Video: What’s in the auto bailout

By Roland Jones
updated 12/19/2008 5:50:55 PM ET 2008-12-19T22:50:55

U.S. automakers got a $17.4 billion lifeline from the Bush administration Friday, but now comes the hard part: Winning tough concessions from their unions and turning around their ailing businesses.

Declaring that he was unwilling to allow the auto industry to collapse, Bush announced a plan to loan $9.4 billion to General Motors and $4 billion to Chrysler this month. An additional $4 billion would be made available to the industry in February, after President-elect Obama has taken office.

Ford Motor, the other major U.S. automaker, has said it does not need funding in the immediate future.

The terms of the loans to GM and Chrysler require the carmakers and their unions to make significant concessions. (The term sheets have been posted at the Treasury's Web site.)

The term sheets give the government options to get stock in the two companies, partly nationalizing the industry, and the automakers get three months to come up with restructuring plans to become viable companies. Given the myriad problems the companies now face — from tough negotiations with labor unions to shrinking sales — turning their businesses around won’t be easy.

“I don’t think there’s anyone that thinks billions of dollars is enough to save the automakers,” said Lester Lave, a professor of economics at the Tepper School of Business at Carnegie Mellon University. “If the White House gives them money the companies won’t go into bankruptcy, but they’ll continue to stagger on.”

Bush said the package requires automakers to bring together all their stakeholders — labor unions, dealers, creditors and suppliers — to “make the hard choices necessary to achieve long-term viability.”

The most difficult requirement: wage changes and other concessions that the United Auto Workers union has fought against.

Under terms of the deal, GM and Chrysler must agree to wage and work rule changes effective by the end of 2009 to make them competitive with U.S. plants operated by Japan's Toyota, Honda and Nissan, many in the South.

Last week, UAW President Ron Gettelfinger rejected a bailout deal offered by Senate Republicans that made similar demands. Gettelfinger already is balking at the terms of the Bush administration’s bailout offer, signaling a difficult fight for the automakers in the months ahead.

While he applauded the White House decision to provide the loans, Gettelfinger said in a statement he was “disappointed” that the Bush plan “added unfair conditions singling out workers.”

“These conditions were not included in the bipartisan legislation endorsed by the White House, which passed the House of Representatives and which won support from a majority of senators,” said Gettelfinger. “We will work with the Obama administration and the new Congress to ensure that these unfair conditions are removed.”

The Bush plan requires work rule parity between U.S. automakers and foreign automakers — not a simple task, said Aaron Bragman, an automotive industry analyst at consultancy IHS Global Insight.

“Work rule parity is very different between the UAW and the foreign automakers,” Bragman said. “Work rules govern how you make the cars, or who can touch what in the factory. There’s such a level of detail, and how a Japanese automaker makes cars is totally different to how a U.S. company makes cars. So there are a lot of difficult issues to be fixed very quickly. GM’s Rick Wagoner says they can fix them, but analysts are not so sure.”

The loans give GM and Chrysler only enough money to last until early next year. After that, they’re likely to need more money to survive, notes Bragman.

“Collectively, the automakers have asked Congress for $34 billion, but they are getting $17.4 billion and that will only get them to March 31,” he said. “This is basically a football that the Bush administration is punting to the Obama administration; it lets the automakers avoid bankruptcy, but it doesn’t provide them with enough money to get through 2009, so they’re likely to need more money from the next administration.”

At a news conference to announce the final touches to his Cabinet, Obama would not say if he'll make any changes to the auto loan package.

But Obama warned automakers that "the American people's patience is running out." He said the automakers should "seize on this opportunity" to come up with a plan to make their companies sustainable.

Obama also said a final restructuring package shouldn't just include concessions from the workers. He says they shouldn't be the ones "taking all the hits." Obama says everyone involved with the auto industry has to be "part of the process."

Obama said his economic team will talk with management and workers to find out how the industry and its jobs can be preserved not just in the short term, but in the years to come.

The Bush plan requires the automakers to show a positive net present value by March 31, which essentially means they are on their way back to profitability. But the deepening recession means automakers are likely to sell only 10 million to 10.3 million vehicles next year, according to a Global Insight projection, compared with 14 million to 15 million just a few years ago.

“No automaker can survive as a viable business in the United States if fewer than 11 million vehicles are sold annually industrywide,” said Jesse Toprak, senior analyst at automotive Web site

The economy is unlikely to give much help, with a turnaround unlikely before mid-2009, said Lave of the Tepper School.

“Others say it won’t end until 2010, so it’s about six to seven months before car sales sill pick up much, or it could take 12 to 13 months,” he said. “So if you see how much cash GM is burning through each month — about $4 billion at the last count — it’s not a pretty picture, and that money will just be needed to keep them in business, and none of it will be going to finance the corporate redesign they need to do.”

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