Looking rattled and exhausted at yet another press conference last Friday, Ron
Gettelfinger wondered aloud if he had been lured into a trap.
The on-off talks to bail out the American car industry had collapsed a few
hours earlier despite the support of President George Bush and his successor
Barack Obama.
With a national industry and 3m jobs in limbo, angry Republicans were blaming
Gettelfinger, president of the United Auto Workers (UAW) union, for
scuppering the $14 billion (£9.4 billion) loan deal after he refused
last-minute demands for more concessions. Gettelfinger pointed his finger
straight back.
“We wondered, quite frankly, if we were just being set up,” said Gettelfinger.
Then, allowing his paranoia to show, he added: “They thought perhaps they
could have a ‘twofer’ here – pierce the heart of organised labour while
representing the foreign brands.”
Some Republicans, he said, particularly from southern states like Alabama, saw
the bailout negotiations as a way to cripple the union while aiding the
Japanese, South Korean and German carmakers that have located plants and
supply operations in their home districts, far from the Detroit heart-land
of General Motors, Ford and Chrysler.
If it seems incredible to suggest staunchly patriotic Republicans would
deliberately sabotage an American firm in order to get at the unions, it’s a
sign of how badly tempers have frayed in the scrabble to save the big three
Motor City manufacturers. This week matters could even get worse.
Without a speedy deal, GM, the world’s biggest car company, could go bankrupt
this month. Chrysler, the No 3 in Detroit, also faces collapse, with Ford
likely to be the last man standing thanks to some smartly timed asset sales
earlier this year and last.
The liquidation of even one of the big three could prove disastrous for the
rest of Detroit and for Europe. Big component makers, already struggling to
survive, would probably be pushed over the edge, making it impossible for
the surviving Detroit carmakers to keep turning out cars.
“I don’t see how you can have one go down and the other two not go as well. It
would be chaos,” said Erich Merkle, analyst at the accountancy firm Crowe
Horwath.
Senior industry executives have been stunned by how quickly the crisis has
enveloped Detroit. Some commentators – and perhaps now Gettelfinger – have
wondered whether the big three may be exaggerating their plight in an
attempt to win quick funding.
In October, Fritz Henderson, GM’s finance director, assured reporters at the
Paris motor show that the company had sufficient finance to see it through
most of next year.
“Our liquidity plan for the rest of 2008 and 2009, devised in July, is based
on a US vehicle market of 14m . . . I am comfortable with the plan but I am
very glad we made that pessimistic assumption,” said Henderson. “Have we
ample liquidity for 2010? A lot depends on what happens next year, when we
see how weak the 2009 market turns out to be.”
This weekend another life-line was being proffered to the Detroit giants. Bush
has said he is likely to step in this week with money from the $700 billion
Troubled Asset Relief Programme. A lot of that money, though, has already
been spent propping up America’s financial system.
At best the car firms can expect a bridging loan – but that is unlikely to
come without strings or another fight.
GM and Chrysler were in talks with the White House this weekend on loans –
understood to be about $4 billion in GM’s case – that would allow them to
continue to trade until Congress returns in the new year.
A longer-term restructuring plan could then be negotiated, with the
resurrection of the original plan to merge GM and Chrysler, probably under
the cover of Chapter 11 bankruptcy protection. Chapter 11, a
court-supervised procedure that gives troubled companies shelter from their
creditors, could allow GM and Chrysler to make the kind of far-reaching
changes to their structure and labour agreements they have found impossible
to force through in normal circumstances.
One of the key demands that raised the UAW’s hackles was for the Detroit firms
to agree to quickly shave their labour costs to be competitive with the
newly established plants in the south. The big three currently pay about $70
an hour once healthcare and pension costs are factored in, while the
southern plants pay about $45.
Polls in America suggest the public is divided over whether public money
should be risked in helping Detroit.
“Everyone understands the car industry,” said John Quelch, Harvard Business
School professor. He said most Americans, including politicians, didn’t
understand the bank bailout and felt they were not truly qualified to
comment. “But everyone can see what a disaster the car firms have been. And
they are pretty pissed off.” IF the last-minute Washington machinations
fail, the fall-out for Europe, and Britain in particular, could be grim. GM
and Ford have been mainstays of the European scene for nearly 100 years.
They are no longer the dominant players but have large UK manufacturing and
sales operations (see the panel above).
Chrysler has a proud history in Britain. It owned Rootes, which made such
famous British marques as Hillman, Hum-ber and Singer, but now has only a
small presence and does not make any cars here.
On the Continent, GM, owner of Vauxhall, is behind such household names as
Opel and Saab. Ford owns Volvo.
It is unclear what would happen in Europe if the parent company in Detroit
went into Chapter 11 bankruptcy. Previous examples of American corporate
collapses have resulted in radically different outcomes.
When Delphi, the American car-parts maker that was spun off from GM, went into
Chapter 11, its profitable European operations kept trading normally.
More recently when Lehman Brothers, the Wall Street bank, went bust, its
European operations were immediately put into administration and sold to
rivals within a few days.
On taking over, the administrators found that the parent had made a “cash
sweep”, meaning all the spare cash generated on this side of the Atlantic
had been repatriated to America.
A Lehman-style liquidation would be catastrophic for the European car
industry. As well as throwing the tens of thousands directly employed by GM,
Ford and Chrysler out of work, hundreds of thousands – perhaps millions –
more in supply companies would be threatened.
Even if the European arms continued trading, the collapse of a Detroit giant
would be a big blow for the suppliers, a handful of which have grown into
global companies. The suppliers that make parts for GM in Detroit, for
example, are probably also making parts for Porsche in Stuttgart.
“There has been more global-isation among the Tier-one suppliers than among
the carmakers themselves,” said John Wormald, managing partner of Autopolis,
the automotive con-sultancy.
GM and Ford’s European operations have in recent years performed better than
their domestic American businesses, which have run up multi-bil-lion dollar
losses, but their record is still patchy.
After heavy investment, Ford of Europe is making a small profit. In the first
nine months of this year it made $1.3 billion on a turnover of $31 billion,
according to a recent filing with America’s Securities and Exchange
Commission. In the third quarter it managed to eke out a profit of $29m from
sales of $8.3 billion.
GM Europe’s trading position appears to have deteriorated sharply in the third
quarter. Over the first nine months of the year (including the third
quarter) it lost $908m on a turnover of $26 billion. In the third quarter
alone it lost $1 billion on sales of $7.1 billion.
The nag in Detroit’s European stable, however, seems to be Volvo. In the third
quarter the Ford subsidiary lost $484m on sales of $2.9 billion.
GM Europe and Ford of Europe have been through significant restructuring, with
Ford’s judged to have been the greater success.
The man who presided over it, Ford of Europe chairman Lewis Booth, has
recently been moved to Ford headquarters in Detroit to be right-hand man to
Alan Mulally, Ford’s chief executive.
The restructuring and evidence of profitable trading may be sufficient for
European governments to step in. Opel is in talks about a cash injection or
loan guarantee from the German state, while Sweden has said it is prepared
to support Saab and Volvo to the tune of £2.3 billion. The French government
has also indicated that it is ready to help out its national champions,
Renault and PSA Peugeot Citroën. IN Britain, carmakers are becoming ever
more frantic in lobbying Gordon Brown and Lord Mandelson, the business
secretary, to follow the continental lead.
After a recent meeting with Mandelson, Paul Everitt, chief executive of the
Society of Motor Manufacturers and Traders, said: “We emphasised the urgent
need to address liquidity and restore demand.”
The campaign may bear fruit this week. Mandelson and the Treasury are expected
to make loan guarantees available to the car companies’ finance arms for the
first time, a move that carmakers hope will stimulate demand.
The move will do little, however, to provide the financial support now
urgently needed by the car companies’ manufacturing arms.
While Mandelson has been asked for support by Vauxhall, GM’s UK arm, the main
running is being made by Jaguar Land Rover, the Midlands-based group bought
by Tata from Ford earlier this year. As The Sunday Times revealed three
weeks ago, it has asked for a £1 billion loan, or loan guarantee.
Talks between Ratan Tata, head of the Indian business empire, and Mandelson
continued last week.
Whitehall sources say there is a strong chance the guarantee will be approved,
probably for several hundred million pounds over 18 months.
In its talks with government, Jaguar Land Rover has stressed its strong
research and development programme – it spends £400m a year on R&D.
It is expected to bring out several new models next year, including a new XJ
saloon and the first of a series of hybrid Land Rovers.
Mandelson is understood to be reluctant to pledge more government money, but
experts say there is a case for supporting the British car industry.
“This is not like British Ley-land in the 1970s, when they were building
products that nobody wanted,” said Peter Cooke, professor of automotive
management at Buckingham University business school. “UK car plants now have
an excellent record for reliability and quality.”
Cooke said the applications for aid must be seen in the context of a world
industry that already has too much capacity and where rationalisation is
inevitable – several plants will have to close.
“If [the UK industry] were to be badly damaged through lack of short-term
financial support, we could easily find it being ‘rationalised’ out of the
system,” he said.
