By William Patalon III
And Mike Caggeso
Money Morning Editors
The U.S. “Big Three” of General Motors Corp. (GM), Ford Motor Co. (F), and Chrysler Corp. submitted their turnaround plans to Congress yesterday (Tuesday), hoping for approval of a massive loan package they say is central to their survival.
And while the plans include such politically palatable moves as salary cuts for top-tier executives, the sale of cushy corporate jets and the elimination of moribund brands, the three embattled U.S. automakers are also now seeking government aid of as much as $34 billion – which is as much as $9 billion more than the $25 billion figure that’s been on the table from the very beginning of the industry’s bid for bailout money.
Here’s the breakdown:
- General Motors, the largest domestic automaker, said late yesterday that it is seeking as much as $18 billion to survive into 2010 – and that it needs $4 billion of that cash just this month in order to dodge a bankruptcy filing. GM is seeking a loan of $12 billion. It’s also requesting an additional $6 billion line of credit to provide more cushion, should the severe current market downturn persist.
- Ford is asking for $9 billion. The Dearborn, Mich.-based carmaker hopes it won’t need to utilize the federal loans, and that it just wants to have access to the capital as a backstop. Ford is aiming to return to profitability by 2011.
- Chrysler confirmed its previous request for a $7 billion loan that its executives detailed during Congressional hearings two weeks ago. But it now says that , because its projected year-end cash reserves of $2.5 billion won’t come close to covering its projected major first-quarter expenses of $11.6 billion, Dow Jones Newswires reported. The loans – coupled with Chrysler’s ongoing restructuring efforts – would keep that carmaker operating through the end of March. But it will need to access the capital before the end of this year.
The plans were submitted on the same day that the auto industry reported the worst U.S. sales in 25 years. Both U.S. and top overseas automakers all reported sales declines of more than 30% from year-ago sales, increasing the level of urgency for the embattled Big Three, CNNMoney.com reported yesterday.
“This is part of an urgent request for federal funding to create 'a new GM' – a lean and fully competitive company,” GM Chief Executive Officer Richard Wagoner said during a conference call with journalists. “Taking these tough actions will help us weather the current economic stresses, and will position the new GM to be profitable.”
U.S. Sen. Carl Levin, D-Mich., a strong advocate of the bailout, said he is confident Congress will return next week to approve a loan package. He said he's not concerned about the higher price tag being requested, stating that lawmakers wanted an honest accounting of how much might be needed in a worst-case scenario.
Speaking at a press conference late yesterday, House Speaker Nancy Pelosi, D-Calif., told listeners that it was imperative that the Big Three get the federal rescue money immediately.
“Bankruptcy is not an option,” Pelosi said. “Everyone is disadvantaged by bankruptcy. It takes too long. What takes a year we can do in a few weeks … I don't think anyone wants to see bankruptcy.”
Despite those concerns, Pelosi would not commit to having Congress pass a Big Three bailout when it returns next week. But if Congress doesn’t return, Pelosi urged the U.S. Treasury Department to use money available under the previous $700 billion Wall Street bailout to tide the automakers over until early next year.
It's not clear if the Treasury Department would agree to this, since the Bush Administration does support the concept of aid for the U.S. auto sector, but opposes using the $700 billion Troubled Assets Relief Program (TARP) to money to help them.
To help persuade lawmakers to approve the bailout money, the carmakers proposed a wide range of changes. Among the highlights:
- Executive salary cuts: Ford announced that the salary of Ford CEO Alan Mulally would be cut to $1 a year if the firm actually borrowed money from the government. General Motors said that Wagoner, the CEO, also will accept a $1 salary. Chrysler’s Robert “Bob” Nardelli is already being paid only $1 a year, according to the Chrysler plan. Mulally had a base salary of $2 million and total compensation of $21.7 million last year, according to the company’s filings. Wagoner received base pay of $1.6 million and total compensation of $14.4 million. Closely held Chrysler does not disclose executive pay.
- Financial restructuring: GM intends to renegotiate its outstanding debt with lenders and bondholders. As of the third-quarter’s close, the firm had more than $30 billion in unsecured debt. GM said it anticipates making all of the roughly $28 billion in payments it owes its suppliers.
- Product streamlining: As part of its cost-cutting efforts, GM suggested that two of its brands – Pontiac and Saturn – could be dropped from its product mix. Pontiac – known in the past for such cars as the Firebird, Trans-Am and GTO – could become a niche brand sold by other dealerships. GM would look for alternatives for dealers of the Saturn, which revolutionized the industry with its no-haggle pricing policies. The company has already said it was considering the sale of its Hummer vehicle line.
- Union concessions: GM intends to seek additional changes in the labor contract it has with the United Auto Workers union – enabling it to modify retiree health care plans and job guarantees the company says it can no longer afford. Money Morning previously reported that national union leaders with all three of the U.S. automakers are planning to hold an emergency meeting in Detroit today (Wednesday).
- New alliances: Chrysler, which a year ago was sold by German automaker Daimler AG (DAI) to the U.S. private equity group Cerberus Capital Management LP, said it remains focused on “developing partnerships, strategic alliances or consolidations” as part of its long-term plans. Chrysler leaders say the firm could save between $3.5 billion and $9 billion a year if it merged with another automaker. GM last month said that it had halted discussions about a possible combination with Chrysler to focus on its own turnaround efforts.
- More hybrids, no corporate jets: Each of the Big Three pledged an accelerated introduction of hybrid vehicles. Ford yesterday promised to put “a family of hybrids, plug-in electric vehicles, and battery-electric vehicles” on sale by 2012, BusinessWeek.com reported. The specific plan calls for a battery-powered electric commercial van in 2010 and a battery-powered retail sedan in 2011. The company is also believed to be developing plug-in versions of its Focus and Fusion cars by 2012-2013. By 2010, Ford said 80% of its investments will be in cars and so-called “crossover” vehicles—as opposed to trucks and SUVs. That’s up from 60% in 2007. Ford and GM also announced plans to get rid of corporate jets. Mulally, Wagoner and Nardelli were all criticized at a House hearing last month – and ridiculed in the media afterwards – when they admitted they had each flown their corporate jets to Washington to ask for rescue money. According to CNNMoney, Ford promised to sell its five corporate jets, while GM vowed to sell four of its seven – and to transfer the leases on the remaining three to another operator. Chrysler spokesman Ed Garsten says Chrysler does not own any private aircraft but instead leases them on an “as-needed” basis. The CEOs apparently learned their lessons well, albeit a bit late: When they return to Washington to beg for the loan money later this week, Mulally and Wagoner will be wheeling hybrid vehicles made by their companies; Nardelli will also drive a hybrid in his return to Capitol Hill, published reports state.
Planning to Stand Tall
The bailout loans aren’t the ultimate answer for the auto companies, however. Indeed, the cash is intended to tide the firms over and buy time for their restructuring plans to take hold and yield results.
With the turnaround plan its leaders have crafted, Ford believes its North American auto operations will be breakeven – or possibly profitable – by 2011, on a pre-tax basis. Ford had previously announced a goal of returning those operations to profitability in the New Year, but dropped that target in May, without providing a new objective.
Ford also said it expects industrywide sales of 12.5 million vehicles in 2009, 14.5 million vehicles in 2010 and 15.5 million vehicles in 2011. That’s well below the industry average of roughly 17 million a year – which was the standard every year from 1998 through the end of 2006.
GM and Chrysler submitted plans with far more conservative sales forecasts.
GM said once its restructuring plans are complete, it thinks it can be profitable even if annual vehicle sales only range between 12.5 and 13 million. GM President Frederick A. “Fritz” Henderson said the company's restructuring plan will make it fully competitive with Japanese automaker Toyota Motor Corp. (ADR: TM) by 2012.
Chrysler is forecasting a return to profitability with industrywide sales of 13.7 million vehicles in 2011 and 2012.
Those less-aggressive forecasts might be the ones the Big Three wants to concentrate on, for current sales figures have been horrid.
GM said yesterday that light vehicle sales plunged 41% in November, dropping to 153,404 vehicles last month from 261,273 during the same month a year ago. Ford didn’t fare much better, with U.S. sales in November falling 31%. Every line of Ford vehicle posted falling sales, and the company responded by slashing first-quarter North American output by 38% to 430,000 vehicles, Bloomberg reported.
Wagoner has been fuzzy on the company’s goal to cut at least $15 billion in costs, but few options have been ruled out.
GM could further reduce its North American work force. It could eliminate and/or sell one or more of its brands. The primary name on the table is Sweden-based Saab, and the interested buyer is the Swedish government.
Some of its directors say filing for Chapter 11 bankruptcy protection is also an option, though it’s one option that Wagoner has repeatedly said is not on the table, TheStreet.com reported.
So far, GM has asked to delay a $7 billion payment to a union retiree health fund. It returned two of its leased private jets. It stopped running its escalator at 7 p.m. at its headquarters. It stopped buying batteries for hanging wall clocks, eliminated voicemail in plants and consolidated printers and copies. It’s also buying cheaper toilet paper and pencils.
Meanwhile, Ford has pulled back the curtain on nearly all of its plans to hopefully break even by 2011.
In the cost-cutting arena, the company is canceling 2009 bonuses for its managers around the world, as well as for all U.S. employees. Mulally would work for $1 a year if Ford receives a bailout. Ford will continue reducing its dealer and supplier base, estimating it will have 3,790 dealers by end of 2008, Reuters reported.
Ford also isto Sweden. Despite high safety ratings, Volvo only captured a 0.5% of the market through October, down from 0.8% a year earlier and accounting for 3.7% of Ford’s total sales last year.
Ford is also hatching plans to produce better and more-appealing vehicles. It plans to invest about $14 billion over the next seven years in fuel-efficient technologies and products. And it is planning a line of electric cars, but details on those won’t be revealed until the Detroit Auto Show.
Chrysler has been mum on current cutback plans.
In October, Nardelli ordered a 25% reduction in the Chrysler’s salaried workforce. And the company is close enough to its stated goal of eliminating 5,000 salaried jobs by year’s end – largely facilitated by salaried employees who accepted buyouts and early retirement – that it doesn’t anticipate many more layoffs.
Nardelli was the first of the CEOs to suggest he’d work for $1 a year. He also said that Chrysler’s owner, private equity firm Cerberus Capital Management LP, will pledge to forgo any profits from a Chrysler sale if the car company receives government money, The Detroit Free Press reported.
Emergency Meeting With Union
Before their bigwigs arrive in Washington D.C., the companies will ask United Auto Workers officials to reopen a 2007 labor agreement to further cut costs, a person familiar with the situation told Bloomberg.
According to Bloomberg, GM will seek to stop paying union workers when plants are closed and no work is available, and Ford and Chrysler likely will ask for similar concessions. Union leaders with each company will hold an emergency meeting in Detroit today, published reports state.
“We are at the bargaining table every day working on things to make these companies, to put them in better shape if you will,” UAW President Ron Gettelfinger said in an interview on Bloomberg Television. “Other people need to come in to see what they can do to assist these companies.”
News and Related Story Links:
Big Three want more money in bailout.
GM Readies Viability Plan: Report
GM Taking Swift Cost-Cutting Action
The Detroit Free Press:
Chrysler case for U.S. aid cloudy
GM, Ford, Chrysler UAW Leaders Call Emergency Meeting.
Dow Jones Newswires:
Ford Vows to Go Electric.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.