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

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.

One option is to leave Saturn short on new models and marketing cash. Some of Saturn's 220 dealers would just go away, and the company would later buy out the rest. When GM killed off Oldsmobile starting in 2000, that division had more than 1,000 dealers. So presumably it would cost GM something less to get rid of Saturn than the $2 billion it paid to drop Olds.

GM has already been cutting Pontiac's offerings. All but about 30 Pontiac dealers are paired with Buick and GMC dealers. Henderson said Pontiac might just sell one or two performance cars in the Buick-GMC dealerships. Hummer and Saab are already for sale. If it succeeds, GM would be down to the four brands it has earmarked for investment. "That's perfect," says Wolkonowicz of IHS Global Insight. "It's what they need to do. GM can't support those other brands because they simply can't afford to do it."

UAW concessions strategy

Next, GM will need to go to the UAW to try to cut jobs of tenured workers whose pay and benefits cost about $58 an hour. They cost $76 an hour, if you count pension and health-care costs for retirees. Ford and Chrysler are in talks with the UAW as well. The union's leadership met Tuesday to form a strategy about what concessions to offer to win over Congress.

Under last year's labor agreement, GM can bring in new hires at wages of $14 an hour and an all-in cost of $28 an hour. But first GM must get the older workers to leave. Henderson wouldn't say what's on the bargaining table, but he said GM needs to work on staffing levels, job security provisions, and coaxing more workers to retire.

Henderson also didn't say how GM would negotiate its debt down by half. But analysts say the company could offer bondholders an exchange of roughly 50¢ on the dollar to reduce the principle by half. Given the vague warnings that—without Congressional help—bankruptcy is nigh, the carmaker may have a good case for its bondholders to cut their losses and run.

To monitor its progress, GM has proposed that the government set up an oversight committee. It would monitor cost-cutting benchmarks; if GM misses the targets, the committee could call the debt.

sales assumptions…

Finally, GM Chairman and CEO G. Richard Wagoner Jr. will take a cue from retired Chrysler Chairman Lee Iacocca, who worked for $1 after the government guaranteed a $1.5 billion loan for Chrysler in 1979. Wagoner will work for $1 in 2009; Henderson will take a 30% pay cut, while those at the executive vice-president level and above will see their pay cut by 20%.

Henderson said government loans would get GM through to March, when cost cuts and previous moves would help the company stand on its own. The plan would make GM a break-even company—assuming overall U.S. car sales of 12.5 million to 13 million cars per year. Sales are expected to finish at about that level this year, and GM has already lost $21 billion. Henderson said the company expects total U.S. sales of 11.7 million cars next year, 13.5 million in 2010, and 14.5 million in 2011.

Chrysler and Ford offered few actual new cuts, claiming they've already cut deeply. Chrysler, for example, has cut its head count by 32,000 people since 2007, including 5,000 who left last week. It has cut employee programs ranging from leased-car subsidies, to company 401(k) matches, to tuition reimbursement. Salaried retirees have lost life insurance benefits and workers are paying more for health care.

Ford has made similar cuts, and said it is selling off its five corporate jets. It plans to cut CEO Alan Mulally's salary to $1 a year if it draws down the government loans.

…and profit projections

In an attempt to appease lawmakers who have bashed Detroit for lagging Japanese companies in innovation and producing fuel-efficient vehicles, Ford pledged to accelerate its launch of electric, hybrid, and plug-in electric cars between 2010 and 2012. House Speaker Pelosi has argued against tapping a $25 billion fund that was already set up by Congress to help the automakers retool factories for more fuel-efficient vehicles; some Democrats worry the automakers will burn up that cash without delivering the green vehicles.

Indeed, a big issue at the hearings that will begin on Thursday is what assurances the carmakers can give that they won't be back a short while later for more money. Toward that end, all three offered profit projections. Ford expects to turn a profit by 2011, assuming industry auto sales climb from 12.5 million in 2009 to 14.5 million in 2010. Chrysler says it can turn an operating profit by the end of 2009 and stay profitable, assuming industry sales of 11.1 million sales in 2009 and 12.1 million sales in 2010.

The wide gap between the assumptions of the various companies about the length of the recession and depth of the car-buying slump is certain to come under fire by members of Congress. Said one Capitol Hill staffer working for a Democratic lawmaker who favors a bailout of the automakers: "I wish they would have gotten together on industry sales, but future sales can't be counted on…. But neither are these government loans, if they don't make a strong case this week."

Business Exchange related topics:

U.S. Automakers

United Auto Workers (UAW)

Bailout

U.S. Financial Crisis

Obama's Stimulus Plan


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