Unfeasible biofuel initiative - Malaysiakini

In a few short years, Malaysia has seen its vision of sustainable development through biofuel production turn into a mirage.

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The government developed ambitious biofuel policies in 2005 when it appeared that the country’s key agricultural product, palm oil, could be profitably transformed into biodiesel. The policies aimed to expand the market for palm oil, improve energy security and create a new export industry.

Malaysia subsidises the end-user prices of petroleum transport fuels so, by replacing a proportion of petroleum diesel with biodiesel, the government hoped to reduce its subsidy burden.

Environmental considerations were a minor motivating factor, with the government seeking to improve ambient air quality and reduce emissions of greenhouse gases through increased biofuel use.

However, the very striving of governments worldwide to encourage the production and use of biofuels undermined the economic viability of the industry. In 2007, global production was approximately 70 million litres of biofuels, converting millions of tonnes of vegetable oils, tallow, grains and sugar cane to biofuels.

A sizeable portion of this production occurred in OECD countries, supported by government incentives that are estimated to have totalled over US$15 billion in 2007 alone. The result was a major surge in demand for agricultural commodities over the past two years, causing dramatic rises in prices, including for palm oil.

High feedstock prices put biofuels beyond the reach of any but the wealthiest nations that can afford to maintain subsidies.

Malaysian biofuel producers were not able to draw on significant domestic government support to maintain their operations.

To date, government support for the Malaysian biodiesel industry has been limited to RM60 million (US$16 million) in low-interest loans in 2004, and RM12 million (US$3.3 million) in federal grants for demonstration projects in 2006. Plans to mandate the replacement of five per cent of domestic diesel consumption with palm-based biofuel (B5) were never implemented.

Hoped-for jobs from the biofuels industry did not materialise and, instead, many biofuel facilities suspended operations in 2008, stranding public and private investments.

Worsen subsidy burden

While 92 biodiesel projects had been approved in Malaysia during 2006 and 2007, a survey of plants in September 2008 revealed that there were 14 functional biodiesel plants, only eight of which had produced biodiesel in 2008 (approximately 130 000 tonnes—less than ten percent of their potential production capacity).

The remainder had suspended operations due to high feedstock prices, and a further four had closed. Eight new biodiesel plants were under construction.

Assuming no further closures or cancellations, total production capacity is expected to reach approximately 2.7 million tonnes in 2009.

Biodiesel is estimated to cost around RM0.67 (US$0.20) per litre more to produce than petroleum diesel when palm oil is RM3000 per tonne and Malaysian Tapis crude petroleum oil is US$115 per barrel.

Replacing petroleum diesel with biodiesel would therefore worsen the government’s subsidy burden, rather than improve it. The Malaysian Government’s consumption subsidies for petroleum fuel have been estimated to total around RM25 billion (US$7.8 billion) in 2008 alone.

Replacing five per cent of petroleum diesel with biodiesel would add RM395 million (US$122 million) per year to this subsidy bill, at the above mentioned prices.

A B5 mandate would lock Malaysia into consuming around 500000 tonnes (approximately 560 million litres) of biodiesel per year, regardless of its cost relative to petroleum diesel. The implications could be expensive.

For example, if petroleum oil prices fell to US$75 per barrel while palm oil rose to RM5000 per tonne (only RM500 higher than prices in March 2008), the subsidy cost of supplying five per cent of Malaysia’s diesel from biodiesel would be around RM2.2 billion (US$675 million) per year.

Crude oil vs palm oil balance

A biofuel mandate would be a retrograde step for the Malaysian Government, which introduced measures in June 2008 to restructure the price subsidy for petroleum fuels. Fuel subsidies increase consumption, discourage more efficient use of resources and absorb national budgets that could be spent on social services (such as health and education).

By moving fuel prices closer towards the international market price, the government generated subsidy savings in the transport fuel and electricity sectors of RM14 billion (US$4.2 billion) in 2008 alone.

If palm oil is cheap relative to petroleum oil, replacing five per cent of Malaysia’s petroleum diesel with biodiesel could generate subsidy savings.

For example, if the palm oil price were to fall to pre-2006 prices of around RM1500 per tonne while petroleum oil prices shot up to US$175 per barrel, a B5 mandate would reduce government subsidies by around RM1400 billion (US$430 million).

Were such circumstances to arise, however, production and blending of biodiesel would be profitable, eliminating the need for government intervention.

The profitability of Malaysian biodiesel production is precarious, depending on volatile palm oil and petroleum prices, and decisions of policymakers both in Malaysia and overseas.

The vast majority of Malaysia’s current biodiesel production is exported, mostly to the EU and United States where domestic subsidies support biodiesel use (including imports).

Malaysian biodiesel is likely to be benefiting from a loophole in U.S. legislation that allows fuel blenders to claim a US$1 per gallon (US$0.26 per litre) subsidy for blending biodiesel (including imports), even if the product is then re-exported (usually to the EU, where the biodiesel can access additional consumption subsidies).

Pressure from the EU to close this loophole could prevent Malaysian (and other) biodiesel exporters from accessing the U.S. subsidies. In the longer term, sustainability standards could limit access into the EU of all but certified biofuels and feedstock.

Despite biodiesel being uneconomic, many countries have supported the development of a domestic biodiesel industry for social and environmental reasons.

There is no evidence to suggest a strong social or environmental rationale for promoting biofuels in Malaysia. While high commodity prices have delivered benefits to some, these have been more than offset economy-wide by rising food prices, which have hit the poor hardest.

Oxfam (2008) estimated that high food prices attributed to global biofuel production have caused 30 to 75 million people to fall into poverty and to jeopardise the livelihoods of 100 to 220 million people.

Forest clearing offsets benefits

The presumed environmental benefits of biodiesel—most notably in terms of reducing greenhouse gas emissions—have evaporated with improved understanding of the full lifecycle impacts of biofuel production.

Biodiesel is commonly considered to be "carbon neutral" because carbon released in burning the fuel is offset by growing the feedstock.

However, the conversion of forest to oil-palm plantations has been has been found to cause greenhouse gas releases that far outweigh any carbon emission reductions arising from the use of biofuels sourced from that land.

The expansion of the palm oil industry in Malaysia has been associated with deforestation, release of carbon from vegetation and soil, forest fires, soil erosion, water pollution and biodiversity loss.

Current domestic production of biodiesel in Malaysia is unlikely to be driving deforestation, due to low production levels.

However, the growing global demand for palm oil—largely due to increased demand for vegetable oils for biodiesel production—has contributed to a plantation expansion boom in Borneo, with associated deforestation and social conflicts.

The Government has said that no more forest reserves will be converted to oil-palm.

However, it is allowing land previously zoned for agriculture to be cleared, including rainforest.

Should the Malaysian Government institute its B5 mandate, 570 000 tonnes of palm oil would be required. This equates to approximately 130 000 hectares of land or three per cent of the current 4.2 million hectares currently under cultivation.

The majority of new Malaysian oil-palm developments are in the states of Sarawak and Sabah.

These state governments have a great deal of autonomy and it appears that, in some areas at least, environmental impact assessments are not being performed rigorously.

Many Malaysian firms are also operating in the Indonesian provinces of Kalimantan and Riau, which have high rates of conversion of forest to oil-palm, and less exacting governance structures.

These fundamental elements of biodiesel production are unlikely to change in the near term. In the meantime, measures to address sustainability issues will become increasingly important in order to supply environmentally-conscious markets.

Such measures might improve the environmental credentials of palm oil destined for OECD markets, but are likely to do little to avoid expansion of uncertified oil-palm and consequent deforestation.

As for the international export opportunities, prospects have diminished since the early euphoria. European Union and U.S. subsidy policies may currently be improving the viability of Malaysian biodiesel exports, but policy changes in the future may limit access for Malaysian biodiesel to U.S. and EU subsidies.

Refrain from intervening

In light of the limited economic, social and environmental benefits of promoting biodiesel in Malaysia, this report recommends that the government refrain from intervening in the market for biofuels, through such measures as offering direct price support or imposing mandatory blending.

The biofuel industry should be allowed to function in response to market signals - consistent with environmental and social standards - so that the industry establishes itself on a sustainable rather than a government-dependent basis.

The government’s current plan to move domestic retail fuel prices towards the world price is commendable, particularly as steps are also being envisaged to ensure that adequate safeguards are provided for the poor.

The government has correctly surmised that biodiesel can only, at most, complement other energy sources. It cannot significantly augment the nation’s energy supplies.

A B5 mandate would only lock in a new form of fuel subsidy that is delinked from market forces, thus creating new inefficiencies in the economy that would likely require painful reform in future years.

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GREGORE LOPEZ is a postgraduate student at the Crawford School of Economics and Government, Australian National University. The above is a summary of this biodiesel subsidy viability report

Index indicates Australia may be nearing recession

SYDNEY, Nov 19 - The outlook for Australia’s economy is its weakest in 20 years, raising the risk of a recession in 2009, according to an index of economic trends.

The annualised growth rate of the leading index, compiled by Westpac Banking Corp. and the Melbourne Institute, fell to 1.1 per cent in September from 3.5 per cent in August. The monthly index measures the likely pace of growth three to nine months into the future.

“This is a very disturbing fall in the growth rate of the leading index,” Westpac chief economist Bill Evans said in a statement Wednesday.

He said it was the biggest monthly drop since the mid-1980s, and marked two straight months in which the index was below the long-term trend of 3.9 per cent.

Evans said the report’s outlook for early 2009 was poor, with the possibility of a recession.

“The growth rate is signaling a very weak growth outlook through at least the first half of 2009,” he said. “It is consistent with Westpac’s view that growth in the first half of 2009 will be barely positive with a decent risk that the first two quarters of growth in 2009 could be negative.”

A recession is defined as two straight quarters of contraction.

Evans predicted that Japan, the United States and most of Europe would be in recession through much of 2009.

For Australia, Evans said he was confident that China’s economic stimulus package would gain traction, commodity markets would recover and confidence would be partly restored.

“Australia’s reliance on Asian growth, which has been a huge liability in recent months, should once again become an asset as we move into 2010,” Evans said.

Earlier this week, the National Association for Business Economics in the United States also projected recessions in some of the world’s major economies. It said the US economy, which shrank at an annual rate of 0.3 per cent in the July-September period, would contract at a rate of 2.6 per cent in the current October-December quarter.

The association also forecast that Japan, Canada, Mexico, Britian and much of Europe would all suffer recessions in the coming months. - AP

Malaysia well positioned as gateway for Islamic finance in Asia Pacific - Malaysiakini

KUALA LUMPUR, Nov 18 – Malaysia is well-positioned as a regional gateway for Islamic investments in the Asia-Pacific region, said Second Finance Minister Tan Sri Nor Mohamed Yakcop.

“We also have strong linkages with the Middle East and other Asian markets to support trade flows between Asia and the Gulf States and to intermediate intra-regional capital flows and investment opportunities,” he said in a speech at the KLIFF Islamic Finance Award 2008 here this evening.

The challenge, therefore, is to further strengthen syariah compliance while continuing with the efforts on developing a wide range of products and services to meet the changing requirements of a highly dynamic and rapidly evolving environment.

These efforts when diligently pursued will enhance Malaysia’s attractiveness and leadership in the global Islamic financial market, he said.

Against the backdrop of the ongoing global financial crisis, he said, Islamic finance was

also clearly providing a more equitable and risk-averse alternative to the conventional approach.

This would contribute towards greater global financial stability, he said.

Given the uncertainties in the financial environment, the global financial community is increasingly seeking new avenues to spread their investment and business risks and to search for new asset classes in markets that provide greater resilience and this is where there is potential role for Islamic finance, he said.

The pillar of Islamic finance lies in the syariah principles which not only emphasise underlying assets but also ethical values, including socially responsible investment, fair trade and good governance and transparency.

“I believe these characteristic of Islamic financing, along with the necessary regulatory framework governing transparency for trading and fund management, have mitigated and helped cushion Malaysia’s financial system from the shocks of the global financial crisis,” he added.

He said the Islamic financial services industry has now emerged as a viable new asset class for investors and advanced to become an increasingly integral component of the international financial system.

Today, the total assets of the global Islamic financial system has surpassed one trillion US dollars, about five times larger than what they were five years ago.

Islamic finance has also been among the fastest growing financial segments, with an estimated annual growth of 20 per cent, the minister said. – Bernama

Land leased in Africa to secure crops for South Korea

SEOUL, Nov 19 - Daewoo Logistics of South Korea has secured farmland in Madagascar to grow food crops for Seoul, in a deal that diplomats and consultants said was the largest of its kind.

The company said it had leased 1.3m hectares of farmland – about half the size of Belgium – from Madagascar’s government for 99 years. It plans to ship the maize and palm oil harvests back to South Korea. Terms of the deal were not disclosed.

The pursuit of foreign farm investments is a clear sign of how countries are seeking food security following this year’s crisis – which saw record prices for commodities such as wheat and rice and food riots in countries from Egypt to Haiti.

Prices for agricultural commodities have tumbled by about half from such levels but countries remain concerned about long-term supplies.

The United Nations’ Food and Agriculture Organisation warned this year that the race by some countries to secure farmland overseas risked creating a “neo-colonial” system. Those fears could be increased by the
fact that Daewoo’s farm in Madagascar represents about half the African country’s arable land, according to estimates by the US government.

Shin Dong-hyun, a senior manager at Daewoo Logistics in Seoul, said the company would develop the arable land for farming over the next 15 years, using labour from South Africa, and intended to replace about half South Korea’s maize imports.

South Korea, a heavily populated but resource-poor nation, is the fourth-largest importer of maize and among the 10 largest buyers of soyabeans.

Carl Atkins, of consultants Bidwells Agribusiness, said Daewoo Logistics’ investment in Madagascar was the largest it had seen. “The project does not surprise me, as countries are looking to improve food security, but
its size – it does surprise me.”

Concepción Calpe, a senior economist at the FAO in Rome, said the investment came after this year’s food crisis. “Countries are looking to buy or lease farmland to improve their food security,” she said.

Al-Qudra Holding, an investment company based in Abu Dhabi, said in August it planned to buy 400,000 hectares of arable land in countries in Africa and Asia by the end of the first quarter of 2009.

Meles Zenawi, prime minister of Ethiopia, said this year its government was “very eager” to provide hundreds of thousands of hectares of agricultural land to Middle Eastern countries for investment. - Financial Times

Apec economist: India and China the key - Malaysiakini

LIMA, Nov 19 - India and China’s ability to resist the global economic slowdown will greatly influence whether the crisis drags the world into a depression, a top Pacific Rim trade community economist said Tuesday.

“If China and India come through this crisis with very good growth rates that would be very important for the rise of global economy,” Bob Buckle told reporters on the eve of a summit of the 21-nation Asia-Pacific Economic Cooperation.

The International Monetary Fund has said emerging economies — which include China and India — will account for the world’s entire projected 2.2 per cent overall growth next year.

It estimates rich nations’ economies will together grow by just 0.1 per cent this year while the developing world will grow by 5 per cent.

China’s economy has grown feverishly, in the double digits annually for 15 years while India’s has grown at slightly less than 10 per cent. Together, the two countries have about 40 per cent of the world’s people.

The IMF readjusted its growth estimates last month, projecting that China’s economy would grow 9.7 per cent this year and 8.5 per cent in 2009. India’s is estimated to grow 7.8 per cent and 6.3 per cent, respectively.

In both countries, the production drop would be far softer than rich countries. The economy of the United States, where the crisis originated, is projected to shrink to -0.7 per cent next year with euro-zone similar.

China, India, Russia and Brazil currently have the world’s largest cash reserves and at last weekend’s G-20 summit in Washington they demanded a greater say in world economic and political forums.

Of the four, only China and Russia are Apec members. But the host of last week’s summit, US President George W. Bush will be in Lima to work with them on finding a way out of the crisis.

Apec has just three Latin American members and their projected growth rates for 2009 are Peru with 9 per cent, possibly the region’s highest, Chile with 4 percent and Mexico with about 1 per cent.

There is a prevailing opinion among Apec’s members, whose economies account for 60 per cent of global economic growth, that all trade protection should be removed, said Buckle, a New Zealander who heads its economic committee.

“The reasons for this I think are very clear. If economies do embark on protectionist measures that tends to have a more negative effect on the global situation,” he said. “ We saw that in the 1930’s when the economies responded to the international crisis at that time by putting up trade barriers.”

At last weekend’s Washington summit, the G-20 presidents (of rich and major developing nations) agreed to take whatever action necessary to stabilise the financial system. - AP

Yahoo’s fate riding on Yang’s successor as CEO - Malaysiakini

SAN FRANCISCO, Nov 19 - With Jerry Yang quitting as Yahoo Inc’s chief executive, the Internet company’s board will confront pivotal questions as it looks for a new leader.

Should Yahoo swallow its pride and try to strike a buyout deal with Microsoft Corp at a price far below Microsoft’s $47.5 billion offer from 6 1/2 months ago? Or should Yahoo still pursue a long-awaited turnaround that’s becoming more difficult to achieve as the economy tanks?

If Yahoo plays it safe and hires someone from within or someone friendly with Microsoft, it could signal the board merely wants an interim captain who can steer the ship until Microsoft, or possibly another buyer, comes to the rescue.

But should Yahoo recruit a CEO with a prestigious resume or pluck an up-and-coming technology star, it will be seen as a sign that the company is digging in to remain independent for the long haul.

“It’s time for Yahoo to decide if they are going to keep entertaining offers or really start to focus on a business strategy,” said Mike Leo, a veteran online ad executive who now runs Operative Inc. “Yahoo still has some great assets. They have just been mismanaged.”

Most analysts and investors have interpreted Yang’s departure as precursor to Microsoft’s acquisition of Yahoo in its entirety or at least its search engine, which ranks a distant second in usage behind Google Inc’s.

Yahoo shares gained 92 cents, or more than 8 per cent, to close Tuesday at $11.55. That’s a fraction of the $33 per share that Microsoft offered in early May before Yang’s request for more money prompted the Redmond, Washington-based software maker to withdraw its bid.

The negotiating breakdown infuriated shareholders and their fury intensified as Yahoo’s stock plunged to its lowest levels since early 2003.

Yang, Yahoo’s co-founder, clung to the hope that he could still engineer a comeback, but his plans went awry yet again this month when Google backed out of a proposed ad partnership to avoid an antitrust battle with the federal government.

The loss of Google’s help, which was supposed to boost Yahoo’s sagging profits, evidently prompted Yang and Yahoo’s board to conclude they needed to announce a change in command even before a successor had been found. Yang, 40, will remain CEO until his replacement is hired and then revert to his former advisory role of “Chief Yahoo.”

Yahoo so far has given few clues on the leadership skills it’s seeking, saying only that it wants a CEO “who can take the company to the next level.” The company has hired Heidrick & Struggles, an headhunting firm, to recruit its next CEO.

Although Yahoo’s profits and stock price have been crumbling for nearly three years, analysts say the company’s huge audience of about 500 million Internet users and leadership positions in e-mail and news could still attract a big-name executive. “Yahoo can still be salvaged,” said Forrester Research analyst David Card.

The names of possible successors include obvious ones like Yahoo’s current president and Yang confidant, Susan Decker, as well as its former chief operating officer, Dan Rosensweig, who left last year after a management shake-up diminished his authority.

Other candidates offer more intrigue, like former eBay Inc CEO Meg Whitman or media mogul Rupert Murdoch’s top lieutenant at News Corp, Peter Chernin, who just so happens to be getting ready to negotiate another contract.

Whitman appears to be a long shot because she has indicated she’s more interested in pursuing a political career than returning to the executive suite.

Jonathan Miller, the former CEO of AOL, has been mentioned as another possibility. But when he left AOL in 2006, his severance agreement included a noncompete clause that prevents him from working from rivals like Yahoo until March 2009. Time Warner Inc, AOL’s corporate parent, enforced the provision to block Miller from joining Yahoo’s board last summer.

Gartner Inc analyst Allen Weiner believes Yahoo should recruit a turnaround specialist or a “young Turk” in the mold of Jason Kilar, who was lured from Amazon.com Inc last year to run the online video site Hulu.com. If Yahoo takes that kind of a step, Weiner said the deep pools of talent at Silicon Valley neighbors Google and Apple Inc. might yield a savvy new leader.

Other names being bandied about include the former head of Microsoft’s online operation, Kevin Johnson, who helped persuade the software maker to bid for Yahoo. Johnson left Microsoft during the summer to become CEO of computer gear maker Juniper Networks Inc., which is located a half-mile from Yahoo’s headquarters in Sunnyvale, California.

Whoever Yahoo selects needs to have charisma and vision if the company is to have any hope of bouncing back, said Todd Dagres, founder of the venture capital firm Spark Capital. “Yahoo is like a wounded animal right now. They need an Obama-like leader,” he said.

Microsoft might make a move on Yahoo before the board even has a chance to hire a new CEO, Jefferies & Co analyst Youssef Squali suggests. He estimates Microsoft could buy Yahoo in its entirety for $20.50 to $22 per share or perhaps just snap up Yahoo’s search operations for $8 per share.

Microsoft declined to comment Tuesday on its interest in Yahoo.

Yahoo’s most outspoken director, Carl Icahn, has been lobbying for a search deal with Microsoft since he became one of the company’s largest shareholders in May.

Icahn waged a campaign to fire Yang during the summer before reaching a truce that gave him and two allies seats on Yahoo’s board. Those allies, former Viacom Inc CEO Frank Biondi and former Nextel CEO John Chapple, also could vie for Yang’s job.

Even if Icahn finally gets his wish, a Microsoft deal might not be enough to make him whole. He acquired his 5 per cent stake in Yahoo for around $25 a share.

Sanford Bernstein & Co analyst Jeffrey Lindsay doubts Microsoft will renew its pursuit of Yahoo until early next year. He reasons Microsoft has little to lose by waiting, since Yahoo’s stock is unlikely to rise much higher, and the extra time will give the software maker more time to assess how its own efforts to improve its Internet operations are panning out.

Waiting also would help Microsoft get a better understanding of the antitrust hurdles a Yahoo bid might face under a new presidential administration. - AP

Detroit spinners?

LONDON, Nov 19 - The plant that assembles Chrysler’s Jeep Wrangler near Toledo, Ohio, sprawls across four buildings, but Chrysler occupies only one of them. The others house three of the troubled carmaker’s suppliers.

South Korea’s Hyundai Mobis builds the Wrangler’s chassis, while Kuka, a German maker of robots and welding machines, puts together the body. The facility’s paint shop is operated by Magna International of Canada, with Chrysler responsible only for the vehicle’s final assembly.

The plant, opened in 2005, illustrates the interdependence of Detroit’s troubled carmakers and their myriad suppliers in the US and overseas.

Relationships like these lie at the heart of the intense lobbying effort by Chrysler and its two bigger Detroit-based rivals – General Motors and Ford – to persuade US lawmakers to approve a $25bn rescue package.

Congress began hearings on Tuesday on the plan, aimed at averting the collapse of an industry that accounts for about 4 per cent of gross domestic product but is quickly running out of cash. Were either GM or Ford to go bankrupt, it would mark the biggest business failure in US history.

The Detroit carmakers operate 105 US assembly and component plants, with close to 240,000 employees. They provide healthcare benefits for 2m Americans and pensions for almost three-quarters of a million people.

The dealers who sell General Motors, Ford and Chrysler vehicles are growing increasingly vocal in urging Congress to support a $25bn emergency funding package for the carmakers. Their voice, moreover, is one that counts.

Car dealers are among the most politically powerful entrepreneurs in cities and towns across the US. Many dealerships are long-established family businesses that have deep local roots, with the connections and
financial clout to ensure that politicians listen when they speak.

“This is not an issue about Detroit or three companies,” says Jim Arrigo, who owns a Chrysler, Dodge and Jeep dealership in West Palm Beach, Florida and is one of 33 Chrysler dealers in Washington this week to lobby politicians on Capitol Hill. “It is about millions of people, mechanics, sales representatives and accountants working across this country whose livelihood intersects the automobile industry.”

The average dealership employs 53 people, according to the National Automobile Dealers Association (Nada). But the dealers’ mission is complicated by the fact that they are widely seen as part of Detroit’s
problem rather than the solution. Most Detroit-affiliated dealers were set up in the days when the three dominated the US market. But GM, Ford and Chrysler sold just 47 per cent of the light vehicles bought in October.

GM alone has 6,500 dealers, more than five times as many as Toyota. According to Nada, the average Toyota dealer sells 1,821 cars a year, compared with 586 at an outlet for GM’s Chevrolet marque and 378 by one selling Chrysler’s Dodge.

Addressing that imbalance is not easy. Under state franchise laws – many tailored to the needs of car dealers – carmakers cannot alter agreements without dealers’ consent. In practice, this means compensation. GM forked out about $1bn to Oldsmobile dealers seven years ago when it discontinued the brand.

The carmakers’ latest strategy is to make a full suite of vehicle types available only to those dealers that rationalise. GM has set up three main sales “channels” for its eight brands. Only Chevrolet and Saturn are standalone. GMC (trucks), Pontiac (small cars) and Buick (larger sedans) are grouped in one channel, as are Cadillac, Hummer and Saab. Chrysler is encouraging Chrysler, Jeep and Dodge outlets to amalgamate so that they offer all three under one roof.

Forty per cent of Chrysler dealers still represent just one or two brands. But the plunge in sales could speed up the process. About 700 dealerships, three-quarters of them selling Detroit brands, are expected to go out of business this year. Few doubt that the number will rise in 2009 as more come to the conclusion that, even in a depressed real estate market, the commercial property they occupy is worth more than their businesses.

Proponents of the bail-out claim that the damage would spread much further. Carmaking, they argue, has one of the largest “multiplier” effects of any industry: for every job, at least seven more people are employed indirectly.

Manufacturers, parts suppliers and dealers say the impact of a collapse on the real economy would dwarf that of this year’s bank failures. Nearly all the jobs lost would be blue-collar, with the pain felt largely in Michigan, Ohio and Indiana. Michigan already has unemployment of almost 9 per cent, the highest of any state.

Some draw a parallel with Lehman Brothers, where government’s failure to intervene is now seen as having hastened the collapse of AIG and exacerbated the financial crisis. Nancy Pelosi, Democratic House leader, has said that the impact of the failure of a Detroit carmaker would be “devastating”.

Bob McKenna, president of the Motor & Equipment Manufacturers Association, which represents suppliers, describes such an outcome as “catastrophic”.

But many lawmakers, Republicans in particular, are hostile to a bail-out that they say would reward Detroit for its failure over many years to build competitive businesses. It could also set a dangerous precedent as recession sends other US industries into the skids, then on to Washington in search of handouts. Rescue funds, if they come at all, are likely to be tied to strict conditions requiring changes to management, union contracts and business models.

Less disputed is the risk that, without aid or an extraordinary uptick in America’s depressed car market, one or more Detroit carmaker may not survive through next year. Ratings agencies, equity analysts and credit default swap markets all increasingly point to the likelihood of a failure among GM, Ford and Chrysler.

Standard & Poor’s last week lowered the credit ratings of two big suppliers and placed 13 others on review. Even formerly blue-chip companies such as Magna, BorgWarner and Johnson Controls, were on the list.

According to CSM Worldwide, the automotive consultancy, three-quarters of suppliers of 68 of the key components and modules that go into cars derive 20 per cent or more of their business from the Detroit companies.

About 37 per cent of suppliers generate more than half their business from GM, Ford or Chrysler. Many are already unprofitable and the loss of a single big customer – a Ford or a GM – could push them over the edge, disrupting the supply chain of other customers.

Advocates of a bail-out say, therefore, that the failure of one large Detroit company could cause the other two to collapse. “Everything is so intimately connected that if one of these guys goes down, it would probably take the entire industry down,” says David Cole of the University of Michigan’s Centre for Automotive Research.

Other large US companies – notably airlines – have filed for Chapter 11 protection and continued doing business for years. But carmakers and industry analysts say that a bankruptcy filing for an automaker would cause a collapse of sales as consumers baulked at buying a car whose warranty might not be honoured or for which they might have trouble getting parts.

The carmakers also reject the notion that they are undeserving of a bail-out. GM and Ford are now producing well-reviewed models – the former’s Saturn Outlook sports-utility vehicle is one – that match or beat Japanese rivals’ offerings in consumer rankings.

After years of struggling with high healthcare and wage costs, Detroit last year clinched deals with the United Auto Workers’ union to cut its healthcare obligations by billions of dollars and pay new hires more competitive wages.

The healthcare savings were due to show up on carmakers’ bottom lines from 2010 – but it is no longer clear whether they will be around to reap them. GM has said its cash reserves may fall below the minimum $11bn-$14bn it needs to keep running by early 2009, while analysts think the finances of privately owned Chrysler, which does not report earnings, are similar if not worse. Ford has more money but burnt through an average $2.6bn a month in June to September.

The discussion over whether to bail out America’s carmakers is clouded by the fact that most who know them best, including outside consultants, are based in Michigan and have a vested interest in their survival.

Few willspeak critically on the record, but some privately say the true picture may be more nuanced than Detroit paints. One thinks the carmakers may be “crying wolf” in the hope of raising the amount of government largesse they get.

“If they really wanted to sell assets and raise cash they could,” he says, pointing to lucrative franchises such as Ford of Europe and GM’s joint ventures in China. Indeed, GM this week sold its remaining shares in Suzuki, and Ford on Tuesday sold 20 per cent of its stake in rival Japanese carmaker Mazda.

Past industry experience also suggests that the failure of the three carmakers, while widely felt, might in fact come at a cost lower than the sum of their lost parts. At least some of the Detroit companies’ operations would probably survive and employ workers under new owners.

Daewoo Motors failed in 2001 at a heavy short-term cost to employment and its local and overseas plants. Ten years later, five of the former carmaker’s plants in Korea have been busy turning out Chevrolets and other cars for none other than GM under its GM DAT joint venture with Daewoo’s creditors and others.

When US suppliers such as Delphi or Collins & Aikman filed for bankruptcy in 2005, their European units carried on doing business after being sold or ring-fenced from their parents. The Detroit companies would have a harder time selling their unionised Midwestern car plants but some of their suppliers would probably survive, picking up business from Japanese carmakers and emerging leaner from the process.

Indeed, there are signs that Detroit’s overseas arms are preparing themselves for all eventualities, including failure of their owners. Opel, GM’s German subsidiary, is in talks with federal and state governments about lining up €1bn in guarantees to keep it going in case its owner’s troubles deepen.

Nor is the past record on state-led rescues of “national champion” carmakers encouraging. Chrysler secured $1.5bn in loan guarantees in 1979 – a bail-out seen today as having addressed the symptoms of Chrysler’s problems rather than their root cause.

The UK government poured millions of pounds into trying to save MG Rover, only to see it fail in 2005 at an estimated cost to taxpayers and business of £870m. China’s Shanghai Automotive owns some remnants of the business.

Yet politics rather than economics is likely to prevail in Washington, if not this week then after Barack Obama takes office in January. Organised labour is a key Democratic constituency and jobs in several “swing” states that voted Democratic in the presidential election are on the line.

“We are determined to pass legislation that will save the jobs of millions of workers whose livelihoods are on the line,” Senate majority leader Harry Reid said last week. “They deserve no less.”

GM and Ford, as publicly traded companies, may prove more politically palatable candidates for aid than Chrysler, owned by Cerberus, the private equity firm. Industry insiders say the company is the only one in Detroit that could fail without taking its two rivals down with it. The impact on suppliers would also be comparatively muted.

But the reckoning will be costly to Detroit in any scenario. Whatever happens, tens of thousands will lose their jobs in the months ahead. According to S&P, even with financial aid, “US automakers are unlikely to avoid further sweeping changes to their product lines, market focus, or possibly their status as independent entities.”

Rod Lache, automotive analyst at Deutsche Bank, says that GM’s predicament “has the potential to set in motion a sequence of events that would be bankruptcy-like”. The company’s market share could continue to fall and finance companies are likely to tighten their terms even further.

“I don’t think any enterprise the size of Ford or GM has ever been closer to filing for Chapter 11 before, so it’s uncharted territory on the economic impact it would have,” says one industry consultant. - Financial Times