US carmakers publish rescue plans

silverharp

A couple of questions.

If a company is too big to fail should not Anti trust legislation have been used to break up these monoliths years ago?

Is it even remotely possible to turn these companies around if their costs structures are so out of whack with their competitors?

Do the Japanese auto makers have a case against the US gov. for rigging the market against them now?

Is public policy in this situation as bankrupt as the underlying companies?


http://news.bbc.co.uk/2/hi/business/7761015.stm


US carmakers publish rescue plans

The US car industry is in need of resuscitation
Chrysler, Ford and General Motors have all submitted their proposals to Congress for multi-billion dollar loans upon which their survival could depend.

The so-called Detroit Three of troubled US carmakers have asked for a combined total of $34bn (£22.8bn; 26.8bn euros).

Slashing costs, reducing levels of debt and investing in greener technologies form the centre-piece of each proposal.

The chief executives of Ford and GM have even offered to work for $1 a year if Congress approves the emergency aid.

Sales at all three of the carmakers have plunged as US consumers tighten their belts in the face of the severe economic downturn.

Ford sold 31% fewer light vehicles in November compared with the same month last year.

GM suffered a 41% drop in sales for the month, while Chrysler fared worse still, with sales plummeting 47%.

Loan proposals

General Motors asked Congress for a loan of $12bn (£8bn), with an additional $6bn if necessary, to help it survive.

Ford meanwhile requested a $9bn (£6bn) bridging loan, which it hopes it will not need.

Chrysler sought $7bn to survive the dramatic slump in sales that has decimated its cash reserves.

In its submission, GM said that, if the loan was granted, it would draw on $4bn this month before beginning repayments in 2011.

Every manufacturer is posting awful numbers and we are no exception

Mark LeNeve, vice president, GM North America

It said it would continue its efforts to develop more fuel-efficient vehicles - including an investment of $2.9bn in alternative fuels - and cut costs, levels of debt and top executives' pay.

This would include reducing its workforce considerably by 2012.

GM also pledged to reduce its chief executive Rick Wagoner's annual salary to just $1.

Ford boss Alan Mullaly made a similar pledge, but only should it need to call on the emergency loan.

Ford also said it would sell its five corporate jets as part of its cost-cutting plan, and proposed other measures including selling some businesses, such as Swedish carmaker Volvo.

It said a $14bn investment was needed in new technologies in the next seven years in order to improve fuel efficiency.

"Ford is asking for access to up to $9bn in bridge financing, but reiterated that it hopes to complete its transformation without accessing the loan should Congress agree to make the funds available," the carmaker said in a statement.

It added that it expected to return to profit, or at least break even, by 2011.

Tough task

Analysts say the poor sales figures have highlighted what a tough task this will be.

"Every manufacturer is posting awful numbers and we are no exception," said Mark LeNeve of GM North America.


Swedish government has ruled out a takeover of Volvo if Ford sells it

Indeed, Honda's year-on-year US sales fell by 32% in November, while Toyota's fell by 34%.

"The consumer is scared and sitting on the sideline. We need appropriate economic stimulus to get the consumer back in the game," Mr LeNeve added.

But the White House has already expressed scepticism about the bail-out proposals.

"We are sticking to our guns that the companies have to prove that they are viable before taxpayer dollars should be given to them," said White House press secretary Dana Perino.

And the Swedish government has ruled out a takeover of Volvo if Ford is unable to sell it.

Avoiding criticism

The heads of all three companies decided not to use private jets to travel to Washington for their presentations to avoid public criticism.

Mr Wagoner and Mr Mulally are both said to have driven one of their own companies' hybrid cars from Detroit, while Chrysler boss Bob Nardelli said he would not use a corporate jet.

GM has warned it could run out of cash in a matter of weeks and cannot wait until President-elect Barack Obama - who may be more sympathetic to industry pleas - takes office in in January.

The company was left with $16bn in cash at the end of September after losing $6.9bn during the previous three months.

But Republican critics and some Democrats say the financial crisis is not the only reason why the biggest US carmakers are in trouble.

They say that the Ford, GM and Chrysler's production is inefficient, and that their labour costs are higher than many of their foreign rivals.

Other critics want to make sure that the Detroit Three adopt more environmentally friendly policies, including strict fuel efficiency targets, in return for government aid.

The United Auto Workers (UAW) union is reportedly considering renegotiating their members' contracts.

Green credits

Most analysts think that GM is "too big to fail", while Chrysler is the most vulnerable of the three companies and might be forced into a partnership with a stronger rival.

Their presentations on Tuesday precede hearings in Congress later this week.

According to sources familiar with GM's proposal, the carmaker may consider selling off its Pontiac, Saab and Saturn brands.

Correspondents say it is unclear whether Congress could vote on the bail-out proposals. It could instead delay consideration until the new House of Representatives, with a much bigger Democratic majority, takes office on 6 January.

The Bush administration has offered to accelerate the payment of some $25bn in green investment credits already allocated to the car industry, but this has been opposed by Democrats in the House of Representatives

Économiste Monétaire

I don't think they're "too big to fail", transposing that idea from the banking sector phrase. They're regular companies--they're not part of the infrastructure like the large commercial banks. There was a fair bit on bloomberg about this yesterday, they had an ex-director of GM and Chrysler saying they would in fact require $50bn, at least. This has been going on for years, I think the more idealised solution is to let them fail, however, who knows what effect that would have in totality.

Pelosi said yesterday that she couldn't see the house letting them fail. Anti-trust wise, they aren't monopolies; they've been losing market share to Japanese car markers for quite some time, as far as I am aware. They're just bad companies. I don't know to whom the Japanese car makers could complain, though. It's the U.S., not the EU with McCreevy and his battle against market distortions :cool:

BenjAii

I don't understand how the US car makers have become so bad at what they do. In which case, I find it hard to judge their claims that they can turn themselves around and become successful again.

They are claiming to have awoken, Sleeping Beauty like in 2008, to the need for innovation, and their case for future success is predicated on this.

But it's hard to know how much faith to have in these claims, given the colossal error of judgment it was in misjudging the future of the car market in terms of issues like fuel efficiency & electric vehicles.

There have been more unlikely success stories though, so anything is possible.

Peteee

Économiste Monétaire wrote: »

I don't think they're "too big to fail", transposing that idea from the banking sector phrase. They're regular companies--they're not part of the infrastructure like the large commercial banks. There was a fair bit on bloomberg about this yesterday, they had an ex-director of GM and Chrysler saying they would in fact require $50bn, at least. This has been going on for years, I think the more idealised solution is to let them fail, however, who knows what effect that would have in totality.

Pelosi said yesterday that she couldn't see the house letting them fail. Anti-trust wise, they aren't monopolies; they've been losing market share to Japanese car markers for quite some time, as far as I am aware. They're just bad companies. I don't know to whom the Japanese car makers could complain, though. It's the U.S., not the EU with McCreevy and his battle against market distortions :cool:

The problem is the massive supply chain that goes with these companies. If even one of these companies fail, (We'll say chrysler as the smallest of the 3) then maybe 20% of the demand is taken away from these companies. The supply chain collapses due to this shortfall and everyone who manufacturers cars in america (And this includes Toyota, Honda etc who have plants there) suddenly cant get steering wheels or fuel injectors for their cars to build them.

These 3 companies deserve to fail by any accounts (Unions, bad products, short sighted management), but you'll see the collapse of a huge segment of the american economy (I've seen estimates of up to 3 million workers directly or indirectly involved in the big 3)

Ford are in the best position to get through this, and as much people make fun of American cars, GM and Chrysler seem to be the only car companies coming up with viable electric/hybrid cars that are actually good (GM Volt http://en.wikipedia.org/wiki/Chevy_Volt) and could be the first step away from a primarily carbon driven economy.

silverharp

Peteee wrote: »

The problem is the massive supply chain that goes with these companies. If even one of these companies fail, (We'll say chrysler as the smallest of the 3) then maybe 20% of the demand is taken away from these companies. The supply chain collapses due to this shortfall and everyone who manufacturers cars in america (And this includes Toyota, Honda etc who have plants there) suddenly cant get steering wheels or fuel injectors for their cars to build them.

These 3 companies deserve to fail by any accounts (Unions, bad products, short sighted management), but you'll see the collapse of a huge segment of the american economy (I've seen estimates of up to 3 million workers directly or indirectly involved in the big 3)

I'm wondering if there is an element of crying wolf in all this wrt to the supply chain issue as I dont think it would ever be a case of shutting down in the morning, that being said who'd buy a new car from a company you thought wouldnt be around for long.

it will be interesting to see their output and sales in the coming months. The US recession guarantees things will get worse for them.

Économiste Mon&#233 wrote: »

- I don't think they're "too big to fail", transposing that idea from the banking sector phrase. They're regular companies--they're not part of the infrastructure like the large commercial banks. There was a fair bit on bloomberg about this yesterday, they had an ex-director of GM and Chrysler saying they would in fact require $50bn, at least. This has been going on for years, I think the more idealised solution is to let them fail, however, who knows what effect that would have in totality.

Pelosi said yesterday that she couldn't see the house letting them fail. Anti-trust wise, they aren't monopolies; they've been losing market share to Japanese car markers for quite some time, as far as I am aware. They're just bad companies. I don't know to whom the Japanese car makers could complain, though. It's the U.S., not the EU with McCreevy and his battle against market distortions .

points taken. From the Japanese or other car makers point of view it is a real slap in the face that you are not allowed beat your competition. not a case of Pareto Effeciency

Économiste Monétaire

Just to add some more reading for people interested in this story:
Economist
IHT
CNBC
WSJ. Linked story on the Unions, here.
Bloomberg

Also, Obama looks keen on using the TARP funds to help them.

silverharp wrote: »

points taken. From the Japanese or other car makers point of view it is a real slap in the face that you are not allowed beat your competition. not a case of Pareto Effeciency

As I said, it's rarely applicable

silverharp

Mish did a piece on it as well

http://globaleconomicanalysis.blogspot.com/2008/12/auto-sales-plunge-to-lowest-level-since.html

some choice excerpts

It is quite apparent that Mike DiGiovanni is admitting an enormous overcapacity problem and GM has no idea how to fix it. This is all the more reason for Congress to turn down GM's request for aid. The reality going forward is that fewer cars are going to be sold and GM calling the position "unsustainable" has no idea what to do about it or how to survive on fewer sales.


Here's the deal: GM is begging for taxpayer handouts, going to the negotiating table with no contingency plans needing $6 billion more ($4 billion of it immediately) than it did just two weeks ago. GM management is pathetic. It deserves to go under. And the first order of business under any restructuring should be to get rid of GM's management team, lock, stock, and barrel, starting with CEO Rick Wagoner.

Économiste Monétaire

Just to update. The plan was rejected in the Senate yesterday. It looks like bankruptcy for GM and Chrysler.

BenjAii

Ironic it's failed because Senate Republicans object to the car workers keeping their union negotiated pay deals; if I remember correctly this was the same Party objecting to any limits being put on Wall Street remuneration in their bail out ......

Thomas_S_Hunterson

THought this was excellent: