Chief executives of the Detroit Three and United Auto Workers union testify today before lawmakers in the U.S. House of Representatives, a day after telling Senate members their companies could fail without government assistance.
The Senate also will vote today on a proposal to carve $25 billion in direct loans to the auto makers out of a $700 billion Wall Street bailout approved last month, although the bill likely will die due to opposition from Republicans and the White House. Senators behind the bill are expected to offer a second version if it fails.
Meanwhile, another auto industry bailout bill faces a vote in the House, although a spokesman with Rep. John Dingell’s (D-MI) office could not provide a timetable.
Corp. Chairman and CEO Rick Wagoner joins LLC Chairman and CEO Robert Nardelli, Motor Co. CEO Alan Mulally and UAW President Ron Gettelfinger before the House Committee on Financial Services this morning.
If the House hearing plays out like yesterday’s testimony, the auto executives will face pointed questions over their past management decisions and how the auto makers in such desperate straits plan to finally restructure their businesses for the long term, repay taxpayers for the risk lawmakers would take with their money and not return before Congress again in several months looking for additional cash.
Today’s reaction to the testimony reflects a general milieu in Washington that the $25 billion will not come from the Wall Street funds, but from a rewriting of legislation allowing the auto makers to use $25 billion intended for retooling factories for advanced propulsion vehicles to bolster their finances.
A bailout also could wait until the Obama Admin. takes office next month.
“The tone of the hearing (and) the direction of questioning did not change our view that federal aid is more likely than not,” Himanshu Patel, an analyst with JP Morgan Chase & Co., says in a research note today. “However, we feel it is clearer now that the timing of any such aid is not imminent.”
Adds industry backer Sen. Carl Levin (D-MI), who addressed the House this morning:
“One way or another, this week we have to merge these two paths and provide the bridge loans for the domestic auto industry that the President, the President-elect and leaders on both houses support – for the sake of millions of workers and their future and to keep a recession from being pushed into a depression.”
The two paths to which Levin refers are a $25 billion carve-out from the Wall Street aid package, or the redesignation of $25 billion in loans set aside to retool plants for production of alternative-fuel vehicles.
Reeling from a credit crunch and record low sales, auto makers from Detroit seek $25 billion in loans from the government to help bridge what Wagoner called “a financial chasm that opened before us.” Mulally noted yesterdayreached profitability in the year’s first quarter, and was “well on our way to sustainable profitability before the economic and credit crisis hit.”
Nardelli called bankruptcy a more costly solution to taxpayers than government aid, with thousands of pension obligations and millions of dollars in health care potentially landing in the government’s lap.
“The impact would be devastating,” Nardelli tells the lawmakers. “The systemic risk would be dramatic across the entire economy.”
Gettelfinger sought to expose myths about the union, saying his members focus on improving quality, productivity and reducing on-the-job injuries, “receiving a fair day’s wage for a fair day’s work.” He suggests the failure of one auto maker could bring down a second (company) or all three.
But Sen. Richard Shelby (R-AL) shot back with harsh criticism during Tuesday’s hearing, which lasted into the evening, asking rhetorically if the lawmakers were assembled to help Detroit restructure for the long-term “or perpetuate a market failure.”
Shelby said the auto makers’ dire financial position reflected a failed business model and suggested the executives were seeking life support rather than a bailout.
“You’ve burned billions and billions of dollars trying to turn around your industry,” he says. “What would you do if you got $25 billion? And if you got $25 billion, you’d probably (be back for) $25, or $30, or $40 (billion) more. And how would you pay the money back to taxpayers?”
Wagoner cites the industry’s capacity reductions in recent years and a 47% reduction in the Detroit Three’s workforce, but Shelby interjected, “So why aren’t you making money?” Wagoner blamed “significant costs to restructure” and “a market that has plunged because people who want to buy our cars can’t get credit.”
Dissatisfied, Shelby stopped Wagoner a second time to say the auto makers weren’t making money when consumer credit was easily obtained and U.S. sales reached 17 million units. GM’s CEO says he believes Detroit finally has achieved the proper business model, but Shelby was unimpressed.
“What do you tell people who say they’ve heard this before?” Shelby asks. “You’re the chairman of, what would you tell them?”
Wagoner pointed to Wall Street’s reaction to last year’s landmark labor agreement.
“The people critical of us – the Wall Street analysts – say, ‘These guys have gotten their labor costs competitive this time, layered on with the fact they have good products now, their moving on technology, quality, productivity, etc.’ Our stock price went up a lot.
“That was evidence to people that if the industry continued even at 15 million or 16 million units, it would be a good business,” Wagoner says. “But this (crisis) came across pretty quickly.”
Asked what GM would do with the money, Wagoner cited investment in traditional product programs to maintain competitiveness, as well advanced technology, such as the Chevrolet Volt extended-range electric vehicle, and to pay suppliers, “to keep the system going.”
The auto executives’ defense of the industry was tempered by additional testimony from Peter Morici, a professor of international business at the University of Maryland and former chief economist with the International Trade Commission.
Morici says the Detroit Three are burdened by labor agreements preventing a level of reinvestment in product that would keep them competitive with Asian transplants. He told lawmakers bankruptcy would prove a better route for the auto makers and suggested this would not be their only trip to Washington hat in hand.
“I would suggest if you give them $25 billion this month, they will be back,” Morici says, adding later: “It is not that they are bad managers, they are burdened by history.