Detroit Three Reveal Federal Assistance Business Plans

The Detroit Three automakers have all turned in their viability business plans to the U.S. Congress, providing varying degrees of detail in response to a letter sent late last month by Speaker of the U.S. House of Representatives Nancy Pelosi and Senate Majority Leader Harry Reid to the chief executives of Ford, General Motors (GM), and Chrysler. The three plans, released early yesterday by Ford and later in the day by GM and Chrysler, all outline a history of the issues that brought them to need federal funding from Congress, and present some data about what the money would be used for, and how much of it the companies are requesting. In total, the companies are actually requesting US$34 billion—GM has upped its request to US$12 billion in loans plus a US$6 billion line of credit, Ford is asking for US$9 billion to be made available, and Chrysler has requested US$7 billion immediately. But what the automakers have outlined in terms of plans for the money differs between the three companies.

General Motors: Changing the Corporate Structure

GM has outlined a plan that will see it change how it operates in the United States, reducing brands and putting others up for review, with the ultimate goal of restructuring the company to be profitable at a market sales level of 12.5 million units annually. Of the three automakers, GM provided the most specific details to its plan. The plan calls for the formation of a federal oversight board to monitor the progress that GM and the other automakers make along the road to recovery as the taxpayer loans are doled out. GM is asking for US$12 billion in loans, of which US$4 billion is needed immediately (by the end of December). It would also ask for a US$6 billion line of credit, to be tapped in case the worst-case sales scenarios come true for 2009. In return, the company stated that it will:

• Launch predominantly fuel-efficient, high-mileage cars and crossovers over the next four years.
• Proliferate the extended-range electric vehicle (E-REV) powertrain debuting on the 2010 Chevrolet Volt to other vehicles
• Focus efforts on only four core brands in the United States: Chevrolet, GMC, Buick, and Cadillac. Pontiac would be folded into the Buick-GMC structure as a handful of "speciality vehicles" like the Solstice roadster, while Saturn dealers would be approached to find "other options" (presumably meaning other brands that they could sell). Hummer has been up for sale for some time, and Saab is going under strategic review.
• Further reduce headcount by 30,000-40,000 total personnel by 2012.
• Reduce dealer count by another 1,750, to 4,700 by 2012.
• Reduce the debt carried on its balance sheet by engaging lenders, bond holders, and unions to reduce the amount of outstanding debt that the company has.
• Drop CEO Rick Wagoner's salary and the GM Board of Directors compensation to US$1/year, cut the top four executives' pay by 50%, and eliminate bonuses. Common stock dividends will be suspended for the life of the loans

Ford: Electric Cars On the Way

Ford also presented a thorough case, working through the changes that it has already made and outlining the scenarios going forward. Ford is asking for US$9 billion, but not immediately—it feels that it has adequate liquidity going forward to survive at a market sales rate of 11.5 million units, given its current cash and the line of credit it already has access to. Ford would like the US$9 billion to be made available however, in case the worst-case sales scenarios come true for 2009. Ford's plan is similar to GM's in terms of its downsizing and restructuring, but differs in that Ford would:

• Put the Volvo brand up for strategic review, up to and including a sale.
• Focus on introducing more small, fuel-efficient cars, and proliferating fuel-efficient technologies such as its EcoBoost GTDI engine across all models.
• Improve fuel economy by 14% for the 2009 fleet, 26% for 2012 models, and 36% for its 2015 models, when compared to the 2005 fleet.
• Accelerate its battery-electric and plug-in hybrid vehicle programmes, to be revealed at the North American International Auto Show in Detroit next month; Ford will introduce a battery electric commercial van by 2010, followed by an electric sedan in 2011.
• Close two plants this quarter, and four more by 2011. It would sell four remaining Automotive Components Holdings (ACH) plants as well.
• Reduction of dealer count by 16% by year-end.
• Drop CEO Alan Mulally's salary to US$1/year, if the company needs to access the federal loans; also eliminate 2009 merit increases, bonuses, tuition assistance, 401k matching, and scholarships for all salaried personnel.

Chrysler: Not Much Meat

Chrysler's submission was about half as long as the other two, and very light on data, plans, and various scenarios. Absent from Chrysler's plan were any discussions of sales and profitability under varying market sales levels, replaced by a minimal discussion of necessary cash levels that the company had to maintain. No new information was presented in Chrysler's proposal that has not already been published; Chrysler asked for US$7 billion in aid immediately, and outlined how it planned to spend the money maintaining operations, paying bills, and continuing with the plan that it was already on to restructure the company and make it viable. The Chrysler plan also focused heavily on the past year of history since private equity firm Cerberus Capital Management took the reins from Daimler, but the points and progress listed were no new information above and beyond the supposed changes to the products already announced. A major part of the Chrysler plan focused on finding partners with which to align the company going forward, using the example of the interaction with Nissan as the main example.

Outlook and Implications

The automakers had an opportunity with the request to provide detail about their plans for federal funding to go in a new direction with their turnaround plans. What much of the country outside the "Rust Belt Midwest" does not understand (and has not really had communicated to them) was that the domestic automakers began taking steps to put themselves on the way to recovery two years ago, before a confluence of events outside their control basically took away their revenue streams. Plans were in place and being executed at GM and Ford to drastically revamp the way the automakers did business, the way they created vehicles, how they operated and interacted internationally, even what kinds of products were being scheduled for introduction in the United States. Those plans however were not effectively communicated outside the boundaries of the automotive press, it would seem, if the reactions of Congressional politicians and the American public at large are anything to judge by. Now that the bottom has fallen out of the economy, taking new car sales to lows not seen in 26 years, the automakers' need to come to the only organisation in the land willing to lend money has been perceived as the fault of the industry itself, despite the progress it had been making. So what the automakers have apparently done is finally taken those turnaround plans, tweaked them slightly to account for the fact that sales for the next several years are not going to be anywhere near what most people had thought they would be, and put them in a form to respond to Congress' request for business plans on viability. The double standard evident in the request itself is staggering; for the comparably paltry sum of US$34 billion, the Detroit Three automakers have to jump through hoops not demanded of the financial industry, which has received hundreds of billions of dollars with no oversight, no testimony before Congress on how it will be used, no request for reform or executive compensation cuts, and far from any guarantees that any of it will be seen again.

So the question then remains: has Congress' and the American public's question of "how will the money be spent" been answered? The answer is a resounding "maybe." There is little new information for an auto industry insider in any of the business plans presented by the Detroit Three; but to an outsider, it may seem like a wealth of information, a treasure trove of data on which to measure the merits of the claims of continued viability of the Detroit Three. Of the plans, GM's is probably the strongest in responding to the point-by-point requests that the original Pelosi/Reid letter outlined. GM's scenarios are conservative, but in line with IHS Global Insight's forecasts for potential market volumes going forward. Ford's are a bit more aggressive, but like GM, it presents a variety of scenarios in terms of how the company would fare given varying levels of market health. But the one thing that the Chrysler plan does that neither the GM nor Ford plan do is to say exactly how the federal loans would be spent.

While the GM and Ford plans are very complete (if not terribly surprising) in the information they present regarding the actual business restructurings, product changes, and technology progress that the automakers plan, the Chrysler plan substitutes that kind of detail with a simple breakdown of what it intends to use US$7 billion to do. These two different approaches could result in some interesting testimony on Capitol Hill later this week, as the CEOs all return to Washington, D.C., tomorrow to testify at the Senate Banking Committee hearings about their information. Very little data about Chrysler's condition is presented; given that it is a privately held company, the strategy may have been to try and keep this information close to the chest. Such a strategy is not likely to work on Capitol Hill, despite a vague listing of expenditures that Chrysler is planning on making in the first quarter of 2009.