The American car industry: In pieces

General Motors and Chrysler say they need more help. So do their suppliers.

FROM the moment in December that the outgoing Bush administration reluctantly threw a $17.4 billion lifeline to General Motors and Chrysler, it was always likely that one way or another the government would have to provide a lot more money. So it has proved.

On February 17th the two struggling carmakers submitted recovery plans to the Treasury Department, as required under the terms of the emergency-loan deal. GM said that it would need at least another $16.6 billion, in addition to the $13.4 billion it has already received, to become smaller, leaner and, it hopes, profitable. It is also seeking $6 billion from other governments to prop up its generally more successful overseas operations. To stay in business, Chrysler asked for $5 billion on top of its existing $4 billion loan.

Both firms insisted that if they did not get the money, bankruptcy would end up costing the taxpayer a great deal more. GM reckoned the government might have to stump up $86 billion to finance its passage through Chapter 11, and Chrysler put the cost of “debtor-in-possession” financing of an orderly wind down of its operations at $24 billion. Most of that money would have to come from the government.

The numbers, though big, were foreseen. The money advanced by President George Bush was only a down-payment designed to see the companies through the first quarter, while his successor decided what to do. Since then, the light-vehicle market has deteriorated further. New-car registrations in America fell by 37.1% year-on-year in January. That equates to an annual market of just 9.5m vehicles, compared with 13.2m in 2008 and 16.1m in 2007. GM is now projecting a market of 10.5m this year, rather than the 12m it had thought was a cautious assumption in December. The company has decided to shut 14 factories in America instead of the nine it had announced. It will eliminate nearly 2,000 dealers and cut 47,000 employees from its payroll, 20,000 of them in America. The Hummer, Saturn and Saab brands are all up for sale or closure. GM thinks it can break even next year, provided the market recovers to 12.5m vehicles or so.

Chrysler attempted, somewhat unconvincingly, to show how it might survive either in a shrunken form as an independent company or as a more successful and global outfit if a proposed alliance with Fiat goes ahead. The Italian carmaker has offered to supply Chrysler with fuel-efficient engines and small-car platforms in exchange for a 35% stake. In that case Chrysler expects, optimistically, to reduce its capacity by only 100,000 vehicles a year.

Both firms (and Ford) also announced tentative agreements with the United Auto Workers union to bring labour costs fully into line with those at the American factories of Asian and European carmakers. But they have been less successful in meeting two of the government’s other conditions for funding. The UAW is unwilling to accept that half the payments into a union-run trust to cover retired workers’ health care should be in company stock. GM is also struggling to unite its bondholders in an agreement to convert two-thirds of its $28 billion debt into equity.

One problem may well have been an absence of sustained government pressure on the negotiators. Only the day before GM and Chrysler were due to present their plans did the administration finally get around to setting up a presidential task-force that will assess both the restructuring efforts of the two companies and the plight of the rest of the American automotive industry. The panel, to be chaired by the treasury secretary, Tim Geithner, and the director of the National Economic Council, Larry Summers, includes Ron Bloom, a former banker and consultant to the United Steelworkers, who played a big part in restructuring the American steel industry.

The task-force faces an unenviable task. In theory, if it is unimpressed by what GM and Chrysler have come up with by March 31st, when the carmakers have to show that their plans are bearing fruit, it could demand immediate repayment of the loans the government has already granted. Given the noises coming from the White House, that is highly unlikely. But the task-force still faces three big, urgent and inextricably related questions.

The first is whether GM really can achieve the required degree of restructuring without entering into some form of managed bankruptcy. The second is whether Chrysler—even with Fiat’s assistance—has a future as an independent company. If not, would it make more sense to grasp the nettle now by selling those assets, such as the Jeep brand, that still have some value? The third is what help should be given to the car-parts industry, which receives far less attention than its famous customers, but which is facing acute problems of its own.

The plight of the parts-makers demonstrates both the urgency and the complexity of the situation. Their trade organisation, the Motor and Equipment Manufacturers Association (MEMA), wrote to Mr Geithner on February 13th warning him that the entire industry, which is the largest manufacturing employer in the country, was facing “breakdown”. In the 18 months to June 2008 the industry’s employment fell from 783,000 to 653,000, since when the rate of job losses and bankruptcies has accelerated.

Although the suppliers are heavily exposed to the difficulties of the Detroit Three, most of them also sell parts to the Asian and European manufacturers in America (see table). Given the extreme interdependency of the supply chain and the degree of specialisation within it, the failure of even one or two small firms can lead to stoppages on vehicle-assembly lines.

The collapse in new-vehicle demand has traumatised parts-makers. They have seen their cashflow fall by half or more during the first quarter, as carmakers have scrambled to cut production, in many cases entirely shutting factories for weeks and months. MEMA’s surveys suggest that a third of the supply base is already in financial distress, and another third expects to fall into that state before the end of the quarter. With inventories finally thinning, the carmakers are now starting to ramp up production, albeit at a much reduced rate. But parts-makers, which typically get paid only after 55 days, must somehow find the cash to supply their customers when no one will lend to them and no payments can be expected before late April.

Parts suppliers used to be able to borrow against payments owing from the Detroit Three, but now cannot find any lenders willing to bear that risk. So they are asking Mr Geithner to guarantee the debt, and to oblige GM and Chrysler, as a condition of their federal loans, to pay them within ten days rather than the usual 55.

But it is unlikely that even these measures would be enough to stave off mass bankruptcies were the task-force to allow GM to go into Chapter 11, which in turn would jeopardise the ability of the carmakers so far not seeking bail-outs—Ford and the foreign transplants—to keep their factories open.

President Obama has said that the final decisions about the future of America’s automotive industry will rest with him. It is doubtful whether any of the choices his task-force presents him with will be either cheap or palatable.

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