Is there light at the end of the tunnel?
There an old wheeze about the search for a one-handed economist, since the profession is well known for its “on the other hand” predictions that contradict initial ones. The immediate question is whether to grant GM an additional $13 billion and/or Chrysler an additional $5 billion on top of the taxpayer given $13.4 billion at GM, and $4 billion at Chrysler by the imposed deadline of March 31st.
Well, as Treasury hands continue to scrutinize the business plans for signs of life at Chrysler and General Motors, key assumptions in the plan on industry size, share and pricing are being challenged. And the assumptions used will make or break the companies.
These auto loan sums pale when compared the $173 billion already granted to bail out AIG and its workers and pay them millions in bonuses. But the U.S. government, like the EC, apparently places a higher value on rescuing financial institutions that threaten larger economic instability in its view, than saving any company in the manufacturing business. The increasing populist resentment of such snobbery complicates the politics of bailouts, but appears to make the case for continuing to help the auto companies recover since they are part of the real economy that makes things. The Obama administration is now saying it won’t necessarily adhere to the March deadline, which suggests it might play for more time while doling out additional loans slowly. Republican leaders continue to press for bankruptcy.
Both Chrysler and GM maintain that they are viable businesses and TDB has reported on the public portions of the plans after their February 17th submissions. At that time, TDB noted that GM now forecasts 2009 U.S. industry sales of 10.5 million units, down radically from its previously projected industry sales rates of 12.5-13 million last December. This was part of the reason why its funding requests went up.
Unlike Chrysler’s estimate of a flat market in the 10-11 million range for the next four years, however, GM assumes growth to 11.5-12.0 million or more units annually starting in 2010. GM says it will then achieve breakeven levels in 2011, and have a positive cash flow of more than $6 billion in 2012-2014. Several caveats could change this, including the need for GM to put more money in its pension funds in 2013 — if the financial markets and its investments don’t recover by then.
In an e-mail to Chrysler employees this morning, Bob Nardelli, Chairman of Chrysler, presented an updateon the ongoing negotiations with Treasury officials. Calling the discussions “constructive,” Nardelli said he continued to stress that Chrysler is a “viable business as a stand alone company” and its “future is further enhanced through the proposed global alliance with Fiat.” Well, what else would or could he say?
Chrysler also maintains that its conservative estimates of seasonally adjusted annual selling rates (SAAR) for the 2009-2014 period of 10.1 million, 10.6, 11.1, 11.6, 12.1 and 12.6, respectively, will result in earnings before taxes and interest ranging from $2.9 billion to $4.7 billion annually, and total of $24.8 billion during the period.
Chrysler then takes its plan and adjusts it to the more optimistic SAAR prediction of a “competitor.” Using GM’s SAAR rates Nardelli maintains, “We would generate an additional $9 billion of cash flow over six years. We would be able to repay 100% of all of our taxpayer debt in five years, versus starting to pay our debt in 2012, as submitted in our stand-alone plan.”
Never mind that to me it looks as if GM’s optimism mirrors that of Obama Administration officials when they talk about economic growth in areas outside of the U.S. car companies, and how the administration’s stimulus package will imprve things. Chrysler is making a strong case in public that U.S. taxpayers should continue to gamble on its future rather than absorb additional liquidation costs under Chapter 11 of another $20-25 billion. A pure liquidation would only recover about 25% of the lent money, according to Chrysler.
Another crucial assumption here is market share. Chrysler forecasts it will “maintain a U.S. market share of approximately 10%,” defending this as “appropriate, given our company’s history. Since 1992, we have lost only 2.4 percentage points of share in total, while each of our two domestic competitors has experienced a much larger share loss. In fact, each of our domestic counterparts recorded a 45% reduction in share during the same period.”
Nardelli is most passionate about the case for Fiat. Thus, it appears that using U.S. taxpayer money to bailout Chrysler, which would then be controlled by Fiat, presents political problems for the administration. It’s not surprising that Chrysler maintains that it can make it either way. But Nardelli’s letter makes it clear what he is pushing for.
“Our viability for the long term would be enhanced even more by global strategic alliances and partnerships. The proposed Fiat alliance provides significant benefits to Chrysler,” Nardelli said. “Fiat would make available to us its entire product portfolio and powertrain technology, worldwide distribution capabilities for vehicles we produce today and synergies in the areas of purchasing and engineering, among others. We estimate the cash value of Fiat’s contribution to be between $8 and $10 billion considering the cost to develop these vehicles, platforms and powertrains from scratch. This is equal to or greater than the total amount of loans we have requested from the U.S. government.”
“Even more importantly, Chrysler would save three to five years in development time, giving us a major competitive advantage. We would be able to offer our dealers exciting new products to help support their business. Because the Fiat vehicles, platforms and powertrains already have come up the learning curves of testing, validation and launch, startup issues already have been solved, which translates into improved quality and customer satisfaction. In addition, production of vehicles for Fiat in North America will allow Chrysler to increase its plant utilization, helping to preserve and create in excess of 5,000 manufacturing jobs. The overall contributions from Fiat and the synergies we realize will far exceed the value of the government loans,” Nardelli concludes. Click here for a Nardelli video on Fiat.
The problem with analyzing this business plan/plea/negotiating document is that it is a one-sided dialogue. Given Chrysler’s current spending on incentives and what looks to be rather thin future product plans, it is hard for me to share Nardelli’s optimism. Industry volume is the critical variable for everyone; something Washington is scrutinizing. At a 10.5 or 11 million annual volume in the U.S. it appears that all auto companies are in the red, including the Japanese and Germans. The global Great Recession is also a strongly negative factor. However, another person of Italian descent working at Chrysler pulled off an earlier comeback. He became a national hero of sorts, and even a potential candidate for higher office. Nardelli is looking for a two-for, a comeback from his Home Depot failure, and a PentaStar comeback, the sequel.