Some Details of GM, Ford, Chrysler Planned Presentations to Congress Emerge
By Chris Haak
After the fiasco that was the first round of hat-in-hand presentations to Congress last month, punctuated by some CEOs saying they’d just as soon not sacrifice their salaries in the name of preserving the companies that they work for, not showing Congress that they had a plan to avoid coming back to more money, and arriving via corporate jet, some details are starting to emerge about the message and concessions that the Big Three are prepared to make to lawmakers in order to secure the funding that will keep them out of Chapter 11.
At the November hearings, Chrysler LLC CEO Robert Nardelli offered to work for $1 a year to save the company, but Alan Mulally and Rick Wagoner declined to make that commitment. This time, both men will offer to work for $1 per year in the spirit of shared sacrifice, though not yet clear is whether they will still be eligible for bonuses and equity awards (stock options and/or restricted stock), which is where the big dollar figures of CEO compensation comes from. GM is also expected to announce compensation reductions for other members of senior management, likely similar to those that the company implemented a few years ago (and subsequently rolled back) in response to another near-bankruptcy situation.
GM will also present its plans to offer debtholders the opportunity to swap some of the company’s outstanding debt for equity. This move would fall under the shared sacrifice banner for investors in the company, because stockholders have already lost nearly all of the value of their GM holdings, while bondholders ar faced with an extremely high risk of default. Stockholders would suffer dilution of the value of their holdings if additional equity was issued and granted to bondholders, and bondholders would likely still receive only a portion of the value of the bonds that they are holding. Still, both are likely better off in this kind of scenario than they would be if the company declared bankruptcy.
For its part, the UAW – in spite of already agreeing to one of its first concessionary contracts ever in 2007 – is meeting in Detroit over the next few days to discuss further concessions that the labor force might be willing to make to preserve the health of their employers. High on the list are probably items such as the jobs bank, which pays laid off workers nearly full salary, as well as potential deferral of the mandatory VEBA funding payments that were scheduled to begin in 2010, but which GM and Chrysler – and probably Ford, by that point – will likely be able to afford. There have also been rumors that the UAW may somehow provide other financial assistance to the Big Three.
As we reported yesterday, Ford has now decided to “review its strategic options” for Volvo. This means that a sale of the Swedish brand is likely. The Wall Street Journal reported this morning that GM is likely to tell Congress that it plans to eliminate or sell at least one brand, likely Saab, and that the company may sell all or part of its Buick brand to its Chinese joint venture partner SAIC.
No Corporate Jets This Time
Alan Mulally plans to drive to Washington in a Ford Escape Hybrid, while Rick Wagoner plans to arrive in a Chevrolet Malibu Hybrid. Chrysler has not revealed Bob Nardelli’s choice of vehicle, only to say that it will not be by corporate jet. GM is also planning to have other executives join in Wagoner’s caravan driving E85-powered vehicles such as the Buick Lucerne, though it seems unlikely that they will be able to make the entire trip on E85 – at least without careful planning – since ethanol isn’t the easiest fuel to find.
The Plans for Sustainability
Although the final presentations to Congress will hopefully include more details than are shared in this article, the automakers’ high-level plans should come as no surprise to people who follow the car business. At their fundamental level, they address each company’s biggest shortcomings/opportunities, though I’d question whether they are significant enough to stave off BK.
Ford plans to speed rollout of EcoBoost (twin turbo, direct injection on smaller engines) technology, plus bringing smaller, more efficient European Ford products to the US. Chrysler hopes to keep the lights on long enough to enter into product alliances with other manufacturers, such as the agreements it has with Nissan for Nissan to produce a version of the Versa for Chrysler, and for Chrysler to produce a version of the Ram for Nissan. GM needs balance sheet (and interest payment) relief, so its biggest concern isn’t so much products – because the pipeline is still fairly good, particularly in the small car segment – but financial.
All three companies are also likely to push for Congress to enact some sort of incentives or stimulus to get consumers into the showrooms again, with all of them having suffered miserable sales results since the summer. Such stimulus might take the form of a tax credit or rebate for purchasing a new domestic-brand vehicle, making car loan interest tax deductible again, or simply mailing stimulus checks to taxpayers again and hoping they spend the money on products like cars instead of essentials like gasoline and food, which is more or less what happened the last time the checks went out.
Will It Work? What Next?
As we’ve said before, it will probably cost more than $25 billion to not only move beyond the current crisis, but to put these companies on a path toward self-sustainability (in whatever form that takes, it will likely mean far smaller companies than they are in their current form). Perhaps rather than the funds beyond the first $25 billion will come from cost savings measures and concessions from labor rather than from Congress, but the companies need to be very careful not to cut into the bone. Specifically, GM’s halt of most new product development is alarming, as is the fact that the companies are severely cutting back marketing budgets. At some point, all three companies have to sell cars, and that’s easier to do if you 1) have invested appropriate resources to develop great products, and 2) you invest further resources to sell and market those products. In the face of a sales freefall, one of the first reactions is to cut back on marketing budgets, but instead marketing efforts should be refocused on creative ideas that have resonated with consumers and on building brand equity. Instead, the next thing these companies do after cutting marketing budgets is to throw money on the hood in the form of incentives. That becomes an ugly, downward spiral to ticked off customers (“you mean I paid $3,000 more for my truck last month than my neighbor paid for the same truck yesterday?”) and low residual values.
I hope for the sake of not only Michigan and its economy, but indeed the entire US economy, that Messrs. Mulally, Wagoner, and Nardelli are well-prepared with coherent, intelligent plans to show to Congress, because we can’t afford to lose our auto industry OR to enter into an even deeper recession. And if they do show these great plans, let’s hope that they are able to successfully implement them. I’m not confident that they will be able to, but I’m certainly hopeful.
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