Automotive News - November 17, 2008 - (Page 34) 34 • NOVEMBER 17, 2008 How bailout money would change GM Jamie LaReau jlareau@crain.com Strings attached In return for a Detroit 3 bailout, congressional Democrats will demand Restrictions on executive compensation Development of more fuelefficient vehicles A government equity stake in the companies troduction of fuel-efficient vehicles — something he is willing to do. The Chevrolet Volt electric hybrid is on track to come to market in November 2010. And the Chevrolet Cruze — a small sedan that could top 40 mpg — is expected to debut in the summer of 2010. But Wagoner said he would discourage calls for additional pay cuts for hourly workers — a demand that Republicans are likely to voice. Without further concessions, particularly in benefits, it “may lead to the need for additional taxpayer support down the road,” wrote Himanshu Patel, a J.P. Morgan analyst. UAW President Ron Gettelfinger says he will resist any further concessions. He says the union already has accepted major pay cuts in the current contract. But as Hoselton points out, those concessions were made when the industry was selling 16 million units “The reality is if you and I the taxpayer are going to cough up money to save a business in a capitalist society, that’s unusual, right?” Hoselton says. “So it should provide concessions all the way around.” Even if GM gets a bailout — and even if it slashes production and restructures — some analysts fear it will never truly recover. Last week, Deutsche Bank Securities analyst Rod Lache lowered its price target on GM equity to zero. In an investment note, he wrote: “Even if GM succeeds in averting a bankruptcy, we believe that the company’s future path is likely to be bankruptcylike.” c DETROIT — Even if General Motors gets a congressional bailout to survive the next year — an outcome very much in doubt — the company will emerge in 2010 looking very different. For starters, it will be a lot smaller. According to some estimates, GM must slash North American production as much as 700,000 units — the equivalent of 2½ assembly plants. It will be partially owned by taxpayers; it will produce smaller, more fuel-efficient vehicles; sales incentives will drop; and departing executives won’t be getting huge pay and benefits packages. Let’s assume, for the moment, that Congress gives GM the $12 billion it needs to survive next year. That bailout would be part of a larger $25 billion bailout of the Detroit 3 that Congress will debate this week — a debate that will be contentious. Any bailout will come with strings attached. Democrats will demand limits on executive compensation and partial government ownership. Republicans might seek further cuts in hourly wages. And environmentalists may demand more fuel-efficient vehicles. Here’s what GM is likely to do in return, based on an exclusive Automotive News interview this month with CEO Rick Wagoner and projections by industry analysts. From left: GM’s Rick Wagoner, Bob Lutz and Fritz Henderson unveil a production version of the Chevrolet Volt in September. Wagoner says he will speed up Volt production if that’s a condition of a government bailout. maintain its market share. But here’s the downside of production cuts: GM’s cash burn will rise as assembly plants operate well below capacity. Production cutbacks could raise GM’s cash burn by an additional $500 million to $750 million a quarter, estimates Brett Hoselton, director and senior automotive analyst at KeyBanc Capital Markets in Cleveland. On the other hand, a production cutback would allow GM to reduce sales incentives. According to Edmunds.com, GM incentives this year have averaged $3,600 per vehicle. If the company can slash incentives, it could save billions. Dave Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., says GM’s strategy is straightforward: Cut production to meet demand, then generate more revenue per vehicle to offset the cost of idle capacity. As Cole puts it, “You want to turn it into a seller’s market.” Any bailout will come with strings attached. Those strings are certain to include government equity in the automakers and limits on executive compensation and bonuses, says Dave Pollock, a spokesman for U.S. Sen. Carl Levin, D-Mich., who is expected to introduce a bailout bill in the Senate. A warrant allows the government to buy equity in GM, somewhat like a stock option. For example, if GM’s stock rises from $3 a share to $10, the government can buy the stock at $3 and sell it on the open market for $10. The government also is likely to impose limits on executive compensation and huge pay and benefits packages for departing executives. It could restrict severance pay for GM’s top five executives to three times their base salary. Congress also might demand “claw-backs,” which require executives to pay back their bonuses if a company must revise its previous earnings downward. And a deal could limit corporate tax deductibility on executive pay to $500,000, analysts say. Last week, GM’s Wagoner told Automotive News that he would accept these concessions in return for financial assistance. “Whether that’s warrants, restrictions on executive compensation and golden parachutes, these kinds of things, we’ve said we’re very willing to accept those,” Wagoner said. But he was cool to speculation that Congress might make a bailout conditional on his resignation. “To be honest, that would be counterproductive,” Wagoner said. “What the industry needs now is the most competent, most experienced, most capable leadership team they can have at each of the companies. I think we have a great team at GM.” Production cuts GM must reduce its North American production of vehicles to 2.7 million units or so, according to an estimate by Gregg Lemos Stein, an industry analyst at Standard & Poor’s in New York. That would be a steep cut from GM’s likely production of 3.5 million units in 2008. Stein bases his estimate on projected U.S. industry sales of 11.7 million light vehicles in 2009, a forecast that GM endorses. He also assumes, for the sake of argument, that GM will Hourly pay cuts? Skeptical environmentalists and Republicans want to impose additional concessions on the Detroit 3. Wagoner acknowledges that Washington may ask GM to speed the in- BAILOUT Detroit 3 get chilly welcome in D.C. continued from Page 1 In and out Sen. Carl Levin, D-Mich., and Rep. Barney Frank, D-Mass., are drafting legislation that would make the Detroit 3 eligible for $25 billion in emergency loans from the $700 billion federal bailout fund for financial institutions. The legislation’s provisions could include Equity stakes for government in GM, Ford and Chrysler Limits on Detroit 3 executive compensation A prohibition on using loans to pay dividends Taxpayer protections for costs of the rescue when companies recover What probably won’t be required Government representation on the boards of the Detroit 3 An overhaul of management Wage concessions by UAW members inconceivable concessions, such as capping executive pay and giving taxpayers stakes in the companies. “Whether that’s stock warrants, restrictions on executive compensation and golden parachutes, we’ve said we’re very willing to accept those,” General Motors CEO Rick Wagoner told Automotive News last week. But he added that he is not willing to resign, as some critics have demanded. Rep. Thaddeus McCotter is in a unique position. He is the only Republican from Michigan on the House Financial Services Committee, which will consider bailout legislation. He said he is trying to persuade fellow GOP lawmakers to support the emergency loans. “There are lots of people in Congress, lots, who still think it’s 1972 and the auto industry hasn’t changed,” McCotter said. “They need reminding of all the plant closings and work force reductions. They need reminding that the UAW has a two-tier wage. And the UAW will soon be in charge of administering health care for its retirees.” to reform the root causes crippling automakers’ competitiveness around the world is neither fair to taxpayers nor sound fiscal policy. What assurances will Democrats give taxpayers about their chances of getting their auto bailout money back?” Sen. Charles Grassley, R-Iowa, demanded that the Detroit 3 CEOs cut their pay, as former Chrysler Corp. Chairman Lee Iacocca did in 1979 when the company got federal loan guarantees to avert bankruptcy. “It’s appropriate to ask those who seek federal government assistance to do everything they can to first cut company expenditures, make internal reforms and exhaust all alternative avenues to a bailout from the American taxpayers,” Grassley said late last week in a letter to Senate Majority Leader Harry Reid, D-Nev. Top Democrats in Congress have backed the loan proposal after personal appeals by the Detroit 3 CEOs and UAW President Ron Gettelfinger. But after Obama’s resignation from the Senate, Democrats have just a 5049 membership advantage in the chamber, even counting Sen. Joe Lieberman, I-Conn. In the 100-member Senate, 60 votes are needed to beat a filibuster. Senate Republican Leader Mitch McConnell of Kentucky said it isn’t clear that enough Senate Democrats will support the Detroit 3 bailout bill. ‘Deafening’ silence “The silence from the Democrat rank and file on this matter has been deafening,” he said. “The taxpayers deserve to know if this bailout would increase the national debt and raise their taxes.” Congress and the White House already have approved $25 billion in low-interest loans for automakers and suppliers. That aid, designed to help companies retool to build more fuel-efficient vehicles, has yet to be released. Research suggests that the failure of one or more of the Detroit 3 would have devastating ripple effects throughout the U.S. economy. But a Gallup poll last week reported that only 20 percent of Americans consider aid to GM, Ford and Chrysler to be important. So the Detroit 3 are enlisting their dealers to help make their c http://www.edmunds.com http://www.edmunds.com
Table of Contents Feed for the Digital Edition of Automotive News - November 17, 2008 Automotive News - November 17, 2008 Automotive News - November 17, 2008 - (Page Intro) Automotive News - November 17, 2008 - (Page BB1) Automotive News - November 17, 2008 - (Page BB2) Automotive News - November 17, 2008 - (Page 1) Automotive News - November 17, 2008 - (Page 2) Automotive News - November 17, 2008 - (Page 3) Automotive News - November 17, 2008 - (Page 4) Automotive News - November 17, 2008 - (Page 5) Automotive News - November 17, 2008 - (Page 6) Automotive News - November 17, 2008 - (Page 7) Automotive News - November 17, 2008 - (Page 8) Automotive News - November 17, 2008 - (Page 9) Automotive News - November 17, 2008 - (Page 10) Automotive News - November 17, 2008 - (Page 11) Automotive News - November 17, 2008 - (Page 12) Automotive News - November 17, 2008 - (Page 13) Automotive News - November 17, 2008 - (Page 14) Automotive News - November 17, 2008 - (Page 14a) Automotive News - November 17, 2008 - (Page 14b) Automotive News - November 17, 2008 - (Page 15) Automotive News - November 17, 2008 - (Page 16) Automotive News - November 17, 2008 - (Page 17) Automotive News - November 17, 2008 - (Page 18) Automotive News - November 17, 2008 - (Page 19) Automotive News - November 17, 2008 - (Page 20) Automotive News - November 17, 2008 - (Page 21) Automotive News - November 17, 2008 - (Page 22) Automotive News - November 17, 2008 - (Page 23) Automotive News - November 17, 2008 - (Page 24) Automotive News - November 17, 2008 - (Page 25) Automotive News - November 17, 2008 - (Page 26) Automotive News - November 17, 2008 - (Page 26a) Automotive News - November 17, 2008 - (Page 26b) Automotive News - November 17, 2008 - (Page 27) Automotive News - November 17, 2008 - (Page 28) Automotive News - November 17, 2008 - (Page 29) Automotive News - November 17, 2008 - (Page 30) Automotive News - November 17, 2008 - (Page 31) Automotive News - November 17, 2008 - (Page 32) Automotive News - November 17, 2008 - (Page 33) Automotive News - November 17, 2008 - (Page 34) Automotive News - November 17, 2008 - (Page 35) Automotive News - November 17, 2008 - (Page 36) Automotive News - November 17, 2008 - (Page 37) Automotive News - November 17, 2008 - (Page 38) Automotive News - November 17, 2008 - (Page 39) Automotive News - November 17, 2008 - (Page 40)
For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.