Fantasy car, fantasy turnaround?
Unless the Obama Administration changes the direction laid out by lame duck President Bush last December, on March 31st General Motors and Chrysler will enter bankruptcy as the Federal Government calls loans totaling $13.4 billion. The forced reorganization and break-up of two tarnished American Icons could be avoided if the companies pay back the loans with interest. This seems impossible given frozen credit markets and annualized vehicle selling rates in the U.S. that dipped below 10 million units annually in January.
At these rates no car company in America is profitable. If the bailout isn’t revised or interpreted liberally, there is no future.
The companies must submit by February 17, 2009, a monthly plan through 2010 and annual plans for the next four years on how they will achieve and sustain the long-term viability, international competitiveness and energy efficiency required by the loans they accepted. Recent actions by Chrysler and GM show a drastic and desperate gutting of the industry is underway. But is it enough?
The loan terms are clear. The Restructuring Plan shall include specific actions, including:
• Rationalization of costs, capitalization, and capacity with respect to the manufacturing workforce, suppliers and dealerships of the company and its subsidiaries.
• Achievement of a positive net present value, using reasonable assumptions and taking into account all existing and projected future costs, including repayment of the loan and any other financing extended by the government.
• A product mix and cost structure that is competitive in the United States marketplace.
The Bush Administration did not appoint a car czar to oversee the bailout, leaving it to the Obama administration. Immediately after the inauguration, the new President was ensnared in controversies over ethical violations and tax avoidance of other higher ranking appointments and their subsequent withdrawals. So GM and Chrysler don’t even know who will decide their fate when they submit plans or who to reason with. Core issues will be how to interpret such vague goals as “competitive” product mix and labor costs, just what “long term” or “reasonable” are? If their previous reception in Washington is any indicator, the public floggings will continue until they expire with little reasonableness evident.
Not only are these financial terms themselves onerous during the ongoing economic collapse, but another threat exists under The Energy Independence and Security Act of 2007. On March 30th, the day before the loans could be called, the Secretary of Transportation is due to prescribe annual fuel economy increases for automobiles, beginning with model year 2011. The goal is a combined fleet average of at least 35 miles per gallon by model year 2020. Tied up in this issue is whether California and other eastern states can require even more stringent standards, or if Federal rules preempt State ones under the U.S. Constitution. Since the administration was helped into office by environmentalists as well as labor it is caught between two opposing interest groups. The entire auto industry is against California.
The Bush bailout duly notes the fuel economy rules it passed. The loan requires Chrysler and GM to prove that they comply with applicable Federal fuel efficiency and emissions requirements, and begin domestic manufacturing of “advanced technology” vehicles. These are described as vehicles that are 25% better in terms of economy than typical ones in the class. There are other provisions open to interpretation. It remains to be seen just what the standards are and how they affect product plans due this February. But with large amounts of capacity and engineering by Chrysler and GM previously committed to vehicles that can’t possibly make these goals, it is certain that large investments of non-existent capital are required.
Companies that are broke, in deep debt and with little expertise in the U.S. making small, fuel efficient vehicles will do the expedient thing and bring in vehicles from overseas, as already announced, resulting in a continued erosion if not elimination of many of the remaining, high paying American white collar positions. GM just announced in the U.S. that 3,400 of GM’s 29,500 salaried employees will be fired by spring. And what do you think the offshore based makers will do since they already have a glut of small, fuel efficient cars designed and built for and in their home markets?
True, there needs to be the making of advanced technology vehicles under the loan terms. Some electric cars either converted from oversees platforms or Chevrolet’s Volt are coming but it is unknown how much manufacturing will actually occur and where the engineering will be done, or if customers are out there waiting. In essence the government is creating a perverse effect of requiring more foreign assembled captive imports, engineered largely offshore by increasing fuel economy standards. CAFE, a failed program from its beginning, isn’t helping here.
No surprises then that U.S. auto suppliers are now asking for $25 billion in assistance to prevent bankruptcy as production of American vehicles ceases. In response to this request for more taxpayer money not contained in the bill, Obama press secretary Gibbs said the President desires “to see an economy that’s strong enough to get the automakers and the auto suppliers who are important in that chain back up on their feet and producing jobs.” What this mean in concrete actions is unknown. Is the administration going to modify the bailout?
To those who say Detroit deserves it, consider that the negative consequences of global economic collapse are also happening at Toyota, Nissan, Honda and other off-shore based makers. They are losing billions in whatever currency you choose to use. U.S. factories that made larger vehicles and trucks are being shut down and ones due to open are being cancelled. So the larger auto industry in the U.S., including companies in the non-unionized South whose smug Senators derided Michigan-based executives during last fall’s public hearings are now faced with the prospect of their off-shore based companies demanding that U.S. taxpayers bail them out as well.
This idea was recently floated by Nissan who lost billions on its U.S. built Titan and Armada full-size trucks, so much so that it walked away from the programs and will get rebadged Chrysler trucks in the future — if Chrysler survives. I can’t wait for the hearings with German, Japanese, Korean and Chinese executives being grilled about their plans to preserve American jobs.
The political singing and dancing that are about to ensue could keep all of Broadway’s actors employed and theaters full. How about a show stopping number called “redefining viability” or is it “U.S. Taxpayers keep Korean Engineering Centers Open” that will bring the house down? Rehearsals begin with the plans of Tuesday February 17.