The U.S. Dept. of Energyâs release Wednesday of eligibility requirements for the $25 billion in direct loans to help auto makers and suppliers modernize their plants to build more fuel-efficient vehicles, makes painfully clear the funding package will not go far in salving the industryâs wounds.
One industry expert suggests the standards for eligibility are so rigorous few companies will qualify.
âThe criteria seems to be too strict,â says Dan Cheng, a partner and automotive-practice leader at Southfield, MI-based consultant A.T. Kearney. Specifically, Cheng cites a requirement that says an applicant must demonstrate robust financial viability.
According to the DOE, a manufacturer seeking the funds âmust demonstrate a reasonable prospect that the applicant will be able to make payments of principal and interest on the loans as and when such payments become dueâŚ and that the applicant has a net present value which is positive, taking all costs existing and future, into account.â
The DOE additionally will take into consideration âan applicantâs liquidity as of the date of the loan applicationâ and âfinancial projections demonstrating the applicantâs solvency during the period of time the loan is outstanding.â
Such metrics could present difficulties even for some of the industryâs biggest players, given todayâs 11 million-unit annualized sales environment, Cheng says.
GM, for instance, is burning through a reported $1 billion in cash each month, causing analysts to question its ability to remain out of bankruptcy past 2009 without government support on top of the DOE loans, which wonât be available until next year.
Analysts also tabLLC, a takeover target of GM due to its estimated $11 billion cash hoard, as another company at risk without government help or consolidation. Motor Co. sits on a taller pile of cash to weather the downturn, but itâs expected to report dismal quarterly earnings along with GM on Friday.
In recent weeks, the survival of major suppliers has fallen into question, with alarming quarterly losses reported by heavyweights such asCorp. and Mfg. & Holdings Inc., plus Corp. remains mired in bankruptcy.
âThe government is trying to do everything they can,â Cheng tells Wardâs. âBut as the industry heads further into this downturn, it becomes difficult, especially for suppliers, to demonstrate they will be viable. Thatâs the worry.â
The auto industry has approached the direct-loan program with trepidation from the beginning, especially as new-vehicle sales began plummeting in the yearâs second half.
âThey need operational help,â says Erich Merkle, an analyst at Crowe Chizek and Co. âThis doesnât address the core issue of their financial difficulty. Many of these auto companies will not have to worry about meeting higher (fuel-economy rules) because they wonât be around.â
In last nightâs speech to the Original Equipment Suppliers Assn., GM North America President Troy Clarke offered tempered expectations for the borrowed fundsâ impact on expensive advanced-propulsion programs, such as the Chevrolet Volt extended-range electric vehicle slated for a 2010 launch.
âThe $25 billion federal loan program recently signed into law holds some promise to fund some of these new technologies,â he said in the address, just 90 minutes after the DOE requirements were released, calling the next 100 days pivotal to the industryâs future.
âThe program could lower borrowing costs for car makers and suppliers investing in energy-saving technologies,â he adds, â(But) I wish this timeline was within our 100-day window.â
Which is why leaders of the Detroit Three and the United Auto Workers union were on Capitol Hill again today, seeking an additional $25 billion in loans providing more flexibility.
GM Chairman and CEO Rick Wagoner,Chairman CEO Robert Nardelli, Motor Co. CEO Alan Mulally and UAW President Ronald Gettelfinger were scheduled to meet with House Speaker Nancy Pelosi.
The California congresswoman is pushing for an economic-stimulus bill to be passed, despite Tuesdayâs presidential election, worth roughly $100 billion that likely will contain the additional aid and more expedited timetable auto makers seek.
Greg Martin, a spokesman for GM in Washington, says the top auto and union executives hope to bring Pelosi, one of the industryâs sharpest critics, up to speed on the situation in Detroit that becomes bleaker every day.
âItâs about presenting the case of the current state of the industry; what weâve been doing to reshape our business prior to the financial crisis; and how support is critical in what should be a difficult 2009 to keep those things on track,â Martin says.