Today is D-Day for the Detroit-based ‘Big Three’ as they submit their detailed restructuring plans to US lawmakers ahead of congressional hearings on Capitol Hill on Thursday and Friday into their requests for a US$25bn taxpayer-funded bailout.
Last time CEOs Wagoner (GM), Mulally (Ford) and Nardelli (Chrysler) went to Washington they – deservedly so – received a verbal kicking, not least for showing up in three private jets (at a reported $20,000 per flight vs $900 round trip in first class on a commercial airline) and for not presenting in any detail what they would do with $25bn of public funds.
This time around, things will be a little different. For a start, Ford’s Alan Mulally will, according to US media reports, be leaving the soon-for-sale private jet(s) at home and instead travel the 520 miles from Dearborn, Michigan, to Washington by car (one report said he’d be in a Ford Escape Hybrid). GM’s Rick Wagoner reportedly is driving a Chevrolet Malibu Hybrid sedan to the Hill. Robert Nardelli also reportedly has parked the jet but Chrysler wouldn’t reveal his travel details, citing security reasons.
Both congress and president-elect Barack Obama have refused an easy bailout, demanding strong evidence the automakers can survive long-term.
This time around, the auto chiefs will have another another set of poor monthly sales to bolster their case – November sales results should start trickling out this evening (UK time) with Chrysler, for example, having scheduled its usual conference call for late afternoon EST.
December has not started well – the Dow Jones industrial average was off 680 points or 7.7% to 8,149.09 at the close of trading last night while GM’s shares fell 0.69 or 12.4% to $US4.59 on Monday. Ford was off 5.2% $0.14 to $2.55. Privately-held Chrysler is no longer listed.
The Dow slumped following the grim news yesterday – from the National Bureau of Economic Research – that the US economy had actually been in recession since December 2007. However, Bloomberg News this morning (2 December) said US stock futures actually rose, indicating the Standard & Poor’s 500 Index may rebound from the worst sell-off since October, on speculation the federal reserve bank may step up efforts to spur growth as the economy slips deeper into recession.
In a speech yesterday afternoon, US treasury secretary Henry Paulson said his department was developing new methods of doling out funds under the current $700bn federal government ‘Troubled Asset Relief Programme’ but he reportedly added that a rebound in lending – which would free up more loans for new vehicle buyers and release more liquidity for beleagured car and parts makers – would not happen overnight.
The big question is how long GM and Chrysler can keep going before running out of cash – both have warned of high cash burn. Ford’s position is less dire, reportedly because it borrowed billions last year before the credit squeeze, and has said it can get through 2009 and may even not need the government loans.
Meanwhile, it has been reported that The Engine of Democracy, an umbrella organisation for auto industry supporters, is gathering dealers and component makers from each state for a Friday press conference on the steps of the Capitol to detail how the Detroit Three affect their states.
Each representative will wear a sports jersey embroidered with state-specific statistics about the industry, a spokeswoman for the group was quoted as saying.
On Tueday, the New York Times suggested the Detroit Three would need to show lawmakers they are serious about shrinking their vast lineups of different brands and models to match the current harsh market.
The report contrasted the 15 brands and 112 models offered by Detroit with the seven brands and 58 models sold by Toyota, Honda and Nissan. The Asian brands also offer far fewer models variants and factory options – usually offering extra-cost packages grouping popular items together rather than as individual options.
The NYT said such a wide range was historically a source of strength for the American companies when they dominated the vehicle market — a strategy of providing a car for “every purse and purpose” as Alfred P Sloan, GM’s leader in the 1920s and 1930s, once said – but the Big Three now sell fewer than half of all new vehicles in this country, with a market share of about 47% this year, compared to 62% just five years ago.
Long gone are the days when Detroit cars received a comprehensive exterior and interior restyle every year and a single model like Chevrolet’s Impala could sell 1m units in a single model year.
The NYT argued that supporting all those models and brands with separate marketing budgets, design teams, dealers and management divisions is an enormous expense, particularly for GM, and that the model proliferation is one reason the American companies are losing so much money now vehicle sales have slumped to their lowest point in 15 years.
“Downsizing brands and models is the minimum they have to do,” John Casesa of auto consulting firm the Casesa Shapiro Group told the paper. “This can’t just be about resizing the companies, but also restructuring them.”
Ford yesterday finally confirmed it was “considering” selling Volvo, whose sales are down this year, and GM has put its purveyor of gas-guzzling monster SUVs – Hummer – on the block.
The NYT said it may tell congress later today it is considering selling or eliminating Saab, Saturn and Pontiac as well – it closed Oldsmobile, at considerable cost, several years ago.
Sources told the paper GM had considered earlier in the autumn a plan to put Saab and Saturn up for sale but the plans were dropped because of the lack of potential buyers.
“Cutting Saab and Hummer are no-brainers because each of them has 0.2% of market share, so they’re irrelevant,” Jerome P York, a GM board member during 2006, told the New York Times.
“Beyond that, Pontiac looks very suspect to me.”
Wagoner has repeatedly cited the problems of closing Oldsmobile – four years and $1bn among them – as a key reason to avoid eliminating more brands.
The paper also said the Big Three have potential to reduce dealer networks – GM has about 6,700 in the US vs 1,200 for Toyota, and 14,000 franchises for its many brands versus 1,600 for Toyota.
What sort of reception the three CEOs will get on Capitol Hill on Thursday and Friday remains to be seen.
“I believe the industry will make a compelling case for bridge loans that will allow the companies to return to firm financial footing,” said Democrat senatot Carl Levin was quoted as saying last night.
A media report, citing company sources, said GM would outline efforts to negotiate swapping some of its debt for equity stakes. Another source said Chrysler was likely to suggest swapping debt for equity stakes and reductions in some vehicle models.
In return, lawmakers are expected to ask the CEOs to take pay cuts and both Nardelli and Wagoner are expected to comply – they have previously indicated a willingness to do so.
Ford, however, is not expected to immediately seek loans. Mulally told Congress last month the automaker would ask for funds only if the U.S. market continued to deteriorate.
Another US report said the automakers lilely would seek more concessions from the United Auto Workers union, including axing the much-maligned ‘jobs bank’ which keeps workers on about 90% of their pay even when laid-off, and gives them ‘seniority’ priority when the work returns.
UAW legislative director Alan Reuther has been quoted as saying: “We realise that all stakeholders need to come to the table to do what’s necessary to ensure the viability of the companies. We’re prepared to do our part.”