Selling brands and cutting leasing programs, renegotiating deals with union officials and encouraging worker buyouts, the carmakers are doing everything in their power to raise money and cut costs, and they're still barely staying afloat.
That's why Congress's energy bill included $25 billion in loans to help meet stricter fuel efficiency standards. But now that the time to fund the mandate is drawing near, things aren't looking as certain as they should be.
Ralph Nader is among those leading the call for a cold shoulder to Detroit, saying they don't deserve a federal bailout and that "the taxpayer should not be played for a sucker," reports the Detroit News. Instead, he argues, the government should conduct a public takeover or treat the situation as it did with Chrysler in 1979. But neither solution appears to be an improvement over the proposed loan guarantees.
A public takeover would be fraught with the difficulties of finding the right talent to run it, not to mention government oversight and overhead. Treating the problem like Chrysler's disco-era crash would mean loan guarantees supplemented by government defense contracts. How that's substantially different from the loan guarantee package on its own isn't made clear in Nader's position. The 1979 deal involved $1.5 billion in loan guarantees, which in 2008 dollars equates to about $4.45 billion, a large sum of money, but still likely short of Chrysler's share in any of the proposed loan guarantee programs. GM and Ford could be expected to require an even larger share.
Ford thinks loans are the right way to go for its business, but how the financing is secured is what's still up in the air, according to its CEO Alan Mulally, reports Automotive News. "The only conversation we have now is, what is the right way to finance, and what is the right provision for deciding which companies participate," Mulally told reporters. "We are very positive."
Getting the loan guarantees at interest rates that would make retooling affordable is the lynch pin in the financing strategy. Loans at 20% interest aren't a tenable cost, and with the current state of the automotive and finance industries, none of the Detroit 3 are able to get financing at reasonable rates. The recently announced bailouts of Freddie Mac and Fannie Mae are just the visible evidence of the state of finance in the U.S.
The alternative to securing low-interest government loan guarantees is dire, however. Without a significant infusion of funding, meeting the tough government mandated fuel efficiency requirements, at both federal and state levels, will be impossible. That means that the companies would not be able to sell the cars they could produce, effectively legislating them out of business, at least in the U.S. market.
"This industry could fall down, literally, or be absorbed if they don't get something in place very soon. I think it's that severe," said Congressman Joe Knollenberg, R-Bloomfield Hills.
Raising more funds from sales of subsidiaries and valuable nameplates is a limited avenue, since all three have already liquidated large parts of their holdings. Ford completed the sale of the remainder of its Premier Auto Group (PAG) - with the exception of Volvo - to Tata Motors earlier this year. GM is actively seeking a buyer for its Hummer brand, though nothing has yet been made public. And Chrysler is shopping the Viper brand around as its own marque. Beyond those moves there are few choices that aren't core brands and products the companies rely on for their image and brand identity.
The only serious alternative for the Detroit 3, outside of government loan guarantees, comes from the UAW. By deferring payouts to Voluntary Employee Beneficiary Associations, or VEBAs, GM is seeking to effectively free up money now. Already the company plans to defer $1.7 billion in payments over the coming year. How much more money can be freed up by deferring VEBA payouts, and for how long, isn't yet clear. Ford and Chrysler could also likely employ this method to help their bottom lines, but even so it requires a 9% interest rate and can only go so far.
Reader Comments
Tue Sep 9 2008 3:52 AM
Will says
America is an interesting country. Big business begins to struggle financially and they scream "help" and government and the "people" are supposed to bail them out in the land of the "free market?" However, I don't see government actually assisting it's poorer citiziens in attaining a sufficient health care system.
Now, I am not just having a pop at the U.S. I just don't like the way the government appears to consider bailing out big business and does nothing for the people. Seems a "Laissez faire" is all well and good when it suits.
Tue Sep 9 2008 6:27 AM
chris says
will, government is a business just like any other.. and they will invest in what ever promisses to return them the highest tax dollars.
it's not like germany, england, japan and so many other national governments havent helped out their car companies before.
mind you in the case of england, it was the policies of a single government that brought the fall of the british automotive industry... i just hope that doesnt happen here... or else you might end up with russian wheat czars buying the rights to the GM name and making crappy vette knockoffs in north korea.
Tue Sep 9 2008 9:24 AM
dcars says
I doubt that the US would be the first country to "help" their own businesses if it chose to do it. As far as health care goes, a socialized system as we see it provides poor health care to a lot of people. Our current medicare system for the poor in the "US" is an excellent system, providing high quality services, but isn't publicized.
Tue Sep 9 2008 6:57 PM
HECTOR says
If I am not willing to buy a GM, Ford or Chrysler product I damn well don't want to give them my money for free. The entire GM company can go the way of the dinosaurs and I wouldn't bat an eyelash. I'm not exactly an Ayn Rand capitalist but I would easily allow any of these three companies to fail.
Tue Sep 9 2008 9:37 PM
Don says
The Big Three don't deserve a dime of Uncle Sam's money...this comes out of OUR pockets. They DO, however, deserve to bite the dust for three decades of absolute crap. A good few years of decent cars doesn't make up for the past.
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