If chief executives of the Detroit Three and United Auto Workers union return from hearings in Washington next week with a pledge for billions of dollars in government bailout loans, they also likely will bring back a blueprint for radically restructuring the industry.
Experts suggest changes could include tweaking existing labor agreements, whittling down dealer bodies, axing brands, renegotiating supplier contracts and possibly new leadership atCorp. In fact, for an auto maker such as GM, which stands on the brink of bankruptcy, a deal with the government could amount to an out-of-court reorganization.
“It will be like a restructuring outside of bankruptcy,” says John Trentacosta, a partner with Foley & Lardner LLP and co-chairman of the firm’s automotive industry team in Detroit.
“(LLC) has already restructured out of bankruptcy once. But if the government makes a financial commitment to Detroit, it will be coupled with a plan consisting of many complex parts,” he tells Ward’s. “They will want to put their money in companies that will survive long-term, not provide a 6-month bandage.”
GM Chairman and CEO Rick Wagoner,Motor Co. CEO Alan Mulally and Chairman and CEO Robert Nardelli joined UAW President Ron Gettelfinger on Capitol Hill Nov. 6 to push for a $25 billion loan package that would bridge the auto makers’ finances through the current sales downturn.
The UAW may want some of that money, or additional funds, to shore up a health-care trust the auto makers have delayed funding during the crisis.
The car companies already have been pledged $25 billion in loans from the U.S. Dept. of Energy, but the funds are part of a reimbursement program to OEMs and suppliers retooling plants to produce more fuel-efficient vehicles and of no help in the near term.
Detroit Three executives are expected to return to Washington next week to testify before lawmakers considering a bailout of the industry, perhaps as early as Monday.
And while it is almost certain the two sides will not hammer out details of any deal, with news out of Washington suggesting an uphill battle, experts say negotiations over the coming weeks could lead to a historic restructuring of the industry in an effort to avoid all-out bankruptcy of one or more of the manufacturers.
“(The auto makers) are going to have to show a business plan to bridge themselves across this recessionary economy, and I don’t know how $25 billion is going to get them there,” says Robert Wiseman, a professor of management in the Eli Broad College of Business at Michigan State University.
“All that does is get them to next year, and it doesn’t solve any of their additional problems,” he adds. “What they need to do is walk away from some of the contracts they're tied to, like(Corp.), the UAW and some of their bonds.”
Nadeam Elshami, a spokesman for House Speaker Nancy Pelosi’s office in Washington, says in return for a $25 billion bailout, Democrats have talked in recent days of warrants, or special equity shares, the auto makers would issue the Treasury Dept. that could repay taxpayers at a profit sooner than other investors, as well as limits on executive compensation and bonuses for outgoing executives.
Elshami cannot say whether government oversight of the industry or a “car czar” remains under consideration, but confirms Pelosi wants Detroit rebuilt for the long term. “She understands the critical nature of the auto industry, but also its need to restructure.”
Dave Pollock, a spokesman for Sen. Carl Levin (D-MI), calls details of a bailout package “fluid” and declines to offer specifics. He also won’t say whether Levin wants to carve into the $700 billion Wall Street bailout or craft entirely new legislation tailored to the auto makers’ needs.
Treasury Secretary Henry Paulson said Nov. 12 that money from the $700 billion Emergency Economic Stabilization Act was not meant for auto makers and suggested reworking the loans meant for fuel-efficiency technology instead.
“There are a lot of moving parts at this point,” Pollock says.
In an effort to build momentum for Democrats against growing opposition to the bailout from Republicans, Levin issued a statement Friday.
“I am confident that there will be bipartisan support for legislation to support the U.S. auto industry, beginning with my co-chair of the Senate Auto Caucus, Sen. George Voinovich of Ohio,” Levin says of the Republican who supports tapping the Wall Street bailout.
Any bailout deal is bound to come with additional guarantees that the auto makers address long-standing industry issues they previously have resisted, says Marc Scheinman, a professor of marketing at Pace University’s Lubin School of Business in New York.
“There has been monumental mismanagement on behalf of the leadership at the Detroit auto makers,” Scheinman insists. “So there are no simple answers. But one thing to come out of Washington will be, ‘We’re not giving you this loan for nothing.’ Proof of financial viability is absolutely necessary.”
That means dealing with issues such as overcapacity through the elimination of some brands, a tactic talked to death by analysts in recent years and one GM’s Wagoner has not favored.
Wagoner considers GM’s 8-brand strategy, which builds on founder Alfred Sloan’s slogan of “a car for every purse and purpose,” a marketplace advantage for the company.
However, Wagoner did preside over the company when it eliminated the Oldsmobile brand and now wants to sell the Hummer division.
Trentacsota also sees fewer brands coming out of a government-aid package. “It will have to be part of any restructuring,” he says. “Historic reasons don’t make sense any longer. (Auto makers) need to channel their resources and market the one product as strongly as possible.”
Dealer bodies also must go under the knife, he says, and the government could help by loosening statutes in certain states that make backing out of contracts nearly impossible.
“There is no margin for error now,” Trentacosta says. “The credit crunch brought that reality on us suddenly and radically. If you’ve made a mistake in the past, such as having too many dealers or too many brands, now is the time to fix it.”
Additionally, experts say the Detroit Three must go back to the UAW for additional concessions, just 13 months after winning a historic labor agreement calling for fewer workers, lower wages and looser work rules, as well as organized labor assuming management of costly health-care benefits in 2010.
But Gary Chaison, a professor of industrial relations at Clark University, in Worchester, MA, says Democrats likely will protect many UAW guarantees in return for the union’s help in winning the White House.
He expects largely symbolic gestures by labor, such as shortening the period laid-off workers may use the Jobs Bank, in an effort to win support for the bailout.
“We’ve left the world of economics and entered the world of public relations,” says Chaison, adding, “This is uncharted territory.”
Reflecting the dire circumstances, Chrysler parent Cerberus Capital Management LP, which desperately wants to unload the auto maker and nearly pulled off a deal with GM as late as a week ago, now says if the government comes through with a bailout it will forego any potential profit from a divestiture.
Michigan State’s Wiseman adds one more chip in auto makers’ favor – massive pension liabilities. Should one of the Detroit Three go bankrupt, the government’s Pension Benefit Guaranty Corp. would assume payment of those benefits.
“(The auto makers) have one hammer: all the pension plans,” he says. “So they could say to Washington, ‘You’re going to pay for this one way or another.’ It’s a remarkably strong argument.”
One of the most notable changes the bailout may force, Wiseman adds, is new leadership at GM. Whileand Chrysler recently have installed new CEOs from outside the industry, GM has kept Wagoner at the helm since 2000.
Despite nearly $20 billion in restructuring over the last two years, sentiment is growing in Washington and among the media for his removal in the wake of five straight quarterly losses and a plunge of more than 80% in the company’s market capitalization – the value of its outstanding shares and the price at which the company hypothetically could be purchased.
“He’s gotten their costs in line,” Wiseman says of Wagoner, “but GM needs bigger change than he’s been able to accomplish.”
Himanshu Patel, an analyst at JP Morgan Chase & Co. and one of the last on Wall Street to effectively downgrade GM’s stock to “sell,” also anticipates dramatic restructuring and UAW concessions ahead of any deal with Washington. He considers it an absolute should Detroit need even more support next year.
“If the first round of bailouts is not inclusive of decisive restructuring, might the political appetite for additional bailouts down the road have diminished and the funds not available a second time around?,” he asks rhetorically in a recent note to investors.
Patel’s downgrade comes just hours ahead of Goldman Sachs Group Inc.’s pulling coverage of GM altogether. The investment bank now thinks GM will need $22 billion in federal aid to survive the current market downturn.
As opposition to an auto industry bailout continues to grow in the U.S., the European Union now is adding fuel to the fire with threats it may appeal to the World Trade Organization over whether such government support would constitute illegal state aid.
Europe might provide support to its own auto sector, its leaders say, but only with strict orders to build environmentally friendlier cars.