GM and Chrysler Restructuring Plans Not Viable

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Tag: US Government assess GM and Chrysler's restructuring plans as insufficient and will not lead to long term viability.

April 6, 2009

On March 30th President Obama’s automotive Task Force released its assessment of GM and Chrysler’s viability plans submitted to the administration last February (See Analysis of GM and Chrysler's February 17th Restructuring Plans).  In December 2008, the outgoing Bush administration set a deadline of March 31, for both GM and Chrysler to restructure and show they can be viable business entities.  This was stipulated in the agreement in order for the companies to receive federal bailout loans (See The GM and Chrysler Bailout: Approved).  In a five page document discussing each company’s plan, the Obama administration reached their conclusion that the plans were insufficient and will not return each company to viability.  To date GM has received $13.4 billion and Chrysler received $4 billion in loans.  The companies were seeking as much as $21.6 billion in additional assistance.

The assessment by the Task Force identified a number of key material weaknesses in the company’s February viability plans.  However, a decision was made to not call in the earlier loans and force a bankruptcy as stipulated in the original loan agreement if restructuring targets were not met.  For example, at GM, bondholders were reluctant to reduce $27 billion in debt down to $9 billion and the UAW has refused to accept GM stock in lieu of cash to cover half of its $20 billion retiree health care VEBA trust, which was required under the agreement.  However, GM and Chrysler were given additional time to restructure with the possibility of receiving more financial assistance.  The following are the Obama administration’s near term resolutions for each company (See full reports below):

GM Resolution

 Chrysler Resolution

In addition the administration also announced a warrantee support program.  This initiative is intended to build consumer confidence in the industry with government guaranteed vehicle warrantees for domestic auto manufacturers that participate in the program. GM and Chrysler have already indicated their intention to participate.


The five page analysis of GM and Chrysler viability plans conducted by the President’s Task Force were suspect and maybe considered naïve, however, that may have been the point.  I disagreed with how the Task Force came to their conclusion but not their conclusions - that the plans if realized will not result in viable companies.  I point this out because the key members of the Task Force Steven Rattner and Ron Bloom lack of automotive background as well as the short time they had to make an assessment.

According to Automotive News, Rattner was a former New York Times reporter who worked with the US cable television operator Comcast as an adviser on its failed bid for Walt Disney and as an investor in its purchase of the Metro-Goldwyn-Mayer movie studio. He also was on the board of Cablevision Systems Corp.  Bloom has for the past 12 years advised the United Steelworkers and additional 11 years overseeing restructuring and merger deals, many involving unions.

The lack of experience and time was evident in their analysis, particularly for GM.  For example the Task Force raised a concern about the company’s market share estimate declining at a slower rate than over the past few years.  Even with GM shutting brands and reducing fleet sales, GM can hold market share losses to a minimum if investment is allocated to the remaining brands which was done during the phase out of Oldsmobile.  GM’s newer product has also shown to be well received in the market place.  If that trend continues, it is possible GM’s market share estimates in the future are possible.

The Task Force also pointed out GM has a negative perception problem with a public.  The statement is true and very real, however, GM’s latest product offerings have shown perceptions can change.

Also of interest was their concern that GM earns a disproportionate share of it profits from trucks and SUVs and that of the top 20 profit contributors in 2008, nine were cars.  This a true statement but the industry fleet mix, even today is 50% cars and 50% trucks/SUVs.

The assessment also states GM is at least one generation behind Toyota on advanced “green” powertrain development and that the Volt powertrain is expensive and likely not commercially viable.  I disagree with their assessment on GM’s hybrid development status.  No doubt GM’s implementation has been slow but they do possess the technology as evident by the two-mode hybrid powertrains in the fullsize trucks and the soon to be launched Saturn Vue.  The Task Force also seems to miss the point on the Volt.  Much like Toyota’s Prius, the Volt was never intended to be a profit center and will probably lose money on each vehicle.  The Volt is an engineering and marketing exercise first designed to showcase the company’s commitment to fuel efficient vehicles and change the company’s image with the public.

Finally the task force raised a “red flag” over GM free cash flow estimates in the plan.  GM conducted a break-even analysis based upon paying back the government loans based upon very conservative volume estimates.    There was uncertainty but that is true will all such exercises.

I did find the Task Force's analysis of Chrysler to be very accurate.  Chrysler is limited to North America with little global reach.  The company suffers from quality problems and their manufacturing and engineering capabilites have been gutted.  With a lack of resources the company cannot meet the stricker fuel economy requirements and there are almost no vehicle programs in the works that could lift the company out of its current position when the economy eventually turns around.  The Task Force identified many of the same issues I have been discussing for some time.


I ultimately agree with the Task Force's final conclusion that GM is not viable.  That is because since February, the market conditions have deteriorated further.  For the first three months of the year, the seasonally adjusted sales rate for each month has been well below 10 million vehicles for the year.  (See Forecast: US Auto Market May See Great Depression Like Collapse) March sales just released early in the week showed the sales rate improved slightly from 9.1 million vehicles to 9.3 million (Automotive New Rate).  At this point it is too early to speculate if sales have bottomed as one up month does not make for a trend. For the month GM and Chrysler reported sales drops of 44.7% and 39.3% respectively.  The industry as a whole was down 36.8%.  Under these conditions, GM needs to shed brand, dealers, debt and legacy costs quicker.  This may also allow GM the cover to tackle its legacy cost and debt burden for the last time.

GM is facing a situation where their overhead burden is not sustainable at current or projected market recovery levels at this time.  Simply, GM cannot survive at these volumes and the debt and legacy cost burden continues to increase as a percentage of their decreasing revenue.  GM’s viability plan had numerous weaknesses, continued reliance on fleet sales (could be profitable if done right), lack of revenue projections and the continued funding of the union health care VEBA trust that were not address in the governments assessment.  In any case the Task Force gave GM an additional 60 days to re-evaluate its restructuring plan and will provide financial support. 

Some form of bankruptcy remains an option for GM.  It appears the government understands that a traditional bankruptcy would destroy revenue as multiply surveys support the claim that buyers would stay away out of fear.

From an article on 24/7 Wall St.:

A new Consumer Reports survey shows that 78% of people polled are unlikely to buy a car from a bankrupt car company. Nearly two-thirds said they were highly unlikely to make a purchase under those circumstances. Another recent study by market research firm CNW polled consumers who plan to buy a new car within six months.  More than 8o% of the respondents said they would switch brands if the vehicle they wanted came from an automaker that went bankrupt. A third survey, this one from Rasmussen, showed that 51% of consumer said they would not buy a car from a manufacturer in Chapter 11. While the poll results are not the same, they point to a similar conclusion. GM and Chrysler will lose a tremendous amount of business if they are operating in bankruptcy.

As for the Obama Administration asking GM Chairman and CEO to step down as head of the company, I have mixed feelings.  Wagoner in the last 10 years has done more to positively restructure the company than any other CEO in the history of the company.  The problem I see is no amount of "traditional" restructuring right now can save the company unless the sacrifices by the union and bondholders are deeper than what the government first specified in December to address the worsening market situation.

Wagoner over the years has made a good faith attempt to meet GM's contractual obligations with its union.  At the same time he received large concessions from the union including a lower pay structure and a modern retirement program for new employees.  In addition he streamlined operations, reduced cost and finally focused the company on designing and producing world-class vehicles.  All of these actions has cost the company billions of dollars to accomplish in addition to billion paid out in the Delphi bankruptcy.  However, all of the above was at the price of taking on long term debt to the tune of $30 billion and a $20 billion liability with the union healthcare VEBA trust.

Trying to stay ahead of its legacy obligations was always a priority for Wagoner as health care costs have strangled the company.  Bankruptcy, to wipe out the company’s legacy obligations has been there only true legal option. If the company filed for bankruptcy protection years ago, because of the unintended consequence of destroying revenue from lost sales, the company may be in worse shape today. Overall, Wagoner could have done little to have prevented the company from slipping into the situation it is in now.  With that I do not agree with the Obama Administration’s decision to replace Wagoner on principle but in the end it may be what the company needs to achieve that fresh start.

I do believe ultimately GM needed a management “reset” and GM President and Chief Operating Officer Fritz Henderson is a natural choice to replace Wagoner.  The political symbolism was necessary to get both bondholders and the union onboard to begin the process of “white washing” GM’s liabilities and restructure the company for what I hope is intended to be the last time.

In an interview with NBC’s Nightly News on March 30th, Fritz Henderson told reporters:

… the company would still prefer to restructure outside of court, but the level of support Washington is offering would help the company quickly restructure through bankruptcy…Henderson says GM needs to work faster and go deeper to get more concessions from bondholders and the United Auto Workers union.

What I hope this means is, GM will get the dynamite and rebuild it has needed for 30 years.  Rattner and Bloom may not comprehend the nuances of the business and that is apparent in their assessment but they can grasp the fact that GM’s business model has failed.  With sales in the US at around a 9 million per year rate for the past three months, the Obama administration appears to be using the turmoil as cover to break the unions hold on the company.

GM has cut as much as they could from their salary and retired white collar ranks.  As of January 1st, white collar retirees no longer get company supported health care coverage.  It is time to reassess the union’s health care VEBA trust the company cannot afford.

The company has been warning since John Devine was Chief Financial Officer earlier this decade that GM's health care obligations were sufficating the company.

The following was from a health care policy industry report in 2004:

General Motors, one of the largest private purchasers of health care in the United States, is expected to report in its year-end financial report to the Securities and Exchange Commission that its future health care liabilities for retirees have surpassed $60 billion even after adjustments that reduce such liabilities under the new Medicare law, the Wall Street Journal reports (Hawkins, Wall Street Journal, 3/11). The Medicare prescription drug bill gives companies financial incentives and subsidies to continue providing prescription drug benefits to retirees. However, GM spokesperson Jerry Dubrowski said that "the sharply rising cost of health care is offsetting much of this relief" included in provisions of the Medicare law (Garsten, Detroit News, 3/11). The company will be taking the one-time reduction in future retiree health care liabilities from the Medicare law "right away," which will be reflected in GM's 2003-2004 report as a "change in our liability," according to GM Vice Chair and CFO John Devine. According to Devine, GM's future retiree health care obligations rose by a greater percentage than in 2002, when the company had $57.2 billion in health care liabilities, and the obligations are projected to "continue to swell" in spite of GM's success in slightly curbing the rate of health cost inflation during recent years, the Journal reports. During 2003, GM reported that it spent $4.8 billion, or about $3,966 per person, for health care benefits, and expenses are expected to increase to about $5.1 billion this year. Devine said costs are rising partly because GM is using a lower discount rate in its SEC report to calculate the present value of its future retiree health care obligations because of low interest rates (Wall Street Journal, 3/11).

Even though the assessment does not mention or call attention to labor cost it appears to be a big.  I was told from an automotive source one of the major stumbling blocks the Task Force had with GM’s viability plan was the union's hourly pay (and to a lesser extent salary pay). The government is seeking for union's wages to drop to a maximum of mid-teens per hour. Under the current aggreement, top wages are in the high 20s per hour.  If true, the Obama administration is walking a political fine line with the union and a supporter of the President.

Another issue is likely legal challenges the company may face from retirees if health care is cut.  Pulling health care from individuals that are already retired is difficult because the company had legally promised through labor negotiations to provide health care for employees that retire early (i.e. prior to 65yo).  This is one of the ways GM achieved their early retirement numbers. However, if you now tell the retirees that they have to pay for health insurance until 65 years old, then they retired under false pretenses.  For this reason GM could expect a massive number of lawsuits to hit later this year because of this.  For this reason I am not opposed to the company provided some form of bridge coverage for early retirees until age 65 and afterwards an increase in pension to offset Medicare insurance.  This would be similar to what GM did the first of this year with its salary retirees.

GM’s pension plan as of the end of last years was still about 90% funded (See GM Reports Full Year 2008 Financial Results and Opel Restructuring).  The union should make a decision if they want a pension or health care.  At this point in time, the company cannot support both. (See It May Be the Right Time for GM to File for Chapter 11 Bankruptcy).

GM’s is also going to have to move quickly with its bond holders.  According to an Automotive New report:

In negotiations with bondholders, GM last week offered 8 cents on the dollar in cash, 16 cents on the dollar in new unsecured debt, and a 90 percent stake in the automaker, one person with knowledge of the term sheet told Reuters.

According to JPMorgan analysts Eric Selle and Atiba Edwards, GM's swap offer would be worth about 13 cents of value -- 8 cents in cash, plus 16 cents for the new unsecured debt, which would trade at about 30 percent of par without a government guarantee.

Or bondholders can choose not to swap and be left to negotiate 5 cents of value in a bankruptcy, to avoid holding up the proceedings, Selle said in a report.

If bondholders are offered 24 cents definite value, made up of 8 cents in cash and 16 cents in government-guaranteed notes, bondholders may do the swap, Selle said.

"The solution comes down to the U.S. government's willingness to keep GM solvent," Selle wrote. "We believe the question isn't whether the US government is going to support GM, it is how they are going to choose to support GM."

The small cost of a bondholder guarantee would go a long way towards recapitalizing GM, according to Selle.

Another issues specifically the Obama administration will have to consider is estimated $1 trillion of Credit Default Swaps written against GM corporate bonds in case the company defaults.  Depending on how GM proceeds it is likely the government could pay twice in a GM bankruptcy as I wonder how much the insurance group AIG underwrote Credit Default Swaps on GM's debt.

In addition the bondholder and GM dealers will have to restructure also.  GM will have to divest themselves of SAAB, HUMMER, Saturn and possibly Pontiac sooner rather than later.  Speed is going to be critical to any successful restructuring of GM and it appears the Task Force understands this.  Hence I believe replacing Wagoner with Henderson will likely be the right move as it sends a signal to all parties that it is time to make the hard decisions.


The Task Force’s assessment of Chrysler was obvious, as the company cannot stand on its own, and the Task Force hedged and gave the company 30 days to finalize a deal with Fiat before pulling the plug.  Chrysler’s future with or without Fiat is suspect.

Frankly the 30 day extension the administration gave to Chrysler to conclude the Fiat alliance was the politically correct decision to make.  However 30 days may not be long enough to conclude the agreement.  I continue to believe Fiat is a weak suitor for Chrysler and will fail.  As I discussed before Fiat has a weak balance sheet and I question even with Chrysler receiving $6 billion if Fiat could provide the necessary support (Insight Into Chrysler's New Partner - Fiat Releases 2008 Results).

The global automakers have the capacity to produce 93 million vehicles a year.  That is approximately 30 million more than necessary.  The US market was crowded at 17 million sales per year and now unsustainable at 10 million.  I estimate that when the market does recover, manufacturers should target capacity for 13.5 to 15 million vehicle sales per year and certainly is not in need of Chrysler’s capacity and additional Fiat brands they intend to bring to the US.  I do not believe Fiat badged vehicles will sell in sufficient numbers to impact Chrysler plant utilization and 100,000 vehicles a year is an optimistic number.  Even if Chrysler were to adopt Fiat's small car platforms for the US market, I do not believe Chrysler will sell a significant number to impact the bottom line positively.  Even with the likely shift to smaller cars in the US because of fuel economy requirements and possibly higher fuel cost, the market may not shift to the point where Chrysler could take full advantage of the alliance.

The Wall Street Journal reported last week, Cerberus which owns 80% of Chrysler will give up its share of the company as part of the latest restructuring effort.  In addition, Cerberus does plan to retain a stake in Chrysler’s lending arm. At this time I am still left uncertain how Daimler's 20% stake in the company factors into the situation.  It is also being reported that JPMorgan, Citigroup, Goldman Sachs and Morgan Stanley which loaned Chrysler $6.8 billion, who have been resisting government pressure to swap more than $5 billion of that for stock are now open to a deal (See Chrysler Debt Sells for Junk).


I hope the Tack Force sees the big picture and understands that to save GM and Ford they may have to sacrifice Chrysler.  There is the human side of this that must be contended with, however, closing Chrysler should help remove that excess capacity and pricing pressure from the market.  Almost instantly GM and Ford will be in a healthier position.  As for Ford, just because they are not sharing the front page with GM and Chrysler it does not mean they are not in the same hole.



Official White House Releases

Fact Sheet on the New Path to Viability for GM & Chrysler (pdf)

Warrantee Commitment Program Explanation (pdf)  

GM Viability Assessment (pdf)  

Chrysler Viability Assessment (pdf)  


Additional Reading:

This supports much of what I have been writing the past year on the state of Chrysler.

Editorial: Chrysler Suicide Watch 44: Will the Last One Out of the Building…, The Truth About Cars, April 2009

Task force cites 5 key flaws in GM's viability plan, Automotive News, March 2009

Transcript: GM CEO Fritz Henderson on Meet the Press

Cerberus Tries to Get Chrysler Out of a Ditch, New York Times, March 31, 2009


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Tue Apr 07, 2009 2:05 pm
Name: haypops | Comment: Certainly customers resistance to buying from a "bankrupt" manufacturer is understandable. I wonder if we are not there already. Doesn't the constant bad press and discussing of bankruptcy or bankruptcy protection lead to a reluctant customer too. I think we are there already and the actual legal filings will have only small additional deleterious effects.

Wed Apr 08, 2009 10:52 amFrom the noise in the news it sounds as if GM will file for some sort of "quick wash" bankruptcy soon. If they do it quickly and get positive coverage by Obama, maybe the lost sales could be minimized.

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