US Big 3 Automaker's Bailout Plans

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December 3, 2008

The US Big 3 automakers, General Motors, Ford and Chrysler yesterdy released their plans in support of a request to receive Federal loans as the three companies quickly run out of operating cash. These announcements come as November sales were down 36% in the US with GM, Ford and Chrysler showing declines of 41%, 32% and 47%. This was also the third consecutive month, industry sales have been under 1 million with demand in the US at a 26-year low. The big volume Japanese companies Toyota, Honda and Nissan also saw their sales fall, 24%, 32% and 42% respectively (Table 1).


November November November 11 mos. 11 mos. Pct.

2008 2007 chng. 2008 2007 chng.
Aston Martin 100 172 –41.9% 1,500 1,030 0.456
BMW Group 19,784 27,021 –26.8% 281,956 302,468 –6.8%
Chrysler LLC 85,260 161,088 –47.1% 1,363,309 1,885,227 –27.7%
Daimler AG 16,007 22,841 –29.9% 228,893 226,146 0.012
Ford Motor Co. 122,723 182,096 –32.6% 1,863,954 2,348,404 –20.6%
General Motors 153,404 261,273 –41.3% 2,734,789 3,502,774 –21.9%
American Honda 76,233 111,431 –31.6% 1,342,680 1,419,750 –5.4%
Hyundai Group 34,403 56,060 –38.6% 636,458 701,927 –9.3%
Isuzu 130 496 –73.8% 4,570 6,606 –30.8%
Mazda 14,134 20,580 –31.3% 245,984 271,181 –9.3%
Mitsubishi 5,096 7,983 –36.2% 92,687 123,089 –24.7%
Nissan 46,605 80,684 –42.2% 889,249 978,682 –9.1%
Porsche 1,378 2,662 –48.2% 23,881 31,802 –24.9%
Subaru 13,706 14,868 –7.8% 170,412 168,469 0.012
Suzuki 3,216 5,987 –46.3% 81,215 94,523 –14.1%
Tata Motors 3,220 20,062
Toyota 130,307 197,189 –33.9% 2,075,709 2,396,426 –13.4%
VW 21,290 27,133 –21.5% 288,139 298,708 –3.5%
Other (estimate) 548 751 –27.0% 7036 7,094 –0.8%
TOTAL 747,544 118,0315 –36.7% 12,352,483 14,764,306 –16.3%

Table 1: November US Sales (Source Automotive News)

The significant drop in sales come as the National Bureau of Economic Research announced officially the US economy slipped into recession in December 2007. The current “Global” recession is expected to last at least through the first half of next year. This economic downturn is already the third-longest since the Great Depression, behind 16-month slumps in 1973-75 and 1981-82.

Adding to the pressures for the industry, auto sales worldwide are slumping. Sales have weakened in Europe and were down almost 15% in October. November sales have been significantly worse. From the data that has been released, new car registrations in Spain were down 50%, with Sweden and France showing declines of 36% and 14%. Sales in Europe were down as an aggregate 8% in September, 15 % in August and over 5% so far for the year. In light of the lack of demand, the European manufacturers are beginning to take drastic action to cut production.

In response to economic climate the leaders of the European automakers appear uneasy about the situation:

BMW’s CEO Norbert Reithofer:

"… the worst crisis BMW has faced in its history"

VW’s CEO Martin Winterkorn

"We have never before seen this kind of crisis …"

Daimler’s CEO Deiter Zetsche

"the worst crisis since World War II".

The situation in Asia is no different as sales declined in Japan 27% and in South Korea 9% for November. The latest sales in Australia have not been compiled yet but in October the market weakened by over 11%. Even China, one of the hottest markets showed declines in November with sales down 15% from a year earlier. Up until recently, vehicles sales in China was growing at a 20% annual rate.

Toyota's vice president Mitsuo Kinoshita:

"… an emergency of a magnitude we have never seen before."

The Bailout Plans and Upcoming Congressional Hearing

Suffice it to say; as the US manufacturers head to congress again to request a bailout, they do so partly because of problems of their own making but also they are trying to operate under the worst global economic climate since the 1930s. Yet in the coming days as auto manufactures plead their case for cash, they will again face an inhospitable climate on Capital Hill.

House Majority Whip Jim Clyburn, said:

"If I had my way, all three of those guys (Big 3 CEOs) would be in the unemployment line and I think that ought to be one of the conditions for us doing this (the auto loans),"

"We need to have new leadership. That's what we would do if we had this kind of failure on a football field. We would be getting a new coach -- sometimes a new athletic director. ...We need to clean house with these guys and bring in new people."

All three companies submitted action plans to congress as specified at the last round of hearings back in November (US Auto Industry Congressional Bailout Hearings). For the most part each company outlined, their liquidity requirements and the amount of loan dollars needed. The CEOs of each company agreed to accept the symbolic $1 in salary, cut the dividend to shareholders, reduce the salary of executives, etc. The three plans also covered the progress each has made in their ongoing restructuring of their respective cost structure including progress made in reducing legacy cost and manufacturing cost through a new auto workers union labor agreement. Also highlighted were the gains already made in making more fuel-efficient vehicles and their plans to implement advanced fuel-efficient vehicles in the near future to meet stricter Federal fuel efficiency requirements.

The plans addressed concerns raised at the last hearings and attempted to educate congress and the public, the Big 3 are not the same companies they were in the past. The documents presented many facts to debunk the industry's negative perception Congress reinforced last month. Furthermore the documents stressed the companies have been aware of their deficiencies and have been proactive in trying to correct their historical structural as well as product acceptance issues (quality, fuel economy, desirability). Given the contentious hearings and negative reaction the CEOs received, I believe the documents address the questions and concerns raised and is tailored to the target audience (Congress and general public).

Ford’s Plan:

Ford’s plan is consistent with the business model they have outlined as part of their greater One Ford – One Team – One Plan restructuring effort. Of the Big 3, Ford is not in an immediate need of cash. As of September 30th the company had $19 billion in cash and an available $11 billion line of credit. As a result, Ford is requesting a $9 billion line of credit with the government as a lender of last resort with the goal of completing the restructuring without accessing the loan.

To protect the taxpayers, any loan from the government would have to be structured as senior debt in case of a possible default. If the market deteriorated further and the company had to draw down from the line of credit it risks defaulting on older debt. In the plan the company states:

A condition of senior status for any government loan could cause lenders or holders of our debt to allege a debt default, which could result in an acceleration of indebtedness and lead to the very result the legislation was designed to prevent, namely, a liquidity crises.

Ford did outline, if vehicles sales are on the downside of its estimates, drawing down from a Federal line of credit will be a certainty as funding needs would increase to $13 billion. Ford’s baseline funding requirements is $9 billion and if the market recovers strong that would decrease to $6 billion. Baseline sales volume in Table 2.

Ford 2009 2010 2011
Upside 12.5 14.5 15.5
Baseline 11 12.5 14
Downside 10.5 11 12

Table 2: Ford US Sales Range Estimates (millions)

GM’s Plan:

Given GM’s immediate need of cash, their plan calls for an immediate $4 billion in December 2008. The company also is requesting term loans of up to $12 billion to provide adequate liquidity levels through December 31, 2009. In addition to the bridge loans, the company is requesting a $6 billion line of credit to provide liquidity should a severe market downturn persist. The company also plans to begin repaying the loans as soon as 2011. The total request is Federal aid is $18 billion.

Under the plan, GM would significantly reduce the debt currently carried on its balance sheet. GM intends to negotiate with current lenders, bondholders and its union’s changes to current debt structure. The status of existing trade creditors is to be preserved and all outstanding warranty obligations to both dealers and consumers will be honored.

The revolving credit facility of $6 billion could be drawn upon should severe market conditions continue, resulting in sales of 10.5 million total vehicles in 2009. The company expects to fully repay the bridge loan by 2012 under their baseline industry volume assumptions (Table 3). At the completion of the restructuring outlined in the plan, the company expects to be profitable at US sales volumes between 12.5 and 13 million vehicles. According to the company's estimates, under the baseline market conditions, they plan to draw down $10 billion in 2009 to have $14 billion in liquidity. The downside senario calls for the company to take $15 billion of the requested loan to have $13 billion on hand at the end of 2009.

GM 2009 2010 2011
Upside 12 14 15.5
Baseline 12 13.5 14.5
Downside 10.5 11.5 12

Table 3: GM US Sales Range Estimates (millions)

As a result of the debt restructuring and possible government warrants the company expects to substantially dilute the current number of outstanding shares. This should wipe out the value of current shareholders for a long time to come if the company can pull out of this situation. However, a bankruptcy will likely reduce the equity in the company to zero anyway and debt holders would receive pennies on the dollar.

Chrysler:

Chrysler will have about .5 billion in available cash by the end of 2008 and is requesting a $7 billion bridge loan by December 31st. The company outlined its plans to launch 24 major new product launches through 2012 including four types of electric vehicles (one electric-drive vehicle in 2010 with additional models by 2013). In the near term, Chrysler expects to maintain about a 10% market share in the US with the estimated market volumes presented in Table 4. The company also believes they can begin generating a positive cashflow by 2010 ($4 billion increase compared to 2009) and start repaying the loan in 2012 (Table 5).

Chrysler 2009 2010 2011
Upside 12.1 13.1 14.7
Baseline 11.1 12.1 13.7
Downside 10.1 11.1 12.7

Table 4: Chrysler US Sales Range Estimates (millions)


2009 2010 2011 2012
Operating profit 0.4 2.6 2.0 1.8
Net cash change (2.0) 2.3 1.6 1.1
Ending cash balance 7.5 9.8 11.4 12.5

Table 5: Baseline Cash Position and Operating Profit Assuming $7 billion Loan (billions)

Chrysler estimates it will have operating profits of $400 million in 2009, $2.6 billion in 2010, $2.0 billion in 2011 and $1.8 billion in 2012.

Conclusion:

I did not see anything significant or dramatic in the plans presented besides the cash amount requested from the governement. Ford and GM seem to moving forward on previously announce plans. The plans were also based upon market volume assumptions from the early 1980 recession which I have previously discussed (Black September - US Auto Sale Collapse and The Pending Great Reckoning) and at the time believed were valid especially at the lower target of about 12 million annual sales for 2009. With that I believe GM and Ford’s plans may have merit but I am very skeptical as to how long and deep this recession will be and their cuts may not be deep enough. Another area of concern is the lack of depth as to the impact the global recession will have on their overseas operations and possible implications to the US restructuring. As I have outlined earlier, the global auto market is dropping fast and this can have serious cash flow implications to the parent company. GM and Ford generate about half their revenue from markets outside of North America.

More so, I am especially skeptical about the plan Chrysler presented. First off, I have consulted a number of people familiar with Chrysler and the consensus was the company does not have 24 major new product programs that are funded and on the glide path for production. This may be true if one only factors in paper planning or model designation symantics instead of real product programs in development. Also, given all the recent layoffs and buyouts, I question if the company has the technical headcount left to develop the vehicle programs that are discussed. It appears over 40% of the staff took the buyouts. Not to mention, out of the three plans presented Chrysler's was the weakest as far as establishing a solid business case for the government loans.

Overall, I was disappointed with all three company's viability plans available to the public (Congress received confidential versions) because there was little risk analysis given the uncertain economic conditions globally. I belive the business case was made from all three manufacturers that a collapse of the US based auto industry will have dire economic consequences for the country at this time. Other than a rehash of previous announcements, there was little new insight into how these companies plan to survive. Although, this may be the perfect time for the serious rethinking at the Big 3, that has been called for by many analyst including myself for years now. I just did not see that in the plans.

Starting tomorrow we will see what Congress thinks of the plans.

 

 

 


Resources:

GM Business Plan

GM SEC Form 8-k

Ford Business Plan

Chrysler Business Plan


Entire contents © 2008 The Automotive Lyceum All Rights Reserved

 



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