The revival of the US-based automotive industry may depend on help from the government, but it also hinges on where the overall economy heads.
On Tuesday, General Motors and Chrysler faced a deadline to provide the government with an update on their restructuring plans – including reductions in factories, cuts in labor costs, and concessions by private creditors.
These plans, by making the case that the troubled companies are on course to become profitable in the long run, could pave the way for more government help beyond an initial $13 billion in loans that the two companies received at the end of last year.
But the goal of viability is a target that keeps moving with the economy. Few industries have been hit as hard as this one in the current recession.
Sales plunge by a third
US auto sales had been humming at a pace of around 16 million vehicles a year before the downturn. Now sales are creeping at a 10 million annual pace, and it’s not clear when or how fast a recovery for the economy will begin.
“If we reach [sales of 11.5 million this year], GM could be viable. Ford would be viable,” says Dennis Virag, president of the Auto Consulting Group in Ann Arbor, Mich. But “we could see consumer confidence erode even further than where it is today.... That could place additional cash needs on the manufacturers.”
He’s forecasting that a slowly reviving economy, aided by a new government spending package that President Obama is signing into law this week, will push car sales up to that 11.5 million mark for the calendar year.
But in the current environment, any such forecasts come with much uncertainty. If such a recovery doesn’t happen, even Ford Motor Co., which is trying to restructure without federal support, might feel compelled to seek government aid.
Final deadline in March
For GM and Chrysler, this week’s viability plans are an interim step toward a final deadline of March 31. They must have a convincing plan in place or face the prospect of having to give back the initial loans and forgo additional support.
The viability plans that GM and Chrysler were preparing Tuesday were not available as this story went to press. But they were expected to include detail on such matters as plant closings, labor costs, and agreements by bondholders that reduce debt burdens. GM may downshift by selling some of its eight brand names and focusing especially on Chevrolet, GMC, Cadillac, and Buick as core brands.
A decline in gasoline prices from last year’s peak is somewhat of a boon for consumers. But that alone hasn’t revived traffic at dealerships. Where soaring fuel costs were a key source of consumer anxiety in 2008, the weak state of consumer confidence now reflects deeper concerns about job security, access to credit, and whether real estate and retirement accounts will recover lost value.
Ford took out a big loan to bolster its balance sheet before the current storm reached full force – and hopes to make it through on its own.
Chrysler in worst shape
Auto industry analysts say that Chrysler, as the smallest and least global of the three Detroit-based carmakers, is in the toughest shape. But the whole industry – including suppliers and foreign competitors – is being forced to restructure amid the worldwide recession.
A task force, named by Obama this week, will consider whether GM and Chrysler should get more federal aid.
The American public has little desire to see added taxpayer billions go toward corporate bailouts. But Obama, like President Bush before him, hopes to avoid as many job losses as possible in this bedrock industry. An alternative for these firms is a restructuring guided by a bankruptcy judge. “Nobody wins in a bankruptcy,” Mr. Virag says.