President Bush announced a temporary package to rescue General Motors and Chrysler with loans of $13 Billion in 2008 and a further loan of $4 billion in 2009. The companies had warned that without the money they faced closure by the end of the year and indeed had begun plant closures already. In March of 2009 the problem becomes that of President Obama as one condition requires the companies to have an acceptable survival plan for the loans to continue. Congress is focused on the cascade effect of an industry collapse - investors are focused on company survival.
Proof or Consequences
The loans are seen as a bridge to allow the auto industry to survive until a full recovery plan can be produced - and accepted by Congress. An acceptable plan will lead to the loans continuing - but the failure to produce an acceptable plan will doom the companies to repayment. A demand for repayment would force General Motors and Chrysler into bankruptcy. Ford claims to be in better financial condition. Conditions of the bailout are to be measured, enforced or altered in the new year, by the new administration.
General Motors - Dead Man Walking
( Worst Case Scenario Is Now The GM Sales Reality )
The largest Detroit auto maker originally envisaged breaking even at a U.S. sales level of 12.5 to 13 million vehicles annually once it completes its restructuring.
The December plan projected a base case of 12 million sales this year with a downside risk of sales falling to 10.5 million. GM adopted that downside level as its forecast for 2009 on Wednesday, January 13th, 2009
Neither Mr. Henderson nor GM chairman Rick Wagoner outlined specific actions beyond the broad outlines of its December plan, the key elements of which are reducing hourly labour costs at U.S. operations, trimming its U.S. dealer network, scaling back its eight brands and engineering a massive swap of debt for equity.
Can An Industry Change in 90 Days?
Can the auto industry bring about radical change and agreements among its suppliers, labor unions and dealers to satisfy Congress that the industry can survive without a bankruptcy forcing more concessions on all parties? Are the demands for a ninety day solution too great to be completed in three months - forcing President Obama to extend more loans and more time?
By agreeing to loan General Motors and Chrysler billions the two companies will support their own employees, dealers and suppliers. That will keep tens of thousands employed during the worst car-industry downturn in years - and while the U.S. economy continues to struggle. Already analysts are assuming bond holders will accept 30 cents on the dollar. This will lower the car companies debt. Not as certain is the effort to reduce ongoing wage costs and the need of a different business model and / or management.
After years of struggle can two companies meet a three-month window to prove how they'll get competitive with non - American car makers? Is it reasonable to expect a profitable industry and that taxpayers will be repaid.
Taxpayers Can Pay and Hope for the Best - Investors Have A very Different Perspective
The Apprentice Millionaire Market Letter has argued that the auto industry is one sector investors should avoid. The AMP is dispassionate about labor woes and concerned only with the survival of an investors portfolio. General Motors and Ford investors have seen their investments decline more than 90 per cent. Ninety days is too short to reverse decades of mismanagement. The industry has thousands of dealerships in excess of that needed by even bouyant sales levels. The promise of electric and hybrid cars in the future cannot offset the sales slide today. Restructuring is an ideal that cannot be accomplished in the short term - and the long term need cannot be met with the proposed financing package. The billions of debt reduction from existing bond holders will be replaced by billions in debt to the U.S. taxpayer.
Where Are The Car Buyers - Where is the Union " Sacrifice "
Consumers faced with the economic uncertainty of the economy are not clamoring to buy cars. Those who wish to buy have difficulty obtaining credit on acceptable terms. Dealers cannot obtain credit for retail customers, fleet sales or inventory. Already the auto workers have called on the incoming administration to lessen the impact on labor from their part of the " sacrifice " call. General calculations of health and retirement benefits - the cost of decades of retirees - places a burden on Detroit that the new non- U.S. manufacturers do not face.The result is General Motors pays an " all in " labor cost of $ 75 dollars an hour compared to a $ 50 cost to Honda and Toyota. The auto workers argue they already have made concessions and want to stick to their written contracts until 2011. A forced bankruptcy would allow the " auto czar " to dictate new labor agreements, void leases, close plants and dealerships and rewrite supplier contracts. The auto czar may save the industry and shrink it to a correct size and model - but this will not benefit those who hold shares purchased at a time the industry was larger and vibrant.
Can Washington Run The Auto Industry
Should management be replaced by Washington appointees? What business success has a committee from Washington ever accomplished? The examples of Washington directing the business of Fannie Mae and Freddie Mac doesn't offer any encouragement to private equity. however, what confidence can we have in allowing the current management to remain in place. Investors certainly do not want to see "more of the same " from people who have driven the industry to this point. If the industry has to shrink - will Washington chose Chrysler over Ford or try to please everyone with sacrifices that appeal to voters but make little business sense?
The Bailout Allows A Bridge from Bush to Obama
Taxpayers have opposed the bailout two to one in polls. Investors have sold down the stock of both GM and Ford. The bailout will delay - not solve - the problems of the industry. Early in 2009 President Obama will face demands for more money and the same call to help Detroit or face being blamed for putting all those auto workers ( and voters ) out of work and out of their houses. Investors are best advised to maintain a watch - but stand aside.
It will be a no win situation for any politician but it will be especially difficult for the new President.
Jack Bass is the editor of the market letter The Apprentice Millionaire Program available at http://www.amprogram.com
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