Brian and Megan Hazelwood shop at a Chrylser dealership in Newton, Mass. Chrysler needs to attract such customers if it is to survive.
(Ann Hermes/The Christian Science Monitor)Photos (1 of 1)
US automakers’ future tied to the global economy
A recession-driven slump in auto sales makes it tougher for the Big Three to craft their restructuring plans.
By Mark Trumbull | Staff writer of The Christian Science Monitor/ February 17, 2009 edition
Reporter Mark Trumbull discusses some of the reasons Detroit automakers need another government loan.
Reporter Mark Trumbull
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.
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Comments
2. Dennis Virag | 02.21.09
Love it or hate it, a strong domestic automotive industry is a cornerstone of a vibrant economy. Looking back, GM, Ford and Chrysler provided millions of well paying jobs to workers throughout the U.S. Millions more were employed by tool and die makers, component suppliers, dealers, transportation companies and service companies.
Unfortunately, most individuals don’t understand the complexity of the automotive industry, nor the realities of a GM bankruptcy. An automaker is not like an airline, a steel company or a railroad. It is much more complex and intertwined. The breadth and depth is enormous. That is why every developed and developing country covets a local automotive manufacturing industry.
We have a difficult choice. Either we assist our domestic manufacturers in this time of crisis or we let the automakers whither and die. While the industry is in vital need of restructuring, bankruptcy would bring about an end to the domestic auto industry and exacerbate our economic malaise.
If GM were to declare Chapter 11, it would set the broad automotive industry, and many related industries, into turmoil. Auto sales would erode further, falling to the 7 to 8 million range, forcing further production cuts and more plant closings. Soon liquidation would become the only viable option. Currently there is an excess of US and global capacity. The sale of Big-3 assets would be difficult, at best, since companies would not be interested in purchasing extra capacity. Job losses would be permanent. With no domestic competition, foreign automakers would limit their US-based production and increase imports to meet future demand, causing further trade imbalance.
To prevent such an outcome, the federal government should grant the loan requests to support U.S. manufacturing, as well as the long-term positive economic impact: jobs.
Dennis Virag, President
Automotive Consulting Group, Inc.
Ann Arbor, MI
3. James Corbin | 02.23.09
“Love it or hate it, a strong domestic automotive industry is a cornerstone of a vibrant economy.” Yeah, I might believe that if I lived in Michigan and was president of an automotive consulting group! I’m betting Toyota and Honda haven’t been beating down your door asking for your expertise.
“Unfortunately, most individuals don’t understand the complexity of the automotive industry . . .” Apparently, GM and Chrysler don’t understand the complexities either!
This is not a difficult choice. The automakers have had over 30 years to get their quality and products up to snuff. They are clueless. I used to be a Made-in-USA car nut until I got tired of fixing them and finally bought an import. I haven’t been in a domestic showroom since. The automakers did it to themselves and we as a country are not to blame for not bailing out incompetence. Only Soviet-style socialism would bail out companies so grossly mismanaged.
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1. Justanaverageguy | 02.18.09
Here’s what I don’t understand……So if GM goes out of business (because of all the past mistakes they have made), recogizing that that would mean the loss of thousands of jobs, wouldn’t other car manufaturers step in and take up the product void in this country, take over GM plants that are modernized and provide jobs for some of the displaced auto workers?? You can’t loose the #2 car company in the world without having some company come in and absorb the part of the capacity. Yes, it would be messy, yes it would take time..but I don’t hear anyone reporting on this. And the legacy retirees……it would be “breaking faith” with them in terms of healthcare etc. but welcome to the club…if it is there all of us will be relying on medicare for our healthcare not the greatly enhanced GM benefits.