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:
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:
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 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.
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.”
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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 at Money Map Press.