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'US govt cannot afford not to help Big Three,' analysts say

Text by Lorena GALLIOT

Latest update : 2008-12-05

The three big US carmakers, Ford, General Motors and Chrysler, have asked for a combined $34 billion in government credit to revitalise their companies. Analysts say the US government has little choice but to help out.

 Hit hard by the financial crisis, the three largest American automakers – Ford, General Motors (GM) and Chrysler – are once again taking their chances before the US Congress. The “Big Three,” as they are known, are hoping to receive $34 billion in government aid, despite the refusal of a previous bailout request in November.

 

With car sales plummeting due to combined pressure from the financial downturn and high gas prices, the carmakers are requesting a loan from Congress that will help them finance structural reforms and avoid bankruptcy. Ford reported a fall in sales of 30% in November, with GM and Chrysler registering drops of 41% and 42%, respectively.

 

“There is no Plan B,” says Fritz Henderson, chief operating officer of GM. Henderson was quick to underline the catastrophic consequences of a potential bankruptcy for both employees and society as a whole.

 

Last month, the manufacturers’ appeal for aid left Congress cold. At the time, legislators made a point of citing the carmakers’ stubborn insistence on producing large, gas-guzzling models, and insisted that they devise new strategies for company-wide restructuring before Congress would consider granting any financial aid.

 

Carlos da Silva, an automotive market analyst at Global Insight, a financial forecasting firm, says low petrol prices and continuing strong demand for big cars made the automakers unprepared for shifts in the market. "For a long time, Americans rode the wave of a climate favorable to automobiles, and they didn't see things changing", de says.

 

 

“Small, more efficient cars have been a Japanese specialty,” says Gaëtan Toulemonde, a financial analyst for the auto sector with Deutsche Bank. “But that is where the demand is today.”

 

Wholesale structural reform


The industry is complying and has announced plans to improve cost structures, streamline company procedures, revamp product ranges to meet new environmental standards and downsize car dealership networks.

 

For its part, the head of the United Auto Workers has indicated that the union is willing to make sacrifices to help the industry as a whole. President Ron Gettelfinger said on Wednesday that union members would be willing to give up certain job security protections and delay payments into a retiree healthcare trust if it would help US automakers convince Congress to throw them a lifeline.

 

Ford’s chief executive, Alan Mulally, who earned $28 million in 2007, and his GM counterpart Richard Wagoner have said they would be willing to accept annual salaries of $1 if their companies receive government-funded lines of credit. All three chief executives gave up their private jets and travelled to Washington in hybrids, after coming under heavy fire last month for taking separate private planes to ask Congress for a multi-billion-dollar bailout.

 

This time, an agreement between Congress and the Big Three seems likely. At a press briefing on Tuesday, the head of the House of Representatives, Nancy Pelosi, said that some sort of government intervention was the only way forward. “I think it's pretty clear that bankruptcy is not an option,” she told reporters.

 

The White House indicated on Wednesday that it might consider granting aid to the troubled automakers beyond an existing $25 billion loan program already agreed. White House spokeswoman Dana Perino said she was “not ruling anything in or out,” when asked about the request for aid.

 

“Let us have a chance to look at their plans and let them have their chance to testify,” Perino said, referring to scheduled appearances by the automakers’ chief executives before Congress on Thursday and Friday.

 

But she also made clear that a blank cheque was not in the offing. “We are sticking to our guns that the companies have to prove that they are viable before taxpayer dollars should be given to them,” Perino told reporters.

 

President-elect Barack Obama said the carmakers have put forward “a more serious set of plans,” but declined to comment on specific proposals until the congressional hearings are concluded.

 

‘The bailout is necessary’


David Bailey of the Birmingham Business School says the government has no choice but to step in. “The US government cannot afford not to help the Big Three,” he says. “If one of these groups were to disappear the economic implications would be too profound. Nearly three million jobs would be affected.”

 

Neither is sacrificing Chrysler, the smallest and weakest of the three, a plausible option. Ford has made it known that the failure of one of its rivals would threaten its own survival because they depend on the same contractors and spare parts suppliers, a whole other side of the American economy that would be affected.

 

“The companies have to address major structural problems, but they need cash to be able to do so,” Bailey says. “The bailout is necessary for these companies to be able to restructure.”

 

Bailey doubts that a Chapter 11 bankruptcy, which requires a restructuring but allows debtors to hold on to some or all of their assets, can be applied to the auto industry. “I don’t think the bankruptcy protection provided by the Chapter 11 procedure would work in this case, because of a consumer confidence issue,” he says. “Buyers may be reluctant to purchase a car if they are unsure of the brand’s solvability, of its ability to provide spare parts and customer service.”

 

Would the manufacturers be able to repay the government loans before 2012 as promised?

 

“Difficult to say,” according to da Silva. But not to fund the carmakers “would be a catastrophe that the incoming [President] Obama cannot allow.”

Date created : 2008-12-03

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