A day before General Motors was expected to report a nearly $4 billion loss for its latest quarter, top executives of GM, Ford, Chrysler, and the United Auto Workers union came to Washington to press their case for at least $25 billion in federal loans. Without the help, the car companies argued, they may not survive 2009.
General Motors has been trying to convince congressional leaders to include the auto companies in the parade of industries-including banking and insurance-being bailed out through the Treasury Dept.'s $700 billion Troubled Asset Relief Plan. Up to now, GM has been basing its argument for the cash in part on its acquiring the troubled Chrysler. But in the Washington meetings on Nov. 6, car-industry executives focused on simply getting the three companies through the next year with enough cash to stay in business.
To do that, industry sources say, the car companies want access to the Federal Reserve Board's discount lending window, as well as a second federal loan package of up to $25 billion. "The acquisition of Chrysler became a distraction to the pressing need to simply shore up the companies from reaching a potentially disastrous level early next year," said one high-ranking auto executive with knowledge of a meeting between auto executives and Speaker of the House Nancy Pelosi (D-Calif.).
Bad Quarter Expected
Detroit's new thrust is the clearest sign yet of just how desperate its situation has become. In October, GM's sales fell a staggering 45% from the same month a year earlier. Ford's sales were down 30%, and Chrysler's fell 36%. Overall, the industry suffered its worst sales month since 1983.
On Friday, Nov. 7, analysts expect GM and Ford to report dismal earnings for the third quarter. GM is burning through cash and has said it plans to announce more cost cuts. It warned on Wednesday that the industry's prospects are dwindling fast due to the "near-collapse" in demand for cars, which the industry blames in part on the continuing global credit crunch. Ford shares closed Thursday down 5.3%, to 1.98, on the New York Stock Exchange. GM fell 13.7%, to 4.80.
Detroit executives stress that they're pushing forward with the alternative-fuel technologies that the U.S. Energy Dept. already is planning to fund with a $25 billion loan. But they maintain that plunging sales have changed the game and made new federal investment necessary.
Concern About Government Liability
"We are absolutely committed to delivering safe, affordable, quality, fuel-efficient vehicles that Americans want and value," said Alan Mulally, Ford's CEO, in a prepared statement late Thursday. "Despite our progress, the economy and the credit crisis are significant challenges that are dramatically affecting consumer demand for automobiles. Speaker Pelosi and [Senate] Majority Leader [Harry] Reid are seeking ways to help the auto industry given these unprecedented economic challenges. We applaud their efforts and will work together with all of our nation's leaders to continue our transformation to greater fuel-efficiency and to help protect jobs."
Several members of Congress have expressed concern over having the federal government serve as an investment banker to help GM acquire Chrysler, thus triggering massive layoffs. That's why lobbying efforts are now focused on the argument of saving jobs, and potentially saving the government billions more down the road in the form of money it won't have to pay to bail out the auto companies' pension and health-care obligations.
3 Million Jobs Could Be Lost
In recent days, the drumbeat of ominous warnings about an auto-industry collapse has grown louder. The car companies and their supporters argue that such a calamity could trigger much wider layoffs and economic dislocation that would delay a broader recovery of the overall U.S. economy.
"Should all of the Detroit Three's U.S. operations cease in 2009, the first-year total employment impact would be a loss of nearly 3 million jobs in the U.S. economy," says a report from the Center for Automotive Research (CAR), in Ann Arbor, Mich., which has been circulated to the White House, Treasury Dept., and several members of Congress. CAR, which gets some of its funding from the car companies and suppliers, also said: "In economic terms, the rapid termination...would reduce U.S. personal income by over $150.7 billion in the first year, and generate a total loss of $398.2 billion over the course of three years." Lost tax revenue between 2009 and 2011 would be an estimated $156.4 billion, the report stated.
Part of the problem, say analysts, is that auto-supplier companies are so financially fragile that one Chapter 11 filing by Chrysler could push several suppliers into insolvency. The collapse of those companies would wreak havoc on the production of vehicles by GM, Ford, and even foreign automakers like Toyota and Honda that build cars and trucks in the U.S.
Ford Has Greater Liquidity
Auto industry consultancy Grant Thornton of Southfield, Mich., recently issued a report that projected a loss of at least 150,000 to 200,000 jobs if Chrysler was allowed to fail next year. "If one or the other company [GM or Chrysler] were to fail, we would face a much bigger calamity-the collapse of the North American supply base and the potential endangerment of all three Detroit automakers and many businesses that depend on them," says Kimberly Rodriguez, a principal at Grant Thornton.
Sean MacAlinden, chief economist of CAR, says that GM most likely does not have enough cash to stay in business through 2009. Ford, he says, which has greater liquidity, can likely last well into 2010. Chrysler is the weakest of the three automakers. GM has argued privately that it would probably be doing the government a favor by acquiring the company, stripping it down, and restructuring the combined entity.
"The scale of the contraction of the Detroit Three would overwhelm any attempt by the international producers" like Toyota, Honda, and Nissan "to keep their existing suppliers in business or to find alternative suppliers, here or elsewhere," the CAR report says. "U.S. consumers would be forced to rely on only imported vehicles as a source of new vehicle purchases in the first year."
UAW Pushes Targeted Loans
United Auto Workers President Ron Gettelfinger also met with Speaker Pelosi on Thursday. The UAW proposed that the government make targeted loans to the companies to help them fund newly created voluntary employee-benefit funds. The automakers have agreed to pour billions into these funds so that the union can manage its own future health-care liabilities. The union argues that future payments required by the automakers, combined with plummeting auto sales, are keeping banks from lending GM the money it needs to complete its acquisition of Chrysler.
On Nov. 3, the Bush White House said it would not provide the auto companies with $10 billion in loans from the Treasury's financial rescue package to engineer GM's takeover of Chrysler. President-elect Barack Obama, though, has stated several times that he supports the government helping the auto companies get through the recession.
One Capitol Hill legislative staffer who asked not to be identified said there is a chance that Obama might direct his Treasury Secretary-designate, who may be named by next week, to try to convince current Treasury Secretary Henry Paulson to reconsider his decision. An Obama spokesperson did not respond to a request for comment. "If Obama planned to do it anyway after he takes office, they might persuade the White House to do it now....It seems to be a possibility gaining traction," said the staffer.
GM last July spelled out a plan to survive through asset sales and cost-cutting. The automaker is trying to sell its AC Delco parts division, its Hummer sport-utility-vehicle business, and its medium-duty truck business. But the meltdown in the credit markets has hindered those efforts. GM also has delayed most of its new product programs to conserve cash.
GM North America President Troy Clarke told a private group of auto suppliers on Wednesday night that the next 100 days are critical to the industry. "We certainly intend to make sure the new Obama Administration understands and appreciates the immense significance of our industry and the issues facing our business," he said. "And that the cost of support to the auto industry is cheap when you consider the potential ramifications and future benefits."
Reprinted from the Nov. 7, 2008 edition of BusinessWeek.com by special permission
Copyright 2008 by The McGraw-Hill Companies