EmailEmail
PrintPrint
Automakers' bailout bid is running on fumes
Saturday, November 22, 2008

Executives from the Big Three auto companies were sent back to Detroit to assess where they went wrong in congressional hearings in Washington, D.C., in which they failed to make their case that the industry should get a $25 billion bailout.

From having the chief executives fly to Washington on private jets to not being able to say precisely what they will do with the bailout money or how much they actually need, the automakers have managed to back themselves into a corner, industry observers say.

The automakers have two weeks to get back to a skeptical Congress, after top Democrats scrapped planned votes on a bailout they said lacked support -- or a clear justification.

Hearings are expected in December, and lawmakers could consider legislation during the week of Dec. 8, but only if General Motors Corp., Ford Motor Co. and Chrysler LLC can make a better case to lawmakers and the public.

The White House sharply criticized the Democrats for letting the issue linger while taking a congressional recess. "It is appalling that Congress decided to leave town without addressing a problem that they themselves said needed to be addressed," White House press secretary Dana Perino said.

Analysts say the auto companies are not telling the whole story when they say bankruptcy would, in fact, be a death sentence. Few deny that filing bankruptcy would be a serious step, but a Chapter 11 filing would allow the companies to get back on their feet, analysts say.

"Chapter 11 bankruptcy is a reorganization process. The debtor asks the court to be protected from its creditors while it attempts to reorganize its debt," said Donald Calaiaro, a bankruptcy specialist. Chapter 11 provides for debtor in possession financing, in which companies secure credit for loans that would give them the money to provide for operating expenses while reorganization of the company takes place.

The automakers counter that they would find it nearly impossible to get credit given the current economy.

"In today's credit market, financing while in bankruptcy would be very difficult, especially if the company was not able to protect its revenue base," a GM statement provided to Congress reads.

"It's tough to get this financing in good times, so it has to be extremely difficult to get the financing now," Mr. Calaiaro said.

While in bankruptcy, the auto companies would be likely to "look to adjust the union contracts and their longevity costs (for health care and pensions for retired employees), and they will be looking for concessions from the unions. They also may modify some of their contracts with their vendors," Mr. Calaiaro said.

"With Chapter 11, pension benefits, health benefits and wages go on. It is true that in time, these all go down eventually, but there would not be a sudden reduction in payments and benefits for workers and the communities. Yes, the drop would be significant, but not disastrous, and the plants would continue to run," said Peter Morici, a University of Maryland business professor who follows the auto industry.

Right now, he added, "GM is behaving irresponsibly, playing a game of chicken and saying, 'If we don't get funding, we will stop working.' ... They don't have to shut down."

Car companies claim customers would not buy a car from a company about to go bankrupt because of warranty and service concerns. GM cites a June 2008 survey by CNW Research that says 80 percent of customers would not purchase a vehicle from bankrupt manufacturers.

"I'm very skeptical of that claim," said Mr. Calaiaro. "When Chrysler got a bailout from the federal government years ago, they continued to sell cars and people bought them."

Perhaps the automakers' biggest problem is that they have done a poor job making their case for a bailout -- as everything from public opinion polls and to letters to the editor show.

"The industry just hasn't done a good job of really communicating to what it does," said David Cole, chairman of the Center for Automotive Research.

Both elected officials and the public know very little about how the industry works, and thus are making assumptions based on outdated information and ideas, Mr. Cole added.

Take plant efficiency, for instance. Many bailout opponents have suggested the domestic car companies have outdated plants and outmoded assembly procedures.

But the Harbour Report, which does surveys of auto plants in Europe, South America and North America, listed Chrysler and Toyota as having North America's most efficient factories. And North America's most efficient plant is Chrysler's Jeep factory in Toledo, Ohio.

"There are a lot of things about the auto industry that are idiosyncratic to the industry," said Jack Nerad, editorial director of Kelley Blue Book. "It's not like selling a toaster, electric toothbrush or a piece of software."

The Associated Press contributed to this report. Don Hammonds can be reached at dhammonds@post-gazette.com or 412-263-1538.
First published on November 22, 2008 at 12:00 am