Executives at Chrysler Llc. and General Motors Corp. (GM) are pulling out all the stops in their drive to secure a US government bailout. The two car makers are predicting that the US economy and national security will be imperilled if Congress doesn’t give them tens of billions of dollars—either as emergency loans or, as has been done with the country’s banks, by buying preferred shares.
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Lawmakers certainly need to tread carefully in the midst of a credit crisis that is already debilitating the US economy. And with capital markets still in disarray and bailouts in the air, it seems almost inevitable that taxpayers’ money will find its way to the Chrysler, GM and Ford Motor Co. headquarters in Michigan. But politicians shouldn’t just give in to Detroit’s scare tactics. Below, breakingviews sets out some of the questions and options they should consider.
Doesn’t Detroit just need emergency aid to tide it over the credit crunch?
No. Unlike many financial institutions, the Big Three are not simply suffering a temporary drought of capital and confidence. Their distress is the culmination of years of poor management.
Nonetheless, they have their sights set on 2010 for a recovery. That’s based on several assumptions: that recent cost-cutting measures bear fruit; that cash burn is further reduced by an independent trust taking over responsibility for employee health care; that capital markets will recover; and that car sales will increase.
But Motown’s manufacturers have an unimpressive track record with predictions. Efforts to cut their bloated US production bases to match their declining market shares have consistently proved inadequate. The anticipated turnaround within a couple of years also looks optimistic.
For starters, it may require another credit boom, not just a return to a more normal environment, to bring vehicle sales up to levels that would turn the Big Three profitable. It’s true they will save cash on health care, but they still have to fund the new trusts—they are supposed to hand over some $20 billion (Rs98,000 crore) between them in January 2010.
Moreover, if sales remain weak next year, as seems likely, government cash with no strings attached would simply go down the drain rather than being used to put the manufacturers on a better footing. At last quarter’s burn rate, GM would run through about $28 billion in cash next year just treading water.
That’s hardly going to get them back in private investors’ sights. So there’s a significant danger they would soon be back in Washington asking for more.
But isn’t a strong domestic car industry vital to the long-term security of the US?
The main argument here is that domestic car makers have an important role to play in developing new energy sources and technology if the US wants to reduce its dependence on imported oil.
That’s all well and good, but even politicians with a penchant for jumping on nationalistic bandwagons should be alert to the hollowness of appeals to patriotism from executives who have helped steer their businesses into a wall.
The US’ dependence on imported crude has been evident since the oil crisis of the 1970s, if not since World War II. Yet the Big Three have been consistently slow to develop vehicles as fuel efficient as their foreign-based rivals’. And their product mix—driven by the fact that the only models which turned a profit in recent years were gas-guzzling trucks and SUVs—has added to the problem.
A strong domestic car industry at the cutting edge of new technologies would indeed be preferable. But there is littleevidence that giving billions to the Big Three in their current state, and led by the current crop of executives, is the way to achieve this.
Can the government afford to let domestic car makers go bust?
It’s an article of faith in Detroit that a bankruptcy filing—designed as a framework allowing time and legal space for restructuring—would, in practice, put the bankrupt manufacturer out of business immediately. If that happened, it would instantly put hundreds of thousands of people out of work and could also have a disastrous impact on parts suppliers, thereby taking down the other two domestic manufacturers and foreign rivals such as Honda Motor Co. and Toyota Motor Corp. that make cars in the US.
GM has highlighted this doomsday scenario with a report by the Center for Automotive Research which says that within three years of such an event, millions of people would be laid off—one in 10 jobs in the US relies directly or indirectly on the car industry—and that lost tax revenue and increased expenditure would leave the US government $150 billion worse off.
Yet the reality is that for the last few years GM, for one, has looked and acted as if it’s already effectively in some kind of restructuring process, and it hasn’t closed down yet. It has shed staff en masse, rejigged work contracts and benefits programmes to save money, and hawked the family silver. Now it is seeking billions in aid and is offering fire-sale discounts of 40% or more to shift vehicles.
An actual Chapter 11 bankruptcy filing would just make restructuring quicker and, hopefully, more effective. It’s true that with credit markets shut, the US government would be forced to stump up financing to get Detroit through the process. But at least there would some hope that the money would be used to transform Chrysler, Ford and GM into leaner, more competitive players for the longer term.
But wouldn’t people stop buying cars from a bankrupt manufacturer?
There is no question that a bankruptcy would hurt sales, but no one really knows how much. In a recent poll of 6,000 people by CNW Market Research, 80% said they would not buy a vehicle from a manufacturer in bankruptcy.
That’s the kind of data point GM has seized on to predict that a bankruptcy filing would, instead of speeding up restructuring, force a liquidation—with a disastrous domino effect on the rest of the industry.
Others have come to different conclusions. Deutsche Bank AG reckons that if sales fell by half, it would be painful but the major parts suppliers should be able to cope. That’s not to say lawmakers should ignore the potential consequences of a bankruptcy. But they should not base their decisions solely on GM, or anyone else, citing—at times inaccurately—two short reports, neither of which presents its assumptions and methodologies in full.
So what should Congress do?
Assuming some kind of help for Detroit is politically inevitable, lawmakers should at least link any injection of funds to a wholesale restructuring of the Big Three’s business. That could happen within the established Chapter 11 bankruptcy process. If Detroit and the government think people would not buy cars because of worries about their warranties being honoured, the government could stand behind those too.
If an official bankruptcy label is really too scary, another template already exists: the government bailout of Chrysler almost 30 years ago, when shareholders, bondholders, car dealers and employees all made considerable concessions in return for federal financial support. That sounds like a Chapter 11 process, but was never labelled as such.
As well as making those stakeholders deliver concessions, there’s the question of Motown’s management. GM boss Rick Wagoner, for instance, reckons he should stay in his job. He shouldn’t. Unlike the treasury’s injections into financial institutions—many of which have changed the occupants of theirexecutive suites anyway—giving money to the Big Three is not amatter of propping up confidence. It is mopping up after management failure. Their leadership—especially GM’s—needs restructuring too.
It may be, though, they should hang on to their formidable marketing teams. They will need to sell the whole process to the nation. How about “Driving America to Success” for starters?