That’s the strategy that the cash-strapped carmakers filled in by submitting lengthy viability plans – and an appeal for nearly $22 billion in additional loans – to the US government Tuesday.
GM said its survival depends on getting some $16.6 billion more from the Treasury Department, on top of $13.4 billion it has already received since December. Chrysler seeks $5 billion, in addition to $4 billion already received.
Their viability plans, submitted to meet a deadline imposed by the Treasury, sketched a progress report on steep cost cuts and restructuring plans that the companies said would put them on a path back to profitability.
It won’t be easy.
Before they win new government backing, they need to convince an Obama administration task force on the auto industry that their plans are realistic.
When would bailouts end?
At the end of a Tuesday night press briefing on its viability plans, one reporter’s question seemed to sum up the challenge facing GM’s management: How can the Treasury and taxpayers be sure that the company won’t come back again and again and again for more money?
Rick Wagoner, GM’s chief executive officer, replied that the key to long-term viability will be successful car designs and technology for new generations of more fuel-efficient cars.
“In some of these automotive technologies, the leaders are here in the United States, in many cases GM,” he said. “The challenge is, can we get our cost structure in line?… We've got a demonstrated track record of cutting costs.”
Now, too, it’s clear to both the union and the company's creditors that the cost-cutting imperative will demand significant concessions from them.
GM and Chrysler both cited significant progress in talks with the United Auto Workers union, which could lead to lower labor costs and streamlined work rules. One key issue still under discussion is reaching an accord on funding a retiree healthcare plan.
The companies also reported progress in talks with creditors. The trick is to finalize a whole package with all parties by a March 31 Treasury deadline.
“We cannot make an accurate or conclusive assessment of the company’s long-term viability without specific details of the tentative agreement GM has reached with the UAW regarding wages, or without knowledge of how GM plans on treating its obligations to UAW pension and health care trusts,” creditors of GM said in a statement Tuesday night.
Final deadline March 31
If they don’t finalize deals for big enough cost savings from the auto workers union and from creditors by the end of March, one or both of these companies may still need to go through some form of bankruptcy. That route might be a streamlined version of the process, in which stakeholders agree ahead of time on a restructuring plan. But GM and Chrysler argue that they view that as an option they plan to avoid if at all possible.
A bankruptcy would probably be disastrous for already weak vehicle sales volumes, GM argued in its report. If the company entered the typical, and lengthier version of bankruptcy, it might never come out as a going business, the report said.
The government is effectively a stakeholder of GM and Chrysler, in any case. Outright failure could push large pension obligations onto the government-run Pension Benefit Guaranty Corp. And while the industry has to cut jobs, the government has a stake in avoiding the even larger layoffs that a corporate collapse would involve.
"Whether these companies obtain additional government loans or file bankruptcy, taxpayers will pay; it's just a matter of how much and what destruction will be left in the wake," Michelle Krebs, senior editor at Edmunds’ AutoObserver.com, said in an e-mail to reporters. "No matter how we look at it, US taxpayers are shareholders in Detroit automakers."
Lifeline is better
The premise of the initial government loans, approved by the Bush administration in December, is that the Detroit automakers play such a central role in US manufacturing that it’s better for the economy to throw them a lifeline than to let them sink. That argument won out, in particular, because the recession is already causing a massive wave of job losses across America. Adding US carmakers, along with the ripple effect on suppliers and dealerships, would mean enormous additional cuts.
As it is, GM said it would cut 47,000 jobs globally by the end of the year — 19 percent of its workforce. It also said it would close five more US factories, although it did not identify them. The company plans to sell or wind down its Saab, Hummer, and Saturn brands. Pontiac will survive as a niche brand name, while Chevrolet, Cadillac, GMC, and Buick will remain as core GM brands.
Chrysler said it will cut 3,000 more jobs and stop producing three vehicle models. Ford, the other Detroit carmaker, is restructuring on its own. Analysts say that if the industry sales slump doesn’t bottom out this year, Ford could also look to the government for support.
The companies hope to start paying back the loans within a few years. (GM’s plan sets a goal of profitability within 24 months.) But analysts say it’s possible the Treasury will never get its money back.
– Material from wire services was used in this report.