Big Three to Shutter 59 Plants – Chrysler Forces Dealers to Sell at a Loss

By Don Miller
Contributing Writer
Money Morning

Chrysler LLC stunned its employees and dealers early yesterday (Thursday), announcing it was suspending all manufacturing for at least a month, and tightening wholesale credit terms to dealers. By the end of the day, Chrysler was joined by its two other Big Three brethren – General Motors Corp. (GM) and Ford Motor Co. (F). – which also shuttered factories.

All told, the Big Three will idle about 59 factories over the next month as each of the three American carmakers struggle to wait on a rescue that the White House says is still under study. The announcement comes in the wake of a stubborn credit crisis and debate over the government bailout for the Big Three automakers.

The Chrysler announcement – because it came first – was the stunner.

“This is definitely out of the ordinary,” Edmunds.com analyst Jesse Toprak told MarketWatch. “I’ve never seen this kind of shutdown for this long.”

At Chrysler, some 46,000 employees will be affected by the shutdown, but will receive about 95% of their pay through unemployment and contributions from Chrysler.

Meanwhile, Chrysler’s new credit terms are forcing some dealers to sell cars at a loss.  At a time when many are struggling to survive, the company’s financing arm imposed large fees on aging, unsold inventory, which could cost dealers hundreds of thousands of dollars in 2009.
David Kelleher, who owns two Chrysler dealerships in metro Philadelphia, told The Wall Street Journal he has 56 vehicles more than a year old, which are subject to the fees.

“I'm taking, in some cases, a loss to get rid of cars before I face curtailment,” said  Kelleher, who is making deals to reduce his aged inventory before he gets a bill from Chrysler on Jan. 1. Kelleher said he knows of many dealers in worse shape.

Any loss of dealers could hurt the automaker’s sales and increase consumer worries about the company's future.

The company also threatened to temporarily suspend new-inventory loans. Known in the industry as floor planning, the loans are funded by the dealers themselves to stock their  lots with new vehicles and drawn down as they pay off inventory. But since July, dealers have yanked $1.5 billion from the accounts on worries that Chrysler could go bankrupt.

Blaming its woes squarely on the credit crisis, Chrysler said that dealers have indicated "many willing buyers for Chrysler, Jeep and Dodge vehicles," but have been unable to close the deals, due to lack of financing.   

Automakers' cash troubles are coming to a head, which is what forced General Motors, Chrysler and Ford Motor to conserve cash by halting production at many or all of their plants.

Ford said Wednesday that it would idle 10 North American plants for an additional week in January because of the slumping industry. GM said it will indefinitely delay the construction of a Michigan factory that will make its electric car, the Volt – one of the vehicles GM hopes will help turn the company profitable.

Even Toyota Motor Co. (ADR:TM), the world’s top automaker, told Reuters that it will announce a revised 2009 sales forecast at its end-of-the-year news conference Dec. 22. The company is expected to cut at least one million cars from its original forecast of 9.7 million units.

The Big Three have warned that without a loan package, millions of jobs could be lost, which would send ripple effects through the nation's already faltering economy. U.S. auto sales sank 37% in November amid talk of a bankruptcy at GM or Chrysler if Washington fails to deliver a massive bailout package

The latest news raises new questions about the viability of any proposed bailout, with some analysts saying a rescue plan – no matter how large – won’t solve the industry’s underlying problems.

“Even though the industry has improved its products in the last few years, the government shouldn’t give the Big Three a dime until they can demonstrate compelling changes to their products, management, and productivity that will be rewarded by increased market share,” said Money Morning Investment Director Keith Fitz-Gerald. 

Fitz-Gerald estimates the final cost of a rescue package would exceed $100 billion.

Meanwhile, the White House remains evasive about any plans for a bailout.

President George W. Bush said late Wednesday he was "looking at all options," according to the transcript of a Fox News interview. “A disorganized failure, disorganized bankruptcy or disorderly bankruptcy ... could cause great harm to the economy, beyond that which we're now witnessing. And that concerns me,” Bush said.

The news came a day after the White House warned that the U.S. auto industry would have to make "concessions" to win a government bailout.

"And the other point is that, I'm not interested in ... really putting good money after bad," Bush said.

News and Related Story Links:

• MarketWatch:
  Chrysler to shut assembly lines for at least a month

• Wall Street Journal:
  Chrysler Tightens Terms on Dealers

• Reuters:
  Toyota to cut sales goal and outline cost cuts

• Fox News:

  Bush Looking at 'All Options' on Auto Bailout.

• Bloomberg News:
  GM, Ford, Chrysler Idle Plants as Bush Weighs Bailout.