When the Obama administration loaned General Motors and Chrysler some $25 billion several months ago, it said that when the automakers returned for additional loans in late March it wanted viable plans for the companies' recoveries if they expected more funds.
And when those plans were presented, the government rejected them.
As we say, "Back to the drawing boards."
We got the first hint of the upcoming changes on the last Sunday evening in March when word spread that GM's chairman, Rick Wagoner, was stepping down. Soon it became clear the government had asked him to leave.
Come Monday morning it was apparent the Obama administration was "playing hardball" with the automakers. It had rejected GM and Chrysler plans that would have assured added funding. While the government will continue to help fund day-to-day operations of the two, GM was given 60 days to present a new proposal and Chrysler was told it needed to wrap up its alliance with Fiat in 30 days. The alternative for both would be government-backed "prepackaged" bankruptcy.
What failed the test in the eyes of the government task force looking into GM's troubles? It thought the automaker's assumptions of its future market share and pricing problems were overly optimistic. The corporation downsizing plans were too conservative, even though it plans on cutting brands and lowering GM dealership numbers from 6,246 in 2008 to around 4100 in five years. The group considered GM "legacy" costs--retirement plans, health costs, etc--to be unsustainable given GM's future product plans. In theory this is one area that a bankruptcy court could address head-on, able to do away with old contracts, but it would be, at best, very messy, particularly in a city already as financially hard hit as Detroit.
The task force also took on GM for its product mix, saying it was relying too much on SUVs and trucks, making it vulnerable to shifts in market tastes, as during last summer's spike in gas prices. It did not mention GM had a line of nice, fuel-efficient Saturns the public ignored.
As an aside, American new-car buyers are once again proving to be quite fickle. During last summer's gas price run-up, hybrids were drawing big price premiums and even Ford's marginal little Focus was a hot seller.
Now that gas prices are down again Toyota is offering a discount of $1000 off the Prius (this is the just-replaced version) and hybrids are sitting on dealership lots gathering dust just as the new Prius, Honda Insight and Ford Fusion Hybrid come to the market.
We might be seeing the first act in a play in which the government will try to force consumers into vehicles smaller than those drivers want. The "Feds" could, of course, just raise our traditionally low fuel taxes, but that could be construed as regressive, particularly for a government that seems ready to shift the wealth back down the economic scale. There will be acts to follow...
Back to GM. A "controlled" bankruptcy would be a way of breaking up the huge corporation under the eye of the government rather than putting it through a normal bankruptcy court, which would be much more chaotic and wasteful. Most likely it would involve moving the potentially profitable divisions of GM--Chevrolet, Cadillac, Buick and GMC truck--into a new corporation, while those with little or no future--Pontiac, Saturn, Hummer, Saab--would be sold off or closed.
While Wagoner's successor, CEO Fritz Henderson, has said he believes the automaker can rework its future plans to gain the task force's approval, he also commented that if it comes to bankruptcy, they would accept it.
Chrysler's 30-day reprieve got Fiat CEO Sergio Marchionne on a flight to Detroit. The task force said Chrysler hadn't done enough to finalize the tie-up with Fiat and must get on with it. And it must satisfy creditors and unions...a big task for only 30 days. If it fails, privately held Chrysler will likely be liquidated.
The Obama people also said they wanted to see Fiat take a smaller stake in Chrysler, down from 35 to 20 percent. We have heard rumors of what Fiat and Alfa models would be built in the U.S. The industry publication Automotive News has written that the Fiat 500 will be built in Mexico for sale in the U.S. There will also be Chrysler or Dodge vehicles based on the next Panda and the Fiat C-Evo platform. We will get the Alfa MiTo and the 147 replacement, plus a Chrysler vehicle based on the MiTo platform. If the Chrysler-Fiat deal works out.
In an attempt to eliminate one of the major roadblocks to sales of U.S. cars, the Obama administration has said the government will guarantee the warranties on GM and Chrysler vehicles. That should make a difference, but what the government can't do is make up for the immediate loss in the value of any vehicle sold by a soon-to-be (or newly) bankrupt automaker. The administration is also ready to develop a program that will offer tax credits to consumers who buy newer, higher-mileage, lower-emissions vehicles and scrap their old machines.
GM and Ford have also tried to jump start sales by offering programs to cover car payments for consumers who lose their jobs. Hyundai has had such an arrangement in the U.S. since January, offering to cover three months of loan or lease payments should the buyer lose his/her job. The plan worked, and while overall light vehicle sales in the U.S. dropped 39.4 percent during January and February, Hyundai sales were up 4.9 percent.
Under GM's plan, over the course of 24 months it will cover as many as nine payments of $500 should the owner lose employment. Ford will go to 12 payments of $700. We expect other automakers to make similar programs available.
In addition to trying to push more vehicles out the front end of the pipeline, automakers are cutting back on how many they will be adding to the back end. It's predicted Chrysler will lower second quarter production by almost 60 percent. Overall industry production is estimated to fall by over 40 percent. Even Honda, one of the most stable car builders in the US, is trimming output, down by 62,000, and for the first time offering buyouts to the majority of its workers in the U.S.
The Obama administration's hard line with the automakers looks unfair to many, given the surprisingly informal manner in which $700 billion was passed on to banks with surprisingly little oversight. But that was the Bush administration and Obama has a different approach.
During all this talk of downsizing and failing automakers and dealerships, it was refreshing to see one automaker moving ahead, even if the numbers are tiny. Fisker Automotive says it has signed 32 dealers for its $87,900 Karma gas-electric hybrid, which begins production in Finland later this year. This isn't exactly a multi-million dollar layout for the dealer, who must order two vehicles and set aside showroom and service bay space for the Karma. Fisker hopes to eventually increase the dealer count to 45 in the U.S. and 40 in Europe.
We also need to note the passing of one of the most underrated U.S. race drivers. Lloyd Ruby died recently at the age of 81 and most likely few outside the U.S. remember him. He was considered to be one of the unluckiest drivers in the Indy 500, having led the event handily on several occasions only to have bad luck intervene. Like 1969, when he was easily leading, stopped for a final pit stop and had a crewman sent him off before the fueling hose was detached. Ruby was considered the greatest driver never to win Indy, but he wasn't completely luckless, having won both the 24 Hour of Daytona and 12 Hours of Sebring in Ford GT40s.