Such is the severity of the downturn in the global car industry that US manufacturers are now pushing for their own state bailout.
Why stop at the banks? Now governments around the world are pouring taxpayer money in to bail out loss-making financial institutions, it is getting harder to argue against subsidies, loans, guarantees and other forms of government assistance for other industries, too – particularly since the economic pain is now being felt far from Wall Street.
Which is why Rick Wagoner, chief executive of General Motors, the largest US carmaker, packed his suitcase for Washington and headed to the capital again this week. He is leading a lobbying push aimed at tapping taxpayers and staving off the bankruptcy of the loss-making company. GM’s coffers are being depleted at a rate of $1bn a month, and will run dry by the end of next summer. Little wonder its shares have touched levels not seen since it emerged from the Great Depression.
GM – owner of the Vauxhall brand and Chevrolet, amongst others – is in the throes of merger talks with its smaller rival Chrysler, which is also haemorrhaging cash. The hope is a merger will save money, allowing them to close more factories and cut more jobs. The trouble is, things are so desperate they don’t have the cash to write the redundancy cheques. They are asking for up to $10bn in low-cost loans to tide them over.
So here we are, on the brink of Bail-out II: Detroit.
“US auto makers directly employ about 355,000 American workers and through related industries that are dependent on auto manufacturing and sales, the industry supports about another 4,500,000 workers in the US economy,” says a begging letter to the Treasury by Congressman John Dingell, who represents Michigan, where GM, Chrysler and Ford are based. “The three provide health care to almost two million Americans and pay pension benefits to 775,000 retirees or their survivors.”
It is the automotive equivalent of the “too-big-to-fail” argument Treasury secretary Hank Paulson used to justify taking equity stakes in banks.
“I would be stunned if the government didn’t respond,” said David Whiston, auto industry analyst at Morningstar. “The political reality is that this affects Average Joes in battleground states such as Michigan and Ohio. And then there is the financial and economic reality.”
A bankruptcy filing by one of the big three could lay waste to hundreds or even thousands of suppliers, and send unemployment soaring further in areas which are already amongst the most economically disadvantaged. It could also cause a nasty feedback loop. If suppliers collapse after the bankruptcy of one of the big three, the other two might face parts shortages and production stoppages that would tip them over the edge, too.
And behind all this, there is the question of what happens to those 775,000 pensioners. The federally-backed Pension Benefit Guaranty Corporation, which takes over the liabilities of collapsed companies, already has a $14bn black hole and would almost certainly need to be refinanced with taxpayer money if a bankrupt Ford, GM or Chrysler is added to its responsibilities.
How has Detroit got to this desperate state of affairs? The decline has been over two decades. Foreign rivals, notably Toyota, won a better reputation for efficiency and won market share as a result. The pension and healthcare bills of GM, Ford and Chrysler kept climbing, even as their market share fell, exacerbating their competitive disadvantage. The companies took on more debt to cover losses and Ford even mortgaged its logo two years ago to raise cash.
More recently, high fuel prices crimped demand for pick-ups and SUVs. And in recent weeks, the financial crisis has spun out of control.
Sales worldwide went into a dive. GM is expected to say that its European operations, which were around break-even in the first half of the year, have plunged into the red in the third quarter. Asian sales, which had looked like a way out of the morass, have slammed into reverse gear and Russia is the latest emerging market where revenues have collapsed. North American sales are down 13 per cent this year, and there seems little likelihood of improvement any time soon. With credit markets frozen, the auto loans that attract buyers are hard to come by. GMAC, General Motors’ financing arm, announced yesterday it would stop offering loans in many Continental European countries, including Spain, which will squeeze sales further.
The closure of the credit markets has removed the option of financing the Big Three using private loans, if they could find them. Already, the automakers’ debt is rated as junk, and Moody’s, the credit rating agency, downgraded GM and Chrylser debt further on Monday – which will raise the cost of borrowing for the companies if and when the markets reopen.
“The distress goes back a long way,” said Mr Whiston, “but not having capital markets available to them immediately accelerates it.”
In recent days, GM and Chrysler have announced thousands more lay-offs, this time white-collar. GM is also trying to raise cash by selling its Hummer brand, although potential buyers are finding it difficult to raise debt to fund a purchase. All the while, all three companies have been cutting production in the US and across the world. In the UK, for example, Ford began a 17-day closure of its Southampton factory, where it produces Transit vans, at the start of October, while GM extended temporary shut-downs at its plant in Luton. But analysts fret that the decline in sales is always one step ahead of the decline in production, and the losses never seem staunched. For those who follow the auto industry, the main task now is to calculate the date when money runs out. For GM, it is around this time next year. Chrysler will run out by the end of 2009, too, while Ford looks able to hang on into 2010. Little wonder the focus is on raising emergency funds from the US government.
This month, Congress voted $25bn for low-cost loans to help the industry retool factories from SUV production to more forward-looking hybrid and electric technologies, and the first instalment of the bail-out looks likely to come from this fund – perhaps tied to a GM-Chrysler merger deal. In addition, some of the $700bn Wall Street bail-out fund could be earmarked for Detroit, if the Treasury decides to buy up parcels of car loans from the Big Three’s financing arms. And both presidential candidates have pledged more subsidies for green technology that could be channelled to Detroit.
As Mr Wagoner continues his lobbying efforts, the details are up for debate in Washington. The principle long ago seems to have passed into consensus. Let the bail-out begin.
Global slowdown: Honda cuts production in Swindon
Honda joined the growing list of UK car manufacturers pulling in their horns yesterday when it announced plans to slash UK production by 10 per cent in the face of slowing demand. Some 22,000 fewer Civics than planned will be built at the Japanese giant’s factory in Swindon in the four months from December, but there will not be any redundancies among the 4,800 staff affected by the decision.
Yesterday GKN, which makes automotive and aeroplane parts, announced it is axing 1400 temporary jobs, cutting production and revising annual profit forecasts down to a fifth lower than last year because of collapsing demand in car industries across the world. Last Friday, Peugeot Citroen predicted a 17 per cent contraction of the total European car market in the fourth quarter, and said it would “massively” cut production after a 5.2 per cent slump in third-quarter sales. And earlier in the week, Nissan announced plans to cut production at its Sunderland factory’s Micra and Note production line, as well as laying off 1,680 staff in Spain. Jaguar Land Rover and Ford have already put in place reduced staffing plans.
Honda also reported a 41 per cent drop in worldwide second-quarter profits yesterday.
Stephen Foley reports from New York
Wednesday, 29 October 2008
Source: The Independent