Bailout conditions bring hard decisions for US automakers

19 December 2008 21:32  [Source: ICIS news]

HOUSTON (ICIS news)--The $17.4bn (€12.2bn) in bailout money for US automobile makers has built-in conditions to be met by 31 March, eliciting hard questions on how to reshape the domestic auto industry, an industry analyst said on Friday.

"Automakers must meet conditions that experts agree are necessary for long-term viability including putting their retirement plans on a sustainable footing, persuading bondholders to convert their debt into capital the companies need to address immediate financial shortfalls and making their compensation competitive with foreign automakers who have major operations in the US," President George Bush said on Friday.

"If a company fails to come up with a viable plan by 31 March, it will be required to repay its federal loans."

President Bush took the reins on the bailout package after a deal was shot down in the US Senate. However, many of the expectations are similar to the wording in Congressional legislation.

It includes limiting executive compensation; establishing precedence for government-owed debt; opening up financial statements for the government; and requiring US Treasury approval for any transaction above $100m.

The expectations also include reworking its agreements with dealer and suppliers.

Bruce Belzowski, an assistant research scientist at the University of Michigan’s Transportation Research Institute, said the most pressing question in the conditions is who will head up talks between all of the industry's power players.

"The question is who has got the hammer? Who can make these negotiations work? Are they supposed to be led by the management or led by the government?" asked Bruce Belzowski, assistant research scientist at the University of Michigan’s Transportation Research Institute in Ann Arbor, Michigan.

Belzowski said the government needs a bargaining position in getting results after providing the money.

"Hopefully they don’t give it all to them so they have some leverage," he said.

GM and Chrysler will get $13.4bn (€9.38bn) from the Troubled Asset Relief Program (TARP) being directed by the US Treasury Department, with the remaining $4bn coming in February if the final TARP funds are made available. Ford, the other US auto maker, has said it has no plans to receive the aid.

The most difficult negotiations for the auto manufacturers will come when discussions begin with privately owned dealerships, Belzowski said.

"This is the trickiest thing for me. How do you deal with dealers?" he said. "Can they actually set up a way for GM and Chrysler to get out from under dealerships that they don’t need anymore without spending $1bn?"

That was the cost estimated for GM when it shed the Oldsmobile line in 2004, Belzowski said.

The agreement with the United Automobile Workers (UAW) and other labour groups will be less strenuous than predicted, Belzowski said.

"If you just look at the wages outside the benefits and legacy costs they are not that much," Belzowski said about the pay for auto workers. "That argument was kind of a red herring."

The government could get involved in mending the ailing automakers by making sure the financing arms of each company can provide lending, Belzowski said.

"They are dealing with the top down approach, the government is ... they need a bottom up process to get these financers up again to get people loans to buy these cars," he said. "I’m sure that’s going to be one of the issues going forward."

The 31 March deadline, in addition to having to face members of the US Congress again, will be sufficient motivation for GM and Chrysler's decision-makers to get the industry on track, Belzowski said.

"Are they going to come back and ask for more money?" he said. "It won’t be pretty if they don’t come though with a viable plan to be sustainable and profitable and not just get through the economic downturn."

($1 = €0.70)

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By: Ryan Hickman
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