The United States Secret Service revealed its not-so-secret code-name for
president-elect Barack Obama last week: Renegade. If it sounds like the make
of a car, that’s because it is.
The Renegade is a concept car being developed by Chrysler, an open-topped jeep
powered by electricity and diesel. Should the car ever make it into
production then, like its namesake president-to-be, it, too, promises change
- this time at 110 miles per gallon.
No doubt the car firms will be hoping this alignment of Renegades is an
auspicious omen for the motor industry. It could do with one. For years
American carmakers have lurched from financial disaster to financial
disaster and now it seems they are heading off a cliff.
Last week General Motors, the largest manufacturer, revealed it was burning
cash so fast that it might not make it to the end of next year.
The news is little better at its two smaller rivals, Ford and Chrysler. Should
the American car industry fail, experts predict that it could cost millions
of jobs and prove a devastating blow to an economy that is already reeling
from the impact of the credit crunch.
So it is no surprise that the car firms are warning of dire consequences
should their industry go under. However, they are not alone. Many
politicians and even some self-described “free market” thinkers believe
America cannot afford a bankruptcy in the car industry.
Howard Wheeldon, senior strategist at the broker BGC Partners, believes the
failure of one of the big three carmakers would erode confidence in the
American system so much that it could put back the chances of a wider
recovery.
Gary Hindes, managing director of New York-based Deltec Asset Management,
said: “The bankruptcy of any one of these companies would be a catastrophic
event for the US economy.”
Help could be at hand. Early this week the car kings Rick Wagoner of GM,
Ford’s Alan Mulally and Chrysler’s Bob Nardelli, along with United Auto
Workers’ president Ron Gettelfinger, are expected to start negotiations
about an industry bailout.
A proposed rescue already has the support of powerful Democrats, including
Nancy Pelosi, speaker of the House of Representatives. And tomorrow Senate
majority leader Harry Reid will begin pushing for a bill to give the
industry access to some of the $700 billion (£475 billion) earmarked by the
Bush administration to prop up financial firms.
Not everyone is happy. The outgoing Republican administration has so far given
tepid support to cash-for-cars plans. And academics and free-market thinkers
such as the Cato Institute are lining up to accuse backers of a bailout of
wasting taxpayers’ money on supporting the unsupportable.
“It’s a terrible idea. Taxpayers should not be on the hook for bailing out
businesses that have made very bad decisions and deserve to face the
consequences,” said Cato associate director Dan Ikenson.
There is one thing, though, on which neither side disagrees: the scale of the
dilemma facing Obama as he prepares to take office in January. Between them
Chrysler, Ford and General Motors directly employ 240,000 people, or seven
out of 10 American autoworkers. According to the Center for Automotive
Research, the three companies support another 5m American jobs, including
car dealers, parts suppliers and service providers. They also provide
healthcare benefits to almost 2m Americans and pay pension benefits to
775,000 retired people and surviving spouses.
Big numbers, almost as big as the problems that the so-called Big Three face.
GM celebrated its 100th birthday two months ago. Last year it sold 9.37m cars
and trucks around the world under brand names such as Cadillac, Chevrolet,
GMC, Hummer, Opel, Saab, Saturn and Vauxhall. Last week, though, the firm’s
shares hit levels not seen since the second world war after the company
revealed doubts about its “ability to continue as a going concern” and said
that it could run out of cash next year.
High petrol prices have turned consumers against GM’s gas-guzzling behemoths.
Falling sales have combined with high manufacturing costs, the credit
crunch, recession and plummeting consumer confidence to wreck GM’s business.
Shelly Lombard, analyst at Gimme Credit, said: “Their situation is very dire.”
She said the company needed between $11 billion and $14 billion a month to
keep running and keep up with its suppliers, payroll and other expenses.
“This is not a company that can run with zero cash,” said Lombard. GM ended
the third quarter with $16.2 billion in cash and at current rates the firm
will be in the danger zone early next year.
Chrysler’s finances are similarly troubled. Ford, however, is in a better
position than its rivals thanks to what Mulally has described as a $23.5
billion “home-improvement” loan backed by the sale and leaseback of assets
arranged in late 2006.
The American government has already put up $25 billion in funding for the car
firms. That money was originally earmarked to help pay for
government-imposed fuel-efficiency quotas. The firms and their supporters
want more, which is why they are eyeing the $700 billion Troubled Asset
Relief Programme (Tarp).
If the money doesn’t come, bankruptcy looms. Bankruptcy has often been used in
America to give firms the breathing space to reorganise their businesses,
but Lombard said it might not help the carmakers.
“Bankruptcy is designed to help companies reduce debt and renegotiate
contracts. But GM’s problem isn’t high leverage as much as it is labour and
healthcare costs, which the new union contract begins to address,” she told
clients last week.
“A bankruptcy won’t solve GM’s immediate problems, which are falling sales and
inadequate liquidity. Bankruptcy can’t boost sales and will probably
exacerbate GM’s sales decline by making already skittish customers even less
likely to buy GM cars.” Nor will a government bailout solve the problem, she
said. “If GM gets federal loans, it may be harder to negotiate more union
concessions, close capacity, streamline its product line and reduce its
dealer network.”
Ikenson argues a bailout will just delay the inevitable. “This lobbying blitz
has been in the works for many, many months,” he said, dismissing the threat
of millions of job losses as “hyperbole”.
“If all three went down and all the parts’ suppliers went down at the same
time, yes we are talking about millions of jobs. But that’s not going to
happen. What should happen is one of the Big Three should go down and
liquidate. Then prospects for the other two would be much brighter.”
He said it was wrong to argue that the banks had been bailed out and therefore
manufacturing deserved a handout. “The auto industry wants to paint this
black-and-white, Sarah Palin-like distinction between Wall Street and Main
Street.
“Quite frankly, the US economy could survive without an auto industry. It’s
not going to happen, but we could survive. We would not survive without
banks or a credit system.”
Others disagree. Hindes said: “It’s an academic argument that might go down
well at the University of Chicago, but the bankruptcy of one of these
companies would be catastrophic for the American economy – especially now.
It’s naive to suggest otherwise.”
Last week Wagoner blamed the credit crunch for poor sales and said the drop in
volumes was threatening the existence of the entire industry. “It seems a
little silly to use problems that come as a result of a credit crisis as an
excuse to wipe out the most important industry in the country,” he said.
A handout now would put the company back on course. By 2010 newly negotiated
union contracts and an economic recovery would put GM and the industry back
on track, he argued. “We’ve worked on very, very tough issues with our union
and we’ve come up with solutions that work for both of us. We’ve
dramatically restructured the size of our business. We’ve been, I think in a
humane way, able to significantly reduce our capacity and our workforce size
so we are much more competitive,” said Wagoner.
With pressure mounting, most analysts expect some sort of deal will be struck
soon - maybe even this week.
