Auto industry bankruptcies could ripple through tech

Thousands of IT workers wait as Obama pushes for bailout

WASHINGTON -- The auto industry has been offering U.S. lawmakers an apocalypse-level scenario warning them that as many as 3 million jobs could disappear if automakers run out of cash.

The big three U.S. automakers employ about 24,000 engineers alone across all disciplines, including those that are IT-related, according to data compiled by the Center for Automotive Research in Ann Arbor, Mich., which is forecasting hard-to-imagine job losses and economic impact if automakers shut down (download PDF). The 3 million job loss estimate includes everyone working directly for the U.S. automakers as well as their suppliers and other spin-off businesses.

It is those numbers that explain why President-elect Barack Obama and some congressional leaders are seeking billions of bailout dollars to keep the automakers out of bankruptcy.

For tech workers, a wave of bankruptcies in the auto industry would hurt as well. Market research firm IDC estimated that IT spending among all manufacturers in the U.S. will total about $88.5 billion next year, with the auto industry accounting for about 10% of that amount.

Much of the auto industry's IT spending comes from one company: General Motors Corp. (GM), which in 2006 awarded some $7 billion in IT projects to a range of tech vendors, including Electronic Data Systems Corp., which expected about $1.2 billion to $1.4 billion in annual revenue from its deal, and Hewlett-Packard Co., which is getting $700 million over five years.

Robert Parker, a group vice president of IDC's Manufacturing Insights subsidiary, believes automakers are seeking cost reductions from vendors. When it comes to EDS and HP, GM may have a case, he said.

HP officials said the merger with EDS would allow the company to remove redundancies and streamline costs, and Parker said GM will likely want to see those benefits delivered to its bottom line, as well.

Bankruptcy is a real fear among IT vendors that sell to the auto industry; they worry that they'll get hit, too, said Kelly Thomas, senior vice president and general manager of manufacturing at supply chain vendor i2 Technologies Inc. in Dallas. "Once they go into bankruptcy, it's very hard to get your money back," said Thomas.

For now, auto companies continue buying technology and rolling out projects, but they're putting off multiyear projects and have been reluctant to sign longer-term contracts, he said.

Thomas noted that auto industry CIOs are interested in potential money-saving approaches, such as software-as-a-service (SaaS), which is seen as a nonintrusive way to introduce a new system. Otherwise, new system implementations can be "like an organ transplant," said Thomas. Although i2 has SaaS-enabled some of its offerings, the amount of data and integration work needed for a successful SaaS approach can be a challenge -- and far more complex than a CRM system running on, he said.

Mike Nicholes, a parts management consultant and founder of Mike Nicholes Capital Management Inc. in Portland, Ore., said vendors of dealer management systems are discounting systems to make sales. He said auto dealers, which number some 21,000 today, are closing at the rate of 40 to 50 a month.

But Nicholes said some dealers are rebelling over IT-driven changes affecting parts inventory. Dealers once relied on the judgment of parts managers to keep enough of the right kind of inventory on hand. But automakers have been automating those processes, using data in their own systems to anticipate the needs of dealers. The dealers can return unsold parts within 12 months.

Nicholes said the system also helps automakers bring in money; they "get a short-term shot of cash by trying to load parts on dealer's shelves."

Copyright © 2008 IDG Communications, Inc.

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