Auto Industry Bailout Opening Offers In Phase II

GM and Chrysler made another round of bailout requests today.

General Motors and Chrysler LLC . . . in documents submitted to the Treasury Department, also detailed plans to cut 50,000 jobs worldwide by the end of the year. . . . A newly-appointed auto panel will review both plans and determine by March 31 if GM and Chrysler can be viable in the long run. . . . The automakers' request for a $34 billion federal bailout in December fell short when Senate Republicans blocked passage of the request. The Democratic majorities in both houses of Congress have grown since then. . . . If the federal panel looking at the plans rules either company is not viable, it could recall the outstanding loans, a move that would likely force them into bankruptcy. . . . the companies also submitted an analysis of what would happen if it filed for bankruptcy. . . . . . . Separately, UAW president Ron Gettelfinger said in a statement Tuesday that the union had "reached tentative understandings with Chrysler, Ford and General Motors on modifications to the 2007 national agreements."

GM's plans:

GM said it plans to close five more plants in the next few years and confirmed it will drop some of its weaker brands. . . . . GM . . . said that by 2011 it could need a total of $30 billion, which includes the $13.4 billion in Treasury loans it has already received. In the near term, GM will most certainly need $9.1 billion in additional loans and could require another $7.5 billion in the next two years if auto sales don't improve. . . .

GM . . . accelerated its job cut plans, saying that it would eliminate 47,000 jobs over the course of 2009. The company said it would cut about 20,000 jobs in the United States, or about 22% of its remaining U.S. staff.

Previously, GM called for U.S. job cuts of between 20,000 to 30,000 workers, but it had stretched out those reductions through 2012. The company said it plans to close five additional U.S. plants by 2012 --in addition to the 12 planned closings announced in December. . . . GM added it plans to phase out the Saturn brand by the middle of 2011 if it is unable to sell or spin-off the brand. GM is also looking to sell its Saab brand, and will look for help from the Swedish government to support Saab until a buyer is found. . . .

GM is struggling under a $35 billion mountain of unsecured debt. It hopes to shed about two-thirds of that debt with a swap of debt for equity with its bond holders. But the company was not able to reach a deal with the bond holders by Tuesday's deadline, although it did include a letter from their committee's financial and legal advisers saying that they are "prepared to recommend that the committee approve and support the bond exchange" proposed by GM. . . .

In a reorganization scenario, GM said it might need up to $100 billion in additional federal loans to finance their operations during a two-year reorganization.

The Washington Post has more details:

Once-popular lines such as GM's Hummer and Saturn will be spun off, or failing that, eliminated. Saab is up for sale. . . . In addition to U.S. loans, GM is also requesting financial support from the governments of Canada, Germany, Britain, Sweden and Thailand.

Saab accounted for 1,772 U.S. sales in January 2008, out of a total GM sales number of 250,926.

More details are set forth at Marty Padgett's blog (citing a GM press release):

In the U.S., GM will focus on its core brands; Chevrolet, Cadillac, Buick and GMC. Pontiac will serve as a focused brand with fewer entries, within the Buick-Pontiac-GMC channel. GM will have a total of 36 nameplates in 2012, down 25 percent from 2008 levels. The plan also provides additional detail on the Hummer, Saturn and Saab brands.

GM expects to make a decision to sell or phase out the Hummer brand by Mar. 31, with a final resolution expected no later than 2010.

GM has conducted a strategic review of the global Saab business and has offered it for sale. Given the urgency of stemming sizeable cash demands associated with Saab operations, GM is requesting Swedish government support prior to any sale. The company has developed a specific proposal that would have the effect of capping GM's financial support, with Saab's operations effectively becoming an independent business entity Jan. 1, 2010. While GM hopes to reach agreement with the Swedish government, the Saab Automobile AB subsidiary could file for reorganization as early as this month.

Saturn will remain in operation for the next several years, through the end of the planned lifecycle for all Saturn products. In the interim, if Saturn retailers or other investors present a plan that would allow a spin-off or sale of Saturn Distribution Corporation, GM would be open to any such possibility. If a spin-off or sale does not occur, GM plans to phase out the Saturn brand at the end of the current product lifecycle.

GM's dealer count is also projected to be further reduced, from 6,246 in 2008 to 4,700 by 2012, and to 4,100 by 2014. Most of this reduction will take place in metro and suburban markets where dealership overcapacity is most prevalent. The result will be a smaller, but healthier GM dealer network. . . .

As indicated in the Dec. 2, 2008 plan, GM is moving ahead aggressively with plans to improve the fuel efficiency of its vehicles and develop a broad range of advanced propulsion technologies. The company is investing significantly in alternative fuel and advanced propulsion technologies in the 2009-2012 timeframe, supporting the expansion of GM's hybrid offerings and development of the Chevrolet Volt's extended-range electric vehicle technology.

For example, GM in January announced construction of a new U.S. manufacturing facility to build lithium-ion battery packs for the Volt. Lithium-ion batteries are an essential technology for advanced hybrids and electrically driven vehicles, and an important energy storage technology for other applications. GM has also committed to increasing its number of hybrid models to 14 by 2012, and to making more than 60 percent of its fleet alternative-fuel capable. . . .

In order to improve capacity utilization and cost competitiveness, GM has consolidated its manufacturing footprint considerably by closing 12 manufacturing facilities in the U.S. between 2000 and 2008. Given the current very difficult market conditions, GM will close an additional 14 facilities by 2012, five more than were included in the Dec. 2, 2008 plan.

Agreements with the UAW concerning several items have been completed and are now being implemented. First, a special attrition program has been negotiated to assist restructuring efforts by reducing excess employment costs through voluntary attrition of the current hourly workforce. Second, the UAW and GM's management have suspended the JOBS program. The program provided full income and benefit protection in lieu of layoff for an indefinite period of time. In addition, GM and the UAW have reached a tentative agreement relative to additional wage and benefit changes.

I can't imagine a successful spinoff or sale of Saturn. The brand is dead, and this is the biggest brand at any of the automakers scheduled for a change.

Chrysler's plans:

Chrysler said it now needs a total of $9 billion, up from the $4 billion Treasury loan it received in December. Chrysler said it will need that money by March 31. . . . Chrysler said it plans to cut about 3,000 jobs, or 6% of its workforce, and reduce capacity by another 100,000 vehicles this year as it tries to adjust to reduced demand. It also said it has won the concessions from the United Auto Workers union and its creditors that were demanded under terms of the loan from the Treasury Department. . . . If it was forced to liquidate, Chrysler estimated there would be a loss of 2 million to 3 million jobs, resulting in a $150 billion reduction in federal tax revenue over three years. . . .

Chrysler . . . left most of its 12 North American assembly plants idled throughout January due to weak demand and excess inventory. In addition to the job and production cuts, the company pledged to further lower costs by eliminating a manufacturing shift and discontinuing three models. . . . Chrysler said it would need up to $20 billion to $25 billion [in a Chapter 11 bankruptcy].

According to the Washington Post: "Chrysler will stop production of the PT Cruiser, Aspen and Durango by the end of the year." The Dodge Viper model is up for sale.

Fiat has recently made a major investment in Chrysler.

Additional Chrysler details are as follows:

To help meet customer needs and increased federal fuel economy standards, Chrysler plans 24 vehicle launches in 48 months, and announced electric technology as a primary strategy for developing fuel-efficient, low emission vehicles, including an electric-drive vehicle in 2010. . . .

In 2010, the Company will launch four highly successful platforms: a new Jeep Grand Cherokee, a new Dodge Charger, a new Dodge Durango and a new Chrysler 300 (the most awarded car in automotive history since its launch in 2005). The Chrysler 300 launch will be followed by a new, bolder Dodge Charger and an all-new unibody Dodge Durango.

In 2008, Chrysler offered six vehicles with highway fuel economy of 28 miles per gallon or better. For 2009, 73 percent of Chrysler LLC’s vehicles show improved fuel economy compared with the prior year’s model. Fuel economy will continue to improve in 2010 with the introduction of the all-new Phoenix V-6 engine, which will provide fuel efficiency improvements of between 6 to 8 percent over the engines it replaces. A two-mode hybrid version of the Company’s best-selling vehicle, the Dodge Ram is scheduled for 2010. The first Chrysler electric-drive vehicle is also scheduled to reach the market in 2010. It will be followed by other electric-drive vehicles, including Range-extended Electric Vehicles, in the following years in order to further reduce fuel consumption.

The proposed Fiat alliance would further help the Company achieve these standards as Chrysler gains access to Fiat’s smaller, fuel-efficient platforms and powertrain technologies. The alliance would enable Chrysler to reduce its capital expenditures while supporting the company’s commitment to develop a portfolio of vehicles that support the country’s energy security and environmental objectives. . . .

Through year end 2008, Chrysler has:

Reduced fixed costs by $3.1 billion
Reduced its work force by 32,000 (a 37 percent reduction since January 2007)
Eliminated 12 production shifts
Eliminated 1.2 million units (more than 30 percent) of production capacity
Discontinued four vehicle models
Disposed of $700 million in non-earning assets
Improved manufacturing productivity to equal Toyota as the best in the industry as measured by assembly hours per vehicle according to the Harbour Report
Achieved lowest warranty claim rate in Chrysler’s history
Recorded the fewest product recalls among leading automakers in 2008

The following additional restructuring actions are planned in 2009:

Reduce fixed costs by $700 million
Reduce one shift of manufacturing
Reduce total manpower by 3,000 people
Discontinue three vehicle models
Take out 100,000 units of capacity
Sell $300 million additional non-earning assets . . .

Chrysler will fully comply with the restrictions established under section 111 of EESA relative to executive privileges and compensation. In addition, the Company has suspended the 401k match, incentive bonuses, merit increases and has eliminated retiree life insurance benefits. . . .

Chrysler will achieve cost savings . . . through . . . reduced dealer margins, elimination of fuel fill, reduction of service contract margins. . . .

The signed term sheets for the UAW Labor Modifications and VEBA modifications fundamentally comply with the requirements set forth in the U.S. Treasury Loan and once realized would provide Chrysler with a work force cost structure that is competitive with the transplant automotive manufacturers. This agreement is subject to ratification. . . .

The Company has initiated the dialogue with its suppliers and believes that it will be able to obtain substantial cost reductions from suppliers that will result in achieving targeted savings. Chrysler supports the supplier associations’ proposals, which would provide a government guarantee of OEM accounts payables. . . .

Chrysler anticipates that the holders of the 2nd Lien Debt will agree to convert 100 percent of their debt to equity.

Ford, meanwhile, is holding out:

Ford Motor . . . requested a credit line of $9 billion from Congress in December. But Ford said it would not to have to tap the line of credit unless conditions in the auto market and economy deteriorated more than expected.

Ford has considered selling the Volvo brand, and its investment in Mazda. Volvo accounted for 8,036 U.S. sales in January 2008, out of a total Ford sales number of 155,753.

The next step isn't obvious. But, the impact is potentially smaller than I had expected.