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Big Three bailout
US Congress looks set to approve a massive bailout package for Detroit Three
9 Dec 2008
US CONGRESS is on the verge of approving a short-term $US15 billion ($AUS23.2 billion) bail-out package for Detroit’s 'big three' car-makers – but with some onerous conditions.
US senate banking committee chairman Christopher Dodd described Chrysler as “basically gone” and put the prospect of a government-supported merger with General Motors back on the agenda.
And Ford chief executive Alan Mulally, whose company is the best-placed of the big three, even told the Wall Street Journal that he was “very concerned” about the financial health of both GM and Chrysler, and that “each revelation by our competitors has been of growing concern”.
Effectively, both GM and Chrysler have admitted they will be insolvent by the end of the month without assistance.
Although many Americans as well as legislators remain opposed to a bailout for the auto industry, talks over the weekend took on an extra urgency after the government announced the largest loss of jobs in a single month for 34 years, taking the unemployment rate to 6.7 per cent.
More than three million jobs are at stake in the US auto industry and president-elect Barack Obama made it clear that he would take the necessary steps to ensure it survives the recession.
“I don’t think it is an option to simply allow it to collapse,” Mr Obama said of the auto industry.
“What we have to do is provide them with assistance, but that assistance is conditional on them making significant adjustments. They are going to have to restructure.” The CEOs of GM, Ford and Chrysler returned to Washington on Thursday – this time driving electric and hybrid vehicles rather than arriving in private jets, for which they were savaged a month earlier – and detailed what they need to survive.
GM needs an immediate injection of $US4 billion to stay afloat until the end of the year, as well as $US18 billion in loans to remain viable until it returns to profitability after 2012.
Chrysler is asking for $US7 billion in loans by the end of this month to stay in business but expects to be back in the black by the end of 2009 and Ford is seeking a $US9 billion line of credit but says it will not require it unless the recession cuts deeper than expected, or one or more of its competitors fails and disrupts the supplier network.
Mr Mulally, who has offered to forego his $US2 million salary if the company calls on that credit, said Ford was better-placed than its rivals.
“We believe we have sufficient liquidity to get through this recession,” he said, “but if the economy continued to deteriorate and the industry continued to deteriorate, then even Ford might need a bridge loan also.” Mr Mulally admitted that at their first hearing the big three CEOs were not ready for the follow-up questions posed by the members of Congress, who sent them packing from Washington with a demand for a plan and not just a plea for money.
The depth of the dilemma faced by the big three was underlined by the latest sales figures in the US, which showed an overall market decline of 36.7 per cent in November.
Although Detroit was heavily hit – Chrysler was down 47.1 per cent, GM 41.3 per cent and Ford 32.6 per cent – even Toyota (down 33.9 per cent) and Honda (down 31.6 per cent) felt the pain as the recession took hold of the world’s biggest economy.
And they are getting no immediate relief from the previously booming Chinese car market, which dropped 10 per cent in November – the third (and biggest) fall in three of the past four months. Until August, the world’s second-biggest market had not decreased for more than three years.
As senators continued to thrash out a rescue bill, White House insiders suggested that the House of Representatives is likely to pass it to the Senate for a vote on Wednesday. It would then be signed off by President Bush.
The short-term plan is understood to involve providing $US15 billion – either from the previously-approved $US25 billion fund set aside to upgrade plants to build greener vehicles, or in the form of low-interest government loans – to keep the car-makers operating for the next few months, when the Obama administration will be in power.
Among the conditions that Congress is likely to attach to the bailout is the appointment of a “car tzar” to oversee the loans and restructuring of the car-maker’s operations.
There has also been a suggestion that the government will demand non-voting shareholder rights in the companies and that they will have to abandon their legal fight against tougher fuel economy and emissions legislation in California and other states.
While a number of senators have openly called for the sacking of GM chief Rick Wagoner (who has headed the company since 2000), along with other long-standing board members, it is unlikely that their removal will be a condition of the bailout.
Interestingly, Mr Wagoner and his board of directors (who backed their CEO as the man “to lead GM through these difficult times”) have all reportedly offered to follow Mr Mulally’s lead and cut their remuneration to just $US1 a year.
There is less pressure on Mr Mulally at Ford or Chrysler chief Bob Nardelli because they are both relatively new to their posts, but neither man expects to survive the industry shakeout in the long term.
Mr Nardelli confirmed that “the first job to go would be mine” if Chrysler was forced to merge with GM.
As Capitol Hill negotiated the bailout, GM has taken the ‘mea culpa’ route to salvation with a full-page advertisement in this week’s edition of Automotive News – a candid 900-word open letter to America in which it admits “we have disappointed you”.
“At times we violated your trust by letting our quality fall below industry standards and our designs become lackluster,” GM admits. “We have proliferated our brands and dealer network to the point where we lost adequate focus on our core US market.”
Read more:Big three embrace Obama
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