Automaker Bailout: Take Two

Well the deadline came (6:00 PM EST on February 17) and went and as I said during the day, the country was left with more questions than answers. I did multiple radio interviews this morning, and the first question from all the DJs across the country was why? Why is the government throwing good money after bad companies? Why would Congress continue to give the automakers money if there is no end in sight? Those two questions really don't have an answer.

Let's recap what the companies (General Motors (GM) and Chrysler) asked for from Congress and the main restructuring activities:

General Motors

• Requesting an additional $16.6 billion in cash which includes $2 billion for March, $2.4 billion in April, and a $7.5 billion in a new credit line, bringing the total to $30 billion
• Hoping to receive $6 billion from the foreign governments of Canada, the U.K., Germany, Sweden, and Thailand
• Slashing 47,000 jobs worldwide (about 19% of its workforce)
  • 21,000 in the United States (10,000 salaried and 37,000 blue collared)
  • 26,000 outside the United States
• Management expects to pay back full $30 billion by 2017
• Indicated Saab is up for sale and could enter into bankruptcy proceedings as early as next week without help from the Swedish government
• Hummer continues to be up for sale
• Strategic review for Saturn and this name has been put on the block as well. If a buyer is not found, the brand is expected to be phased out (circa Oldsmobile) by 2011

Chrysler

• Requesting an additional $5 billion (above previous estimates of $2 billion) on top of the $4 billion it received in December
• Slashing 3,000 jobs
• Getting rid of three models
  • Dodge Durango
  • Dodge Aspen
  • Chrysler PT Cruiser

General Motors indicated that it would be able to pay back its loans starting in 2011 and be fully repaid by 2017. In my opinion, that is just wishful thinking; paying back loans in 2011 implies that the economy doesn't get any worse, and almost immediately begins to improve. Companies are still laying people off, meaning they expect business conditions to get worse.

However, the track record for the automakers with respect to forecasting is suspect. In December, both Chrysler and General Motors had forecasted an auto market sales run rate that seemed overly optimistic. The baseline expectation for General Motors back in December called for annual industry sales of 12.0 million units, and in the ten weeks since then, the company has dropped its baseline expectation to 10.5 million.

Additionally, management expects that in order for the company to breakeven, in terms of adjusted EBIT in North America, it needs to sell between 11.5 and 12.0 million units annually; we however, feel that figure is closer to the 14.0 million unit level. For once, we would like to see companies take a worst case scenario approach to the auto industry outlook. Even Ford (F) seems to still have rose colored glasses on with its expectations.

Included in the reports are many assumptions that seem a stretch for all of them to come to fruition. This is still a preliminary report for the automakers but is a guideline, and while we hope that more definitive plans are hammered out in the future, we do expect this to be the basic road map back to profitability.

Bankruptcy: A debtor that, upon voluntary petition or one invoked by the debtor's creditors, is judged legally insolvent. The debtor's remaining property is then administered for the creditors or is distributed among them. Source: Dictionary.com

That one word is the biggest question for the auto industry right now. Is bankruptcy the best way to go for General Motors? What about Chrysler or Ford? My answer to each of those questions is no. If Chrysler enters into bankruptcy, I do not see it re-emerging. If General Motors is forced into bankruptcy, Chrysler and followed by Ford will head down the path of misery. General Motors would be the first domino in a long line of companies that could be crippled should it file for Chapter 11 bankruptcy (reorganization).

General Motors had a statistic in its filing that for every manufacturing job in the economy, there are two jobs upstream (at the suppliers) and more than ten jobs downstream (auto dealers, auto repair, and maintenance). Additionally, I do not think that the United Auto Workers [UAW] will be completely powerless in a bankruptcy filing. Some companies are not able to shed the labor contracts that have them crippled.

We do think that General Motors and the rest of Detroit's Big Three will get additional concessions, but not nearly the amount needed or enough to justify the added cost to the American taxpayer. And, unfortunately, the automakers will be back in another six months asking for more money. If the economy doesn't improve or even begins to hint at getting worse, Ford will join General Motors and Chrysler on Congress' door step.

Congress is giving the industry enough to survive for the next three maybe six months, but I would love to see it actually trying to get ahead of the problem and fix it, instead of just waiting to pick up the pieces. Ford and General Motors were well on the way to turning the companies around before the recession kicked in, but I hope that both management teams take this swift kick in the butt and learn something from it and begin to speed up the plans.

These companies can't be the behemoths they have been in the past; they need to become smaller and more nimble, which means they have to be able to switch production from the SUV and light trucks to smaller vehicles at the flip of a switch in order to be more aligned with demand. Only then will this bailout be truly successful.

Disclosure: No Positions

Comments

[Mad Hedge F...:]

I’ll tell you what GM’s problem is. My dad was a religious lifetime GM customer, buying a new Oldsmobile every five years. Once he even flew to Detroit for a factory tour and drove his new prize home. Thirty years ago I told him he was doing GM no favors by buying their cars, and the only way to force them to improve a deteriorating product was to buy better made German and Japanese vehicles. This was right after the State of California had forced auto makers to install seatbelts on new cars. Airbags and ABS brake systems were still years away. His response, “I didn’t fight the Japs for four years so I could buy their cars.” (He was a Marine). GM’s problem is that my Dad passed away seven years ago. Of the original 17 million WWII veterans, 1,500 a day are dying, and there are only 1.5 million left. All of them loved Detroit because it built great Jeeps, Sherman tanks, and half tracks. Their kids prefer German, Japanese, Italian, Korean, and soon, Chinese, and Indian vehicles. It is no coincidence that GM’s problems really accelerated with the passing of the “greatest generation.”

Feb 19 09:20 AM

[jackooo:]

GM has the same ceo. Why do you think things will change?
If. I say If. Gm had the car everyone wanted NOW it would not sell! Why?
It's the economy stupid.

Feb 19 10:00 AM

[epeon:]

I think the guy talking about his dad has some of it right. The greatest generation would buy GM products no matter how bad they were out of a sense of loyalty. The next generation bought GM products but switched because they were bad. They switched mostly to Japanese products and because the products were good, they are staying with them. Winning them back is the key and, so far, one GM has not figured out.

Feb 19 10:31 AM

[qw:]

Maybe when unemployment reaches 10% or more, the new generation will figure out that "loyalty" to national products is somehow related to supporting their jobs.
Look at how the other world economies support local manufacture, try and find non-Japanise made vehicles in Japan, or non-Korean in Korea, etc.
30 years ago, domestic vehicle quality was not the best, but, that is no longer the case. GM and Ford produce very competitive products.

Feb 19 05:57 PM