The sense of relief in Detroit that greeted the $17.4 billion federal lifeline thrown by President Bush to General Motors and Chrysler just before Christmas is unlikely to last long. The terms of the bridging loans amount to a gun at the heads of the two carmakers and their stakeholders. Unless they use the next three months to negotiate a viable way forward, the loans will be called in at the end of March — and bankruptcy will follow.
In effect, the deal announced on December 19th is just one step short of the bankruptcy the carmakers have long insisted is not an option. “If restructuring cannot be accomplished outside of bankruptcy, the loans will provide time for the companies to make the legal and financial preparations necessary for an orderly Chapter 11 process that offers a better prospect of long-term success,” Mr. Bush said. Dealers, bondholders, suppliers, unions and retirees are all going to have to make sacrifices, and with a speed and purpose that has hitherto been lacking.
Dealers must face the fact that GM needs to cut their numbers and slim its bloated brand portfolio. In the past, they have used state franchise laws to make any such action prohibitively expensive. Another priority is to convert around 70 percent of GM’s outstanding debt into equity. Creditors will have to ask themselves whether that is their best option, given that bankruptcy would wipe out the value of their new shares. Suppliers, already hard hit by the collapse in car production, must decide whether to grant easier payment terms that will worsen their own cash positions.
But the main focus of attention is bound to be the United Auto Workers union, which is loathed not just by those Senate Republicans whose refusal to vote for a bailout bill forced Mr. Bush to act, but by many ordinary Americans in less well-paid, less secure employment. At the very least, the union will have to advance the package of concessions it negotiated in 2007 to bring wages and benefits into line with those at foreign-owned “transplant” factories by the end of 2010. Even that may not be enough, since the terms apply only to new recruits, not existing workers.
Union leaders have signaled a willingness to give ground, but if they give too much they may not be able to win their members’ backing. Many workers feel unfairly picked on, and others may hope for a better deal when there are bigger Democratic majorities in Congress and Barack Obama is in the White House. That could prove a fatal miscalculation. The incoming administration was almost certainly consulted about Mr. Bush’s rescue, and Mr. Obama has already made it clear that he will not be a soft touch for Detroit.
Even if a new deal for the carmakers is put on the table in March, they may not like it any better. Many Democrats are determined to show their green credentials by forcing Detroit to build more hybrid and electric vehicles as a condition for federal aid — whether or not there is a market for them. Toyota’s decision in December to postpone indefinitely production of its Prius hybrid at a new factory in Mississippi ought to be a reality check for politicians who want to tell carmakers what they should build, but will probably not be.
The biggest reason why Detroit’s anguish is far from over is that there is no sign of any easing of the conditions that precipitated the crisis. PricewaterhouseCoopers, a consulting firm, predicts that light-vehicle sales in North America for 2009 will fall a further 17% to 10.8 million. And on December 22nd Toyota said it expected to make a $1.7 billion operating loss for the financial year, its first since it began reporting earnings in 1941. Japan’s second-biggest carmaker, Honda, also expects to dip into the red. If even those paragons of efficiency are feeling the pain, what chance is there that Detroit can turn itself around by March?
On December 29th the government said it would provide $6 billion to stabilize GMAC, a finance company part-owned by GM that is turning itself into a bank. Realistically, the most GM can hope for is that it will have done enough by March to keep the drip-feed going until the second half of 2009, when things may start to improve. As for Chrysler — don’t even ask.