and Treasury Secretary Henry Paulson have opposed that.

Gov. Granholm said one way of getting help from TARP would be to have banks that get some of the $700 billion "steer" financing to the Big Three or provide the Big Three with short-term loans to keep them from running short of cash. (With a rescue far from assured, the auto industry is scrambling to conserve cash. Please see related articles on page B3.)

It is unclear how far along these discussions are, or if there is an appetite at the White House to issue such a directive.

Members of Congress from Michigan have been in contact with Mr. Paulson and Commerce Secretary Carlos M. Gutierrez to push for funding for Detroit, if Congress isn't able to come through with a bailout bill, people familiar with the discussions said Sunday.

U.S. Car Makers Fail to Improve Resale Values

Detroit's auto makers continue to lag behind Asian and European competitors in car resale value, an important consumer gauge.

Kelley Blue Book, a well-known vehicle appraiser, plans to announce Wednesday its annual ranking of the top 10 brands for projected resale value -- and not a single one will be American. Kelley, which ran its calculations before the big car makers began pushing for government financial help, defines resale value as the amount of a vehicle's sticker price that is retained after five years of ownership. The typical Chrysler car, for example, is expected to retain just 24.2% of its original cost. By comparison, the top-rated Honda brand's vehicles are expected on average to retain 44.5% of their value.

The typical Chrysler car is expected to retain just 24.2% of its original cost. By comparison, the top-rated Honda brand's vehicles are expected on average to retain 44.5% of their value.

The U.S. industry's poor showing bodes poorly for its ability to win back consumers to American brands after years of slipping market share. Resale value, also known as residual value, is a factor consumers consider closely when buying or leasing a new car. Because monthly lease payments cover the difference between a vehicle's sticker price and its expected value at the end of the lease, cars that hold their value better have lower lease payments.

After the Honda brand, made by Honda Motor Co., Kelley Blue Book's top picks include the Toyota brand, made by Toyota Motor Corp.; Volkswagen AG's Volkswagen brand; the Subaru brand by Fuji Heavy Industries Ltd.; and Toyota Motor's luxury Lexus brand. Rounding out the top 10 are BMW AG's BMW brand; Nissan Motor Co.'s Infiniti brand; Honda's Acura brand; Volkswagen's Audi brand; and the Nissan brand.

American vehicles continued to perform poorly, according to Kelley's survey. Chrysler LLC's portfolio of Dodge, Jeep and Chrysler brands retain only 27.8% of their value. General Motors Corp.'s eight brands collectively retain 30.3%. And Ford Motor Co.'s brands, including Ford, Lincoln, Mercury and Volvo, retain 30.7%. The five individual vehicles with the worst residuals were all big cars or trucks with large V-8 engines, including Ford's Lincoln Town Car and GM's GMC Savana van.

WSJ's John Stoll discusses the second day of testimony from Detroit auto makers, who are seeking money from the government. Congress is going in eyes wide open this time. (Nov. 19)

Detroit's auto makers have posted lower resale values over the years because they tended to overbuild vehicles to gain market share. They also paid less attention to building high-quality small cars in favor of larger, fuel-thirsty sport-utility vehicles. Amid tepid demand for their cars, U.S. manufacturers sold many to rental fleets, which further undermined resale value.

In recent months, skyrocketing fuel prices caused resale values on SUVs to plunge. Chrysler, which relied disproportionately on those vehicles, had to abandon all its leasing operations as a result.
Bankruptcy Fallout

The disparity could widen should one of Detroit's auto makers fail. Top executives for the Big Three auto makers appeared before the Senate Banking Committee Tuesday to seek $25 billion in emergency working capital. The executives have argued that bankruptcy isn't a viable option for U.S. car makers because consumers aren't likely to buy cars tainted by the image of a company that just went belly-up.

Chrysler Chief Executive Robert Nardelli said in prepared remarks that already-weak sales would "be impacted materially as a result of declining consumer confidence" if Chrysler went bankrupt, forcing the company "to heavily discount existing inventory to move our product." High discounts tarnish consumers' perception of a vehicle and can hurt its resale value.

Amid tough economic conditions, resale values dropped across the industry, according to Kelley Blue Book. But the Honda brand, a perennial strong performer in the ranking, reclaimed its top spot this year from Volkswagen, which led the rankings for 2008. Kelley expects Hondas overall to retain 44.5% of their value, just ahead of the 40.9% for the Volkswagen brand.

The Honda brand's strong quality reputation was bolstered by a fuel-efficient lineup during a period of high gasoline prices, says Eric Ibara, Kelley's director of market valuation. "That helped keep the value for those models even higher," he says. Volkswagen, he says, still benefits from high-mileage cars but slipped because of some flagging popularity for its Jetta model.
Better Mileage

A Volkswagen spokesman says the manufacturer expects the introduction of clean-diesel Jettas -- which pollute less than regular diesel and get better mileage than gasoline-powered engines -- to boost the brand's overall resale value over the next year.

Washington lawmakers have floated the idea of attaching to any bailout strict conditions that would force Detroit's companies to improve fuel economy. U.S. auto executives say they're already working to comply with federal mileage rules passed in a recent energy bill and are working on more fuel-efficient vehicles as part of their restructuring plans. GM hopes to have an electric plug-in car, the Chevrolet Volt, on the road in 2010.

For buyers, resale value disparities mean it often costs less to own a more-expensive car if it holds its value better over time. Consider the Honda Civic EX automatic sedan, one of America's top-selling small cars and among Kelley's top resale models. According to Kelley, the Civic, which lists for about $20,675, should retain about 55% of its value over five years. Meanwhile, a Chevrolet Cobalt LT automatic sedan, which lists for $17,295, retains only 32% of its value. At the end of five years, the cost of the Civic minus its projected resale value would be about $9,304, while the initially cheaper Cobalt would end up costing about $11,761.

Kelley developed its resale-value projections by analyzing current sales data, market conditions for each vehicle, competition within vehicle segments and future economic expectations. Kelley excludes low-volume models and most vehicles with sticker prices above $60,000.

The Toyota brand, which is expected to retain 42.7% of its value, rose in the resale rankings this year, helped by the inclusion of hybrids like the Prius and subcompacts like the Yaris. Those vehicles' relatively high resale values helped offset lower residuals from Toyota's SUVs.

BMW's Mini brand and Toyota's Scion brand both carry residuals exceeding 50% but weren't ranked by Kelley because they don't offer more than four models in their portfolios. But individual models among both these brands ranked high in the Kelley ratings.

Domestic manufacturers earned some honors from Kelley. Chrysler's Jeep Wrangler ranked as the best SUV resale pick, retaining 42% of its value. GM's Cadillac CTS bested all full-size cars. The Ford Focus, which has surprised even Ford executives with its increased popularity, boosted its resale value five percentage points to 36%, not far behind some Asian and European makes.

But domestic models like the Ford Expedition SUV and the Dodge Durango SUV dominated Kelley's list of worst-performing vehicles in terms of resale value.

The Chrysler brand is among the worst resale bets, according to Kelley, outperforming only the Isuzu brand, made by Isuzu Motors America Inc., which retains just 23% of its value. GM's Pontiac is Detroit's best resale brand, Kelley says, but it only retains 34.1% of its value -- more than 10 percentage points behind Honda.
Chrysler Weakness

A Chrysler spokesman said the auto maker has curtailed sales to rental agencies as part of its restructuring, a move spurred in part to boost resale values. Still, the auto maker's struggles have intensified in recent months, forcing its owner, Cerberus Capital Management LP, a private-equity firm, to explore mergers with other car makers.

Another reason Detroit's vehicles tend to suffer: They've historically had less frequent redesigns than their competitors, which makes them look older to consumers, says Kelley's Mr. Ibara. He pointed to the Chrysler 300 sedan as a vehicle that caught eyes early on but has since fallen out of favor.

Spoiler Alert! Beyond the Crisper

If you're tired of throwing out food before you have a chance to eat it, refrigerator makers are pushing new models they say will cut dollars from your grocery bill by reducing spoilage -- though you'll pay for the savings.

Manufacturers are rolling out a slew of pricey new appliances that they say can keep fruits and vegetables fresher longer. In September, Sub-Zero Inc. released a line of refrigerators with a new air-purification system that helps reduce ethylene gases that cause premature ripening and spoilage (Prices range from from $6,500 to $11,000). Viking Range Corp. says it is planning to release new refrigerators with air-purification technology early next year that the company says will reduce bacteria and preserve food longer.

An example of Sub-Zero's new line of refrigerators with air-purification technology.

Other manufacturers are unveiling new ways of controlling moisture and temperature inside refrigerators to help preserve food. Earlier this year, Whirlpool Corp. introduced refrigerators with a "6th Sense Cooling" system, which recognizes when the temperature inside the refrigerator goes up -- after someone keeps the door open for minutes while trying to decide on a snack, for example -- and returns it to the desired temperature faster than a regular refrigerator. (Models with the technology range from $1,499 to $1,949.) And manufacturers such as General Electric Co. and BSH Home Appliances Corp. are coming out with more models that have two evaporators to help maintain different levels of humidity in the freezer and fresh-food sections so that food doesn't dry out.

The new products are being unveiled at a time when food waste is gaining more attention amid higher prices. While commodity prices have dropped from summer highs, prices for groceries have continued to rise. The Bureau of Labor Statistics reported last month that retail grocery-store prices went up 7.6% in September from a year earlier.

Still, consumers continue to waste a lot of food. According to a study directed by former University of Arizona anthropologist Timothy Jones released in 2004, the average U.S. household wastes 14% of its food purchases, which totals about $600 per year. And poor food storage is part of the problem. A study released last summer by the non-profit England-based Waste & Resources Action Programme concluded that two-thirds of food waste in the U.K. could be avoided if food were better managed and stored.

Arlene Orona of Laguna Hills, Calif., says she has noticed a difference in how long her groceries last with her new refrigerator. "I feel like all of my food stays fresher longer," says Ms. Orona, who purchased a BSH Home Appliances Thermador Freedom refrigerator for $5,500 last October. The refrigerator has a cooling unit that helps keep its door bins as cold as the interior, according to the manufacturer. Ms. Orona, 40, says she now stores milk on the side doors of the refrigerator and is able to keep fruits and vegetables a few days longer than she used to.

But manufacturers are facing a major hurdle in a weak economy: Consumers are unlikely to spend money on high-priced household appliances such as refrigerators this year. "Demand is on the downswing because sales of these things go lockstep with sales of houses," says David Lockwood, consumer insights director at Mintel International, a market-research company. Food-preservation features are not going to help manufacturers sell more units, he says. "If you can't get financing on a refrigerator, you are not going to try harder because it has this moisture-control technology." Indeed, many consumers upgrade their appliances as part of larger renovation projects -- endeavors that many consumers are now putting on hold.

And it can seem pretty silly to spend thousands of dollars on a fancy new fridge to get technology that may save just a few bucks on the weekly grocery bill. Indeed, some of the new gadgets are pricier than regular fridges. For instance, the new Sub-Zero built-in line costs about $1,000 more than the company's older built-in models. The price difference is "not all directly attributable" to the air-purification technology, but also reflects the design of the new line and expenses such as higher commodity costs, says Paul Leuthe, corporate marketing manager for Sub-Zero. Manufacturers also note that the new devices don't generally require more energy to run than more traditional models.

Thermador Freedom refrigerator by BSH Home Appliances.

Some users say they bought the new refrigerators more for their sleek designs, but have started to appreciate the technology, too. Joe Fobbe, 43, recently remodeled his home in Long Grove, Ill., and purchased the new Sub-Zero refrigerator for $9,000. His wife "has noticed an improvement" in the freshness of product after using the device, he says. He estimates that certain fruits -- especially berries -- and vegetables last about 30% to 40% longer.

Scientists, however, question whether new appliances could actually help curb food waste. New technologies that help create a colder environment with higher moisture and less ethylene inside a refrigerator help in theory, says Marita Cantwell, a post-harvest specialist in the department of plant sciences at University of California, Davis. But how fast produce goes bad is also determined by the shape the fruits and vegetables are in when we buy them, she says. Product quality, where it is grown and how it is handled are aspects that determine how long food will last.

Dr. Cantwell advises that consumers be careful in picking out produce in a supermarket no matter what refrigerators they have. "Don't buy anything bruised or with physical damage," Dr. Cantwell says. She also recommends rotating the food in your refrigerator often so that items that are more perishable or show signs of decay and need to be eaten first are at the front.

But people are often not conscious about the amount of food they waste. Dr. Jones, the anthropologist who monitored food consumption and waste in 240 households for three years, says that during interviews, household members sometimes threw away leftovers in the trash while stating simultaneously that they didn't waste food.

Contrary to logical thinking, food waste tends to rise with food prices, Dr. Jones says. People may switch to foods they don't normally use because they are cheaper, he says, but "they don't end up using it. It doesn't fit into their everyday pattern of behavior." For instance, he says that people may buy a lower cost vegetable and not know how to prepare it -- or may dislike the taste.

Food-science experts also recommend separating various foods -- since the ways they ripen and age can actually hasten spoiling in foods they are next to. Fruits and vegetables, for example, should be stored separately in a refrigerator so that ethylene released by certain fruits doesn't accelerate the ripening of the vegetables. Also, some items such as tomatoes or bananas are best kept at room temperature.

People should also be cognizant of food going bad inside their refrigerators and toss it out immediately. "People put things in their produce bins and kind of forget about them," says UC Davis's Dr. Cantwell. "That can become a source of bacteria and mold that contaminate other things."

Another tip: Buy only the amount of produce that you can eat in a week and finish it as soon as possible. "You wouldn't want to store most things more than one week," Dr. Cantwell says.

America's Other Auto Industry

The men from Detroit will jet into Washington tomorrow -- presumably going commercial this time -- to make another pitch for a taxpayer rescue. Meanwhile, in the other American auto industry you rarely read about, car makers are gaining market share and adjusting amid the sales slump, without seeking a cent from the government.

Some car makers in America still have reason to celebrate.


These are the 12 "foreign," or so-called transplant, producers making cars across America's South and Midwest. Toyota, BMW, Kia and others now make 54% of the cars Americans buy. The internationals also employ some 113,000 Americans, compared with 239,000 at U.S.-owned carmakers, and several times that number indirectly.

The international car makers aren't cheering for Detroit's collapse. Their own production would be hit if such large suppliers as the automotive interior maker Lear were to go down with a GM or Chrysler. They fear, as well, a protectionist backlash. But by the same token, a government lifeline for Detroit punishes these other companies and their American employees for making better business decisions.

The root of this other industry's success is no secret. In fact, Detroit has already adopted some of its efficiency and employment strategies, though not yet enough. To put it concisely, the transplants operate under conditions imposed by the free market. Detroit lives on Fantasy Island.

Consider labor costs. Take-home wages at the U.S. car makers average $28.42 an hour, according to the Center for Automotive Research. That's on par with $26 at Toyota, $24 at Honda and $21 at Hyundai. But include benefits, and the picture changes. Hourly labor costs are $44.20 on average for the non-Detroit producers, in line with most manufacturing jobs, but are $73.21 for Detroit.

This $29 cost gap reflects the way Big Three management and unions have conspired to make themselves uncompetitive -- increasingly so as their market share has collapsed (see the nearby chart). Over the decades the United Auto Workers won pension and health-care benefits far more generous than in almost any other American industry. As a result, for every UAW member working at a U.S. car maker today, three retirees collect benefits; at GM, the ratio is 4.6 to one.

The international producers' relatively recent arrival has spared them these legacy burdens. But they also made sure not to get saddled with them in the first place. One way was to locate in investment-friendly states. The South proved especially attractive, offering tax breaks and a low-cost, nonunion labor pool. Mississippi, Alabama, Tennessee and South Carolina -- which accounted for a quarter of U.S. car production last year -- are "right-to-work" states where employees can't be forced to join a union.

The absence of the UAW also gives car producers the flexibility to deploy employees as needed. Work rules vary across company and plant, but foreign rules are generally less restrictive. At Detroit's plants, electricians or mechanics tend to perform certain narrow tasks and often sit idle. That rarely happens outside Michigan. In the nonunionized plants, temporary workers can also be hired, and let go, as market conditions dictate.

All the same, Mitsubishi Eclipses and Toyota Corollas are made by UAW workers at plants in Illinois and California. In each case, unions have made concessions to ensure the jobs stay put. Honda makes the Civic and Accord in two plants in Ohio, which isn't a right-to-work state. But attempts to unionize foreign-owned factories have generally been unsuccessful, most recently at Nissan; their workers know too well what that has meant for their UAW peers. Since 1992, the Big Three's labor force declined 4.5% on average every year; the international grew 4.3%. According to the Center for Automotive Research, for every job created by the transplant producers, Detroit shed 6.1 jobs in the U.S., 2.8 of them in Michigan.

Another transplant advantage: Their factories are newer and production process simpler. As a result, they can switch their assembly lines to different models in minutes. In response to the economic downturn, Hyundai decided to make more fuel-efficient Sonata sedans and fewer of the larger Santa Fe model at its Montgomery, Alabama plant, sparing steeper production cuts. Such a change would take weeks at UAW plants.

It's true that at the foreign companies, strategic decisions are taken and much of the value-added design and engineering is done back home. But both U.S. and the Japanese and European companies have tended to move operations closer to large markets. The expansion of manufacturing in the U.S. has brought research and development. Honda stands out for designing some cars from the ground up in the U.S. The foreigners account for a small but growing chunk of the $18 billion in yearly development spending. And while headquartered overseas, the companies have millions of American shareholders -- either directly or through pension funds. Is Honda a Japanese or an American company nowadays? It really is both.

As GM CEO Rick Wagoner recently wrote on these pages, the Detroit companies have finally begun to adapt to this real economic world. Last year Detroit struck a deal with the unions to unload retiree health obligations by 2010 to a trust fund set up by the UAW. The trio's productivity has improved as well. In 1995, a GM car took 46 hours to make, Chrysler 43 and Toyota 29.4. By 2006, according to Harbour Consulting, GM had moved it to 32.4 hours per vehicle and Chrysler 32.9. Toyota stayed at 29.9.

Yet these moves born of desperation have come so late that the companies are still in jeopardy. Both management and unions chose to sign contracts that let them live better and work less efficiently in the short-term while condemning the companies to their current pass over time. It is deeply unfair for government now to ask taxpayers who have never earned such wages or benefits to shield the UAW and Detroit from the consequences of those contracts.

There's no natural law that America must have a Detroit automotive industry, any more than steel had to be made for all time in Bethlehem, Pennsylvania or textiles in New England. Britain sold off all its car plants to foreigners and was no less an advanced economy as a result, though it was a healthier one. Detroit may yet adjust to avoid destruction in the best spirit of American capitalism. The other American car industry is a model for how to do it.