This is part of a weekly series about the car business. The auto industry plays an important role in the global economy, and record-high oil prices and a global slowdown have contributed to a crisis in the sector. This column will highlight some of the interesting stories that emerge as that crisis plays out.

Last week, I suggested that the auto industry was ripe for consolidation (Car Biz: Look out below!). The very next day the potential merger between General Motors (NYSE: GM) and Chrysler hit the news.

I can't claim that I'm clairvoyant. I just read the news like everybody else. And overcapacity is old news in the car business. Even in good times, there are too many factories producing too many cars and trucks for too few consumers who can afford them. Some estimates put overcapacity in the industry in the tens of millions of vehicles per year. The burgeoning recession just makes this basic fact impossible to ignore any longer.

Now Chrysler CEO Bob Nardelli is joining the chorus. He recently said that the rapid and dramatic decline of sales in the American auto market "certainly creates an environment for consolidation." He also spoke about "synergies of productivity" but of course he has to say that. CEOs involved in merger talks always talk about 'synergies' even though they are rarely generated in practice.

Ford Motor Co. (NYSE: F) will be handing out employee buyout offers next week at plants in Michigan and Ohio. Just as the automaker continues grappling with a declining market share and lower sales, it needs to trim its workforce to match.

The automaker has already given employees at plants in Ohio and Kentucky the option of leaving the company with a payoff, so this is nothing new. Offers will be made to employees at 14 sites throughout Ohio and Michigan, with possibly more buyout offers coming to more facilities in August.

As expected, the buyout offers are for five assembly plants in addition to supporting facilities that make engines and transmissions. It's a pretty good guess that all those plants and parts come from the large truck and SUV world, as Ford said it is slowly trending away from building so many of these vehicles. What's amazing is that the automaker warned of slowing truck and SUV sales way back at the end of 2005. It's just now seeing the fruits of it not paying much attention pay off.

Ford's Way Forward plan to return to profitability won't come in 2009 as expected, and will probably show progress in 2010. If gas prices stay near current levels into 2009 and Ford still hasn't rearranged its product portfolio to be as flexible as the U.S. customer needs it to be, it may be beyond 2010 for Ford to see a consistent profit.

MAJOR PAPERS:

• The Wall Street Journal reported that Ford Motor Company (NYSE: F) CEO Alan Mulally isn't done cost-cutting. According to people close to the situation, Mulally is considering more job cuts, selling its Volvo brand and closing the troubled Mercury brand.
• BHP Billiton Limited (NYSE: BHP) CEO Marius Kloppers strongly criticized Rio Tinto Plc (NYSE: RTP) and its CEO yesterday, the Financial Times reported. BHP Billiton has outperformed Rio Tinto in several areas, including share price appreciation and EPS growth, said Kloppers, adding, "On every metric I can envisage they [Rio] have been beaten."

OTHER PAPERS:

• According to the Economic Times, AT&T Inc (NYSE: T) is reportedly in preliminary talks with Malaysia's Maxis Communications about buying its 74% stake in Indian cellular phone company Aircel, sources said.
• The United Auto Workers union has rejected several "generous" benefit and wage proposals, according to American Axle & Manufacturing Holdings Inc (NYSE: AXL). In a statement yesterday, the Detroit News reported that American Axle said while tentative agreements had been reached on several issues, the UAW "repeatedly rejected" other proposals that were "considerably higher than the market rate."

MAJOR PAPERS:

• What Countrywide Financial Corporation (NYSE: CFC) knew about its mortgage borrowers, and how it handled that information, is under review by Federal investigators, according to the Wall Street Journal. Some of their findings reveal that Countrywide had questionable information, which it then put together many of those mortgages into securities, and sold them to investors.
• The Air Force's award of a $40B contract for aerial refueling tankers to Northrop Grumman Corporation (NYSE: NOC) and European Aeronautical Defense & Space, will be protested by The Boeing Company (NYSE: BA), reported the Wall Street Journal.
• The Financial Times reported that News Corporation (NYSE: NWS) CEO Rupert Murdoch dashed the hopes of Yahoo! Inc (NASDAQ: YHOO) executives seeking an alternative to Microsoft Corporation's (NASDAQ: MSFT) $40B offer after Murdoch endorsed the view of analysts and investors that it could not match the value offered by Microsoft.

OTHER PAPERS:

• According to General Motors Corporation (NYSE: GM) president and COO Frederick A. Henderson, the New York Times reported that the auto maker will not intervene in the dispute between parts supplier American Axle and Manufacturing Holdings Inc (NYSE: AXL) and the United Auto Workers union. Given that the strike has not yet hurt the company's ability to sell vehicles, Henderson said company officials "just have to keep to our own knitting."

General Motors Corp. (NYSE: GM), which today reported an auto industry record loss of $38.7 billion in 2007, is offering its unionized workforce of 74,000 a buyout package. The automaker, along with rivals Ford Motor Co. (NYSE: F) and Chrysler LLC which have offered similar deals, better hope that too many workers don't take it up on its offer.

There is going to be a steep learning curve for even the brightest of newly hired GM employees who under a new UAW contract receive half of the old wage of $28 per hour. Moreover, the last thing that Chief Executive Rick Wagoner wants is for GM's assembly lines to be staffed by inexperienced or overworked employees. The results of that could be disastrous.

Many workers, though, are going to take GM's offer and who can blame them. Workers with 10 or more years service can opt for a one-time payment of $140,000 to leave the company and those with less service could take a $70,000 pay out. These employees may be able to squeeze even more money out of the automaker in the coming months by being hired back as consultants at wages that are much higher than they are getting now.

But I doubt that GM and the rest of the U.S. auto industry can grow its business through cutting costs alone. At a time when global competition is becoming brutal, The Big 3 can't afford to lose too many workers who know how to build cars that people want at prices they can afford.

December car sales at the "Big Three" are likely to fall about 7% according to a survey by Bloomberg. That would put total vehicle sales in the US at about 16.1 million for 2007, the worst year since 1998.

The obvious causes for the dropping demand for new cars are the housing crisis and high fuel prices. What is less apparent is that a recession in vehicle demand could wipe out the value of most of the cost savings that GM (NYSE: GM), Ford (NYSE: F), and Chrysler have gotten from cost cutting and new UAW contracts.

GM claims that it has cut annual costs by $9 billion. It has also transferred the liabilities of its health plans for workers to a new UAW fund which should drive further expense reductions.

Now, two forces are working against auto company revenue. The first is falling demand which could cut US car sales another million units in 2008, according to some industry experts. The second is that Detroit may need to offer larger incentives to keep the Japanese from getting more market share. Those incentives will eat into profit margins.

Ford and GM trade near multi-year lows now, and that could get much worse.

Douglas A. McIntyre is an editor at 247wallst.com.

MAJOR PAPERS:

• Next year Nestle USA will sell Jamba Inc's (NASDAQ: JMBA) Jamba Juice at stores in eight states in the western U.S., according to the Wall Street Journal.
• Last May Canadian information provider The Thomson Corporation (NYSE: TOC) bought Reuters Group Plc (NASDAQ: RTRSY) for GBP8.7B. While the deal was beneficial to Reuters, the credit crunch could have a severe impact on its bottom line over the next few years, the Wall Street Journal's "Heard on the Street" said.

OTHER PAPERS:

• The Detroit News reported that the United Auto Workers signed a new contract with Ford Motor Company (NYSE: F).

WEB SITES:

• Jeffrey Zucker, General Electric Company's (NYSE: GE) NBC Universal media unit would be interested in DreamWorks SKG if it were to become available, Bloomberg reported.
• According to 21st Century Business Herald's website, Baosteel Group's Chairman, Xu Lejiang, said the company is considering making a bid for Rio Tinto Plc (NYSE: RTP).

Even with a good contract with the UAW nearly in hand, Ford Motor (NYSE: F) is warning that with its falling sales a better union contract may not be enough to balance costs with revenue.

The deal with the union calls for Ford to operate six plants it was going to close. That will cost a lot of money, but it was a necessary concession to get the contract signed.

Ford is warning that overall US car sales may drop next year. Mark Fields, head of the company in the Americas was quoted by The New York Times as saying, "If you look at all the indicators out there, there is more risk than opportunity," And Ford will have to put up more than $13 billion in cash to start a new UAW fund to cover worker health costs.

That leaves Ford in a bit of a bind. Its monthly sales figures in the US have been down 13 months in a row. On a good day it has about 15% of the US vehicle market. US and Japanese competitors are unlikely to give it a break. Auto parts suppliers have probably been pushed to the limit in terms of giving Ford better prices. Some of them have been driven into bankruptcy.

So, Ford can cut more of its white collar work force and fire most of its temporary work force. But once that is done, there is very little left. Which means, if Ford cannot hold its current market share, it has a really big problem.

Douglas A. McIntyre is an editor at 247wallst.com.

Now that the UAW contract with Chrysler is all but ratified, the big union gets to sit down with Ford (NYSE: F). In some ways, bargaining with America's second-largest car company may be the toughest negotiation of all. Ford is in worse shape than its peers, and its revenue problems get worse as each month passes.

Ford may be able to afford putting $30 billion into a health-care fund that the union would manage. That would improve the company's earnings in future quarters. But it would also deplete Ford's balance sheet and give it less cash to fund a turnaround of its U.S. operations. Selling off Jaguar or Rover could bring in more capital, but the process to dump the two brands is slow and the current credit environment will not help Ford get a good price.

Ford had hoped that new products would improve its prospects, but its car sales have dropped about 20% in its home market each of the last two months. It is not clear that Ford can ever make a profit if its U.S. sales do not recover from current levels. It needs sharp cuts in its labor costs in addition to a better sales picture.

The UAW can do a great deal of damage to Ford by insisting on modest job cuts. Ford can ill afford a strike now that the other two U.S. car makers have deals and Japanese rivals pick up market share most months. But the union's rank-and-file came close to rejecting the Chrysler contract because it guaranteed too little in terms of jobs and pay in the years ahead.

UAW workers are likely to take the position that it is not their job to keep Ford in business. And that attitude is the most likely one to put Ford's future in harm's way.

Douglas A. McIntyre is an editor at 247wallst.com.

The approval of the UAW contract with Chrysler is going badly. Several local chapters of the UAW have voted it down. The workers at these plants are upset that the car company will continue to produce cars in Mexico and lacks concrete product plans for some of the manufacturing locations in the U.S.

If workers are going to give concessions on pay, they expect more from Chrysler in terms of future car-building in the U.S.

Chrysler wants to rescue the contract and avoid a strike. It appears to be willing to go to great lengths to do so.

Reuters writes that "Chrysler has guaranteed that it would keep some U.S. factories running well beyond the 2011 expiration of a proposed contract with the United Auto Workers union if the deal was approved." That is a big concession to get the union to vote in favor of the contract on the table.

While this maneuver may work for Chrysler, it will put Ford (NYSE: F) in a tough position. Ford may now be the weakest of the Big Three. Its unit sales have dropped about 20% each of the last two months. If the UAW thinks it can get Chrysler to buckle under on promises for the future of certain large plants, it is likely to ask Ford to make the same expensive pledges.

Being the last of the U.S. car companies to cut a deal with the UAW may cost Ford more than it wanted to give.

Douglas A. McIntyre is an editor at 247wallst.com.

The United Auto Workers went on strike against Chrysler this morning, according to the AP. The strike involves 48,000 workers at Chrysler's American factories.

There has been some speculation that Chrysler's new owner, Cerberus Capital Management, may be not be willing to make a deal with the union, at least not any time soon. Union officials are reportedly preparing for what could be a long strike.

Neat trick. Build automotive plants where there are few UAW members. Honda (NYSE: HMC) appears to have it down to a science. According to The Wall Street Journal the Japanese car company recently built a plant in Indiana, but was only willing to hire employees from counties that outside the ones where "most of the state's thousands of unionized laid-off auto workers" were located.

It seems that foreign car companies are adroit at avoiding geographic areas where the UAW has members or people are likely to organize. It may be why so many of these plants are located in the South. Right-to-work rules tend to be lenient there. Companies like Honda are willing to take local tax breaks, but often don't hire workers who may be inclined to join a union.

There is a reason that most foreign car factories are not staffed by UAW members, and the move to locate in regions where worker's rights are modest may be a part of that.

As the UAW slowly dies due to downsizing at big US car companies, it would be a huge benefit if it could organize workers in foreign car plants. But, one of the reasons that Japanese car companies have a lower-costs-per-vehicle is that they do not have the legacy pension costs that Detroit does. These costs are the byproduct of decades of living with the UAW.

And, companies like Honda are not inviting the UAW in.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Bear Stearns Companies (NYSE: BSC) -- implied volatility decreases after EPS as BSC rallies. BSC is recently up $4.23 to $118.96. BSC October option implied volatility of 40 is below its 26-week average of 43 according to Track Data, suggesting decreasing price movement.

Ford Motor (NYSE: F) -- implied volatility-risk collapses on tentative UAW agreement. Ford is recently up 33 cents to $8.67. General Motors Corp. (NYSE: GM) and the United Auto Workers announced a tentative agreement on a new national contract. Dow Jones reported, "The cost of protecting $10 million of fellow U.S. automaker Ford bonds fell to $590,000, after being in the $630,000 area on news of the strike at GM, according to a market participant. F's 7.45% notes due 2031 were up 1 point to 78.75 cents, according to MarketAxess." F October option implied of 35 is below a level of 52 from last week and below its 26-week average of 49 according to Track Data, suggesting decreasing risk.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

General Motors Corp. (NYSE: GM) is recently trading up $1.46 to $35.93. GM and the United Auto Workers announced a tentative agreement on a new national contract. Alex Brown says, "this contract represents an inflection point for GM. We believe this should significantly improve competitiveness, cash flow, and valuation." GM October option implied volatility of 61 is above its 26-week average of 46 according to Track Data, suggesting larger risk.

Chevron Corp. (NYSE: CVX) is an integrated energy company with a market cap of $195 billion and quarterly June 2007 revenue of $56 billion. CVX closed at $91.88. CVX announced a program to acquire up to $15 billion of common stock over a period of up to three years. Crude oil futures are up 0.79% to $80.16, according to Bloomberg. CVX overall option implied volatility of 27 is above its 26-week average of 24 according to Track Data, suggesting larger risks.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

MarketWatch reports that the United Auto Workers (UAW) ended its strike against General Motors Corp. (NYSE: GM) due to a settlement reached early this morning. 74,000 production workers will return to work. GM shares are up 8% in pre-market trading. This deal will benefit the reputation of Lazard Ltd. (NYSE: LAZ) which represented the UAW.

Details have not been revealed. On the surface it appears that the UAW got something it wanted as did GM. The new four-year contract agreement gives the UAW an independent retiree health-care trust -- estimated to cost GM $51 billion. The Associated Press reports that it would also give workers bonuses and lump-sum payments. Meanwhile, GM will be able to boost its competitiveness -- getting more flexibility to hire new workers at lower costs -- helping to reduce what GM claims is a $25-per-hour labor cost disparity with its Japanese competitors.

The health care trust GM is establishing would pay about 70% of GM's $51 billion pension obligation, or $36 billion, into a Voluntary Employees Beneficiary Association (VEBA). The UAW would manage the VEBA for 340,000 GM hourly retirees and spouses. If the VEBA's investments appreciate enough in value, those 340,000 pensioners will have their pension obligations satisfied. If not, it will be the UAW's fault.

To reach $51 billion in, say, five years, the VEBA will need to achieve a 7.2% annual rate of return -- sounds like a profitable job for Lazard!

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. His brother, William D. Cohan, is the author of a book on Lazard, The Last Tycoons.