Detroit's New Bill: $34 Billion

GM, Ford, and Chrysler present plans for an overhaul as the worst-hit automakers issue a dire warning if help isn't forthcoming

By David Welch and David Kiley

The three U.S. car companies delivered their overhaul plans to Congress on Dec. 2, and asked for a total of $34 billion to get them through the financial crisis. That's a big bump up from what they had asked for last month. And with the Detroit Three CEOs scheduled for another round in the congressional pressure-cooker starting on Thurs., Dec. 4, the two companies in the worst shape—GM (GM) and Chrysler—offered a stern warning that they could run out of cash if help isn't immediately forthcoming.

The automakers' recovery plans were delivered the same day the companies reported a dark picture for November auto sales. GM said its sales last month fell a stunning 41%, apparently made all the worse by recent talk of a possible bankruptcy filing. But other car companies reported results nearly as bad: Ford's (F) sales tumbled 31%, Toyota's (TM) plunged 34%, and Honda's (HMC) dropped 32%. Chrysler's sales for the month were down 47%.

The combined cost of the Detroit Three's requested bailout represents a big hike from the $25 billion Congress had been considering (BusinessWeek.com, 11/18/08). President-elect Barack Obama has indicated he is willing to tap the $700 billion Wall Street bailout funds for the automakers if the companies need it—and if they can present a convincing case that they have a plan to use the money to stem their red ink and become competitive.

"There is not a Plan B"

GM asks in its plan for $12 billion in direct loans to get the company through to March, and a $6 billion revolving credit line it could tap if the market gets even worse. In a call with reporters, GM President and Chief Operating Officer Frederick A. "Fritz" Henderson said GM needs $4 billion of the $12 billion this month to keep paying its bills (BusinessWeek.com, 11/7/08).

"Absent support," Henderson said, "frankly the company can't support its operations. The first $4 billion is crucial. There is not a Plan B."

Ford also asked Congress for more loans than had been initially expected—$9 billion. But Ford said that it may not need the money (BusinessWeek, 12/2/08). The automaker, which has greater cash reserves than GM, said it wanted access to the funds as a backstop in case the recession lasts longer than is forecasted.

Chrysler, on the other hand, asked for $7 billion. The smallest of the U.S. carmakers said it will be down to $2.5 billion in cash reserves by Dec. 31 and will be out of operating capital by the end of the first quarter of 2009. At that point, without an acquisition or government loans, Chrysler would be compelled to file for Chapter 11 bankruptcy protection. In his brief to Congress, Chrysler CEO Robert Nardelli described that as a far more costly road for the U.S. taxpayer.

GM: The most to lose

Nardelli stopped short of saying that the company needs to be taken over or merged, though that is the consensus of many auto industry analysts. Nardelli told Congress, though, that a "consolidation" will produce big cost savings: "Chrysler has conducted internal studies to identify the financial impact of an alliance or consolidation…our estimates for annual synergies once fully implemented range between $3.5 billion and $9.0 billion."

GM and Chrysler are known to have explored a merger but were told by Speaker of the House Nancy Pelosi and Michigan Governor Jennifer Granholm that taxpayers would not pay for it.

GM, the largest of the three U.S. automakers, has the most to lose. And it could create the most havoc in the U.S. economy if it goes bust. GM executives already think that talk of bankruptcy (BusinessWeek.com, 11/12/08) is affecting showroom traffic. Analysts agree. CNW Marketing Research of Bandon, Ore., says that of all consumers who shopped a GM car last month but didn't close the deal, 32% walked away because of bankruptcy rumors and speculation. That was by far the biggest reason buyers didn't close, CNW says.

"People are shying away from GM because of all the bad press," says John Wolkonowicz, an analyst with IHS Global Insight in Boston.

The automaker laid out a long list of cuts and changes that it claims would prove it's a worthy borrower of public funds. Henderson called the plan a "blueprint for creating a new GM, one that is cleaner, profitable, and fully self-sustaining."

The key points of GM's 30-page plan are:

—A systematic review that will shrink or dump four vehicle brands (BusinessWeek.com, 12/1/08)—Hummer, Pontiac, Saab, and Saturn. GM will then plow the bulk of its funds into new models and marketing for Chevrolet, Cadillac, GMC trucks, and Buick. Those brands make up 83% of GM sales.

—Reduce the total number of vehicle nameplates (the name of a particular vehicle, such as Chevy Malibu or Saturn Aura) from 63 to 40.

—Renegotiate GM's $66 billion of debt to drop it to $30 billion.

—Open the existing labor pact with the United Auto Workers in an effort to rewrite job-security provisions such as the JOBS bank (which guarantees 75% of pay for laid-off workers) and get more workers out of the company so GM can bring in new hires at half the pay. That would cut GM's labor costs by $4.5 billion a year.

—Get cost parity with Toyota by 2012.

—Show how GM's product line is changing from being heavily dominant on trucks to having more passenger cars and crossover SUVs.

GM didn't provide many of the details that would be needed to evaluate the cuts fully. It doesn't say exactly what it will do with Saturn, for instance. Henderson said GM has to meet with the brand's retailers to figure out what to do with the brand. But it's clear GM wants to dump Saturn, since the company plans to spend most of its money on Chevy, Cadillac, GMC, and Buick.