Analysis of GM and Chrysler's February 17th Restructuring Plans

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February 20, 2009

On late Tuesday afternoon GM and Chrysler submitted and released their viability plans to the US treasury. Both automakers plan’s called for more federal assistance amidst market conditions that have eroded further since both first presented their case back in December of last year. Also on Tuesday, GM received the$4 billion tranche that was agreed upon with the Bush Administration last December. Links to the full viability plans are provided at the end of this article.

General Motors

GM initially received $9.4 billion in federal loans for a total to date of $13.4 billion. The company originally request $18 billion including a $6 billion line of credit to draw from in case conditions worsened. GM received the last installment of a previously approved $13.4 billion loan on Tuesday, but is requesting another $4.5 billion to meet its December request of $18 billion. The current market conditions are far below its December baseline estimates of 12 million vehicles. The recent viability plans are based upon a baseline of 10.5 million sales in 2009 (Figure 1). Its downside estimate is now 9.5 million vehicles.

The company also formally announced an extensive restructuring based upon the new baseline estimates. The restructuring will close 5 plants and bring the breakeven volume of the company at about 20% market share to 11.5 to 12 million vehicle market. This is down from 12.5 to 13.0 in December. Based upon the latest estimates the company is now requesting a total of $22.5 billion in federal aid, up $4.5 from December. In addition if the market weakens to its downside targets, the company is requesting and additional $7.5 billion for a total of $30 billion. The increase reflects the change in the economic conditions as well as $4.5 billion from a revolving line of credit coming due in the fall of 2011. The company also assume $7.7 billion Section 136 loans from the Department of Energy that will fund fuel efficient vehicles. The company announced is is in discussion for financial support from Sweden, German and Europe, Canada and Thailand and India for over $6 billion to support its overseas operations.

 

Figure 1: Projected Sales Volume

GM plans to begin repaying the loans in 2012 and fully repaid by 2017 under its baseline estimates. However, Figure 2 outlines GM's cash flow estimates assuming its more conservative downside market estimates presented in Figure 1. Under its baseline market estimates the company expects to return to profitability by 2012. Under its downside estimate GM will have to take on additional debt to maintain its minimum cash on hand to run the company.

 

Figure 2 Projected Cash Flow Based Upon Downside Estimate

The company also outlined and established restructuring milestones (Figure 3). As part of the December loan agreement, the company much reach labor cost parity with foreign transplant manufacturers by the end of the year from 2011. In the US the number of hourly and salary employees will drop from 92,000 to 72,00 and will cut nearly 50,000 jobs worldwide. These job cuts represent 19% of GM's workforce and most will come from GM's overseas operations.

The company will also reduce it US manufacturing facilities from 47 to 32 by 2014 cutting its production capacity by about 1 million. More importantly, the majority of the remaining assembly plants will be "flex" plants that will be able to build a wide variety of vehicles and vehicle types based upon market demand.

GM is still working with its bondholders and the UAW labor union to reach an agreement to swap a portion of its debt for equity in the company. Signed letters from both parties agreeing to negotiate were presented in the plan. Given the complexities involved, it was probably not reasonable to assume deals would be reached by Febuary 17th.

 

Figure 3: Restructuring Plan Operating Milestones

GM is also expecting its market share in the US to remain relatively steady at about 20% (Figure 4). However, GM still plans to remain strong in fleet sales, which will account for about 28 to 23% of its volume.

Figure 4: Projected Sales Mix

 

GM also plans to finally address it bloated brand structure in the US and will downsize the number of brands and nameplates it plans to support going forward.  GM had placed Saturn, Hummer and SAAB under strategic review and previously said Pontiac will become a limited line brand.

The New York Times compiled a list of GM GM’s brands at their height and where they stand at the end of 2008 (Chart 1).  It is interesting to see how far GM's mid-market brands, Pontiac and Buick have fallen in the last 25 years.  It is worth noting that Oldsmobile is not on that list because it was phased out of the US market earlier this decade after experiencing a similar drop in sales.


Peak Sales Year Peak Volume 2008 Volume
Chevrolet 1984 2,924,405 1,790,519
Buick 1984 941,611 137,197
Pontiac 1986 841,441 267,348
GMC 2004 581,684 361,739
Cadillac 1984 320,017 161,159
Saturn 1994 286,003 188,004
Hummer 2006 71,524 27,485
SAAB 1986 48,250 21,368

 Chart 1: GM Brand Sales at Peak Vs. 2008

Saturn as a GM brand will be phased out.  It seems the franchise agreement GM has with Saturn dealers is flexible enough for the dealer body to be spun off as a separate entity. If a buyer for the dealer network is not found GM is committed to closing the brand by 2011 at the end of the current products life. What the numbers in Chart 1 do not show is that Saturn has five nameplates today and some of the best product GM has manufactured and the brand could not gain traction in the market place selling less now than in 1994 with a single line of vehicles.

Just in the last week, retiring GM Vice Chairman of Product Development Bob Lutz said the Saturn brand was unlikely to survive the lastest GM restructuring.

Bob Lutz told Automotive News:

“My personal favorite would be to see Saturn survive and prosper but frankly, the reality is that is probably not going to be the outcome.”

The future of SAAB as far as GM is concerned has been decided and will become an independent business entity on January 1, 2010 unless a buyer can be found and the company sold off. As part of the viability plan GM will cap its funding of SAAB. Just today, SAAB filed for a Chapter 11 like bankruptcy in Sweden. GM sought financial aid from the Swedish government with the transition of SAAB but that was apparently rejected. SAAB is attempting to become an independent company and seeking $793 million to be self financed. Last year the company reported it lost $350 million. A decision to sell or phase out the Hummer brand will be made by March 31, 2009.

Pontiac will become a limited line, niche brand within the Pontiac-Buick-GMC sales channel. For all practical purposes this will result in the brand being discontinued at the end of the life cycle of the current Pontiac vehicles. These moves will further reduce its nameplates by 4 to 36 by 2012 compared to December's plan (Figure 5).

As for GM Europe, Detroit News is reporting the business group is open to partnerships if it makes sense for the “sustainable success” of GM Europe and Opel. The German government has offered Opel $2 billion in loans as it struggles in the current economic environment. Europe is a very tough mature market and GM Europe-Opel has been struggling for about the last 10 years to be profitable. The viability plan did not specifically comment on a sale of Opel, but at the press conference, GM management sarcastically stated when asked, they had "no offers for Opel".

However GM Europe President Carl-Peter Forster said:

"Management is willing to consider strategic third-party partnerships, alliances and equity stakes in case such an approach is seen as beneficial for GM Europe and Opel's viable and sustainable future."

Recently the German state of Thuringia would consider a stake in carmaker Opel if the German subsidiary is spun off.

This is important development from the standpoint Buick instead of Saturn will now align with Opel and the current policy is to share products with Buick in China. At the press conference detailing the viability plans, GM Chairman Rick Wagoner stated GM is committed to its China operations and continues to believe China is the future of the company.

 

Figure 5: Restructuring of Nameplates

Chrysler

Chrysler’s plan requested a total of $9 billion in federal assistance. To date the company has received $4 billion dollars. The request is up $2 billion from its initial request of $7 billion in December. Chrysler also plans $6 billion in DOE Section 136 funds. Based upon its estimates, the company plans to begin repaying its loans starting in 2012. From a risk analysis perspective Chrysler's viability plans were not as comprehensive as GM's.

The Chrysler viability plan outlined its debt structure based upon the requirements set forth in the December loan agreement. It appears Damiler and Cerberus both will forgive $2 billion, however, earlier loans with the banks such as J.P. Morgan will not be (See Chrysler Debt Sells for Junk). After the debt relief, Chrysler will still owe upwards of $30 billion dollars with over half owed to the US Government. As stipulated in the December loan agreement, half of the UAW healthcare VEBA liability will rolled into equity.

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Figure 6: Chrysler Debt and VEBA Restructuring

The company’s plan calls for 3,000 additional job cuts and eliminate the Dodge Durango and Chrysler Aspen SUVs and the PT Cruiser. These cuts have previously been announced.

Chrysler painted the grim market environment for the automotive industry as the credit crisis unfolds and economic conditions degenerate (Figure 7). The market for asset back securities has collapsed, consumer are required to put more money down to purchase a vehicle ultimately reducing the opportunity for consumer to get the necessary financing to purchase a vehicle. All of these issues have hurt the whole industry.

 

Figure 7: Automotive Financial Climate

With Figure 8, Chrysler has illustrated the collapse of the US vehicle market. Just over 70% of all its sales and 74% of all its employees are dependent on the US market.

 

Figure 8: Historic US Sales

Chrysler presented a basic risk analysis (Figure 9) outlining it cash needs based upon market conditions. At current level Chrysler estimates it needs $9 billion, up from $7 billion when the market was at 12.6 million sales. Its current request assumes 2009 sales to come in at 10.1 million. This is consistent with GM's baseline estimate of 10.5 million sales. However if sales drop to 9.8 million, Chrysler's cash need goes up to $11 billion. At 9.1 million sales, the company and industry is no longer viable. Chrysler assumes its share of the market will remain at 10%. See the Appendix for Chrysler's sales estimates through 2016. Chrysler is more conservative than GM further out.

 

Figure 9: Chrysler Market Scenarios

Chrysler presented business cases for remaining a standalone company and if they formalize the proposed alliance with Fiat. Since I remain convinced, Chrysler cannot survive as an independent company I will just present the company’s plans assuming it goes forward with the Fiat deal. The whole point of presenting the standalone option was to convince the Treasure to approve the alliance.

Basically Chrysler promoted greater economics of scale with platform and powertrain sharing under a Fiat alliance. The cumulative cash flow impact with an alliance is expected to be $6.9 billion by 2016. However,any benefit is not expected until 2012. I would expect as much because of the product lead time, however, Chrysler’s problems are urgent. Chrysler specifically requested $5 billion in additional loans and the Treasury Department approve the alliance with Fiat to expedite technology transfer between the two companies. Chrysler also plans to spend $2.3 a year in capital expenditures to support product development. Chrysler did not present a worst case cash flow analysis like GM (Figure 10).

 

 

Figure 10: Chrysler Cash Flowt As Independent Company (Billion)

 

Analysis

What was very disappointing was the lack of transparency in plant closures and plant utilization targets. It is understandable because details likely still need to be worked out with the UAW, however, such information is necessary to guage the viability of both companies. I was less concerned with GM than with Chrysler because much of its plan is contigent on the Fiat alliance. Both manufacturers did not provide a restructuring that significantly deviated from the December plans presented to congress or plans announced prior to the credit crisis.

GM and Chrysler were asked to assess bankruptcy as an option to restructure the company. With the progress that has been presented it really does not seem to be a viable option for either company at the moment. For completeness I will discuss what was presented.

GM presented three bankruptcy scenarios and all assume the US government would provide the Debtor in Possession (DIP) financing. GM’s baseline out-of-court restructuring is estimated to cost the US government $27 billion. The three scenarios are as follows:

I. Pre-solicited or pre-packaged Chapter 11: Requires advance approval of debt holders for a debt-reduction deal. Would also require advanced approval by the UAW of a debt-for-equity swap for money owed to the UAW's health-care VEBA for retirees. This option would take about 60 to 65 days and cost the US government $36 billion or $9 billion more than an out-of-court restructuring.

II. Pre-negotiated "cram-down" plan: GM would seek tougher terms from creditors and the UAW. It is expected the more aggressive plan such as a complete conversion of bond debt and VEBA to equity. The option was estimated to take 90 to 180 days. It would cost $46 to $55 billion in Federal assistance to complete and at least $19 billion more than an out-of-court restructuring.

III. A traditional Chapter 11 bankruptcy: would take 18 to 24 months and cost $71 to 86 billion. This scenario is estimated to cost at minimum $44 billion more than an out-of-court restructuring. Chapter 11 would accomplish a more comprehisive restructuring of the company's liabilities, however, adversely impacting revenue.

GM did present the likely scenarios of lost consumer confidence if they were to file Chaper 11 and based upon the Daewoo bankruptcy sales could drop 40 to 80% compared to pre-banruptcy levels. With the shorter 60 to 90 day pre-packaged or "cram-down" plan, the company estimates sales could drop 5 to 10%. It is my opinion reality is somewhere in between, however, GM's concern must be considered and is real. Any sort of bankruptcy will likely result in a significant drop in revenue globally. 

Chrysler estimated it would need to secure $24 billion in DIP financing and does not assumes a private source of funds. The company argued that it is unlikely to secure private funds and the company would need to liquidate placing the burden on local communities and tax payers in excess of the money they request for federal assistance. The company further estimates that if liquidated creditor may received between $929 million and $3.241 billion in recovery. Given the loans the federal government has already issued to Chrysler, the Treasury would recover $146 to $266 million dollars.

In both cases, the bankruptcy analysis presented appears to be reasonable and plausible.  A bankruptcy would almost mean certain liquidation if revenue drops as much as GM estimated.  Bankruptcy is still an option if the creditors do not work with the companies.

US sales continue to deteriorate which puts into question the assumptions made by GM and Chrysler. The seasonally adjusted sales rate for Januray 2009 was at 9.6 million vehicles. J.D. Power and Associates has released its mid-month sales forecast and is estimating February is running at under 9 million vehicles.  The market is moving dangerously close to Chrysler unsustainable level of 9.1 million vehicles if this weakness continues for another 8 to 10 months.

The success of these plans come down to execution and I am very wary of Chrysler more so than GM. GM still has sheer size and market penetration in its favor going forward which Chrysler does not have.This industry is sensitive to the consumer market and both companies for right or wrong have perception problems with the US consumer. GM and Chrysler both spent many pages showing they are not the bloated out of touch manufacturers they were 10-15-20 years ago producing inferior product compared to the competition.

However in this industry it always comes down to the product. GM argued that with fewer divisions the company can allocate their advertising dollar more effectively. Chrysler argues that the alliance with Fiat will improve US capacity utilization, open up new emerging market to them as well as open up Fiats technology tool box. Beside Jeep, minivan and Ram, Chrysler brands have little equity with consumers and few hits in the market even after Daimler revamped its whole product lineup prior to the sale to Cerberus.

GM based upon the level of detail and consumer acceptance of their most recent products finally gets it after all these years. But that will take time for the market to actually believe it. GM has showed back in July their new products are commanding a higher transaction price and a broader market appeal which will help profitability (See Upcoming GM Product May Save the Company). In the case of Saturn, failure lies more with the lack of resources to continue on with the product renaissance and properly market it to alter consumer perception than with the product itself and the strategy. Today GM just does not have the cash to support all of their current brands. Focusing on Chevrolet, Buick and Cadillac as fullline brands with the proper marketing support makes the most sense. Also, GM has in the works a full pipeling of vehicles to release over the next year. By finally restructuring its brands, GM has a good chance of making the company viable. If only the global market holds out and the rest of their operations do not fall apart.  GM still owes us their 4th Quarter and full 2008 financial report.

The biggest caveat I have with GM is the restructuring of its debt is still critical to any success. For reasons I have stated previously (See It May Be the Right Time for GM to File for Chapter 11 Bankruptcy), a bankruptcy filing may be the only way out of this crisis if both the UAW and bondholders do not step up to the plate and take their hair cut. From the documents provided it does appear all parties intend to cooperate.

As for Chrysler, I just am not comfortable with their viability plan because the company presented a framework without detailing  how the Fiat alliance will work in the current market conditions. As I showed a few week ago, Fiat is not a financially sound company (See Insight Into Chrysler's New Partner - Fiat Releases 2008 Results). Yes, Fiat could help in good economic times, Chrysler expand into new markets but these are not ordinary times. The US is not a growth market or even by Chrysler or GM’s estimates will be a growth market most of the next decade and yet Fiat wants to reenter the US. The US market is not expected to reach old highs for years. The US market is already crowded and long time European competitor VW in a good year sells about 300,000 vehicles. That is the output in one Chrysler plant. Is it possible in the near term, Fiat can fill Chrysler excess capacity even with flexible plants? I do not think so. It could take years for Fiat under its own brands to sell that sort of volume. Also, Chrysler's product development portfolio is weak and will require investment as well as time to work out. Two or three years to kick off Fiat based products is an eternity in automotive. The company acknowledged in their plan it will not be until 2012 when the alliance begins to bear fruit. That is unless Fiat could donate federalizes vehicles from Europe in the next few months for Chrysler to sell under its own brands.

In conclusion with today’s economy as fragile as it is, there is little chance the Obama administration will step up and call in the Bush loans and push either company into bankruptcy. Each company will receive enough money to survive if not the full baseline sum requested. There are no easy answers to the decisions that need to be made. Without having the power of God to make things happen, the situation is what it is and logic is no longer valid.

Just a thought. Personally if sanity every returns to the automotive markets I would like to see GM, Fiat and Chrysler form an alliance. Not on this site but I was an advocate of the GM-Fiat deal from earlier this decade that was dissolved around 2005. There continues to be great opportunities between GM and Fiat in Europe and Latin America. This assumes each can be viable in the near term to pull it off.

Resources:

Chrysler Press Release

Chrysler Letter to Stakeholders

Chrysler LLC Restructuring Plan (pdf)

GM Press Release

GM Restructuring Plan (pdf)

GM Media – Government

Appendix:

 

Figure 11: Chrysler's Market Projections Range

Entire contents © 2007 - 2009 The Automotive Lyceum All Rights Reserved



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