Stark Auto Warning: There's No 'Plan B'

GM, Ford and Chrysler unveil rescue plans.

December 2, 2008, 8:44 AM

Dec. 2, 2008— -- A humbler group of auto executives returns to Congress this week, pledging to slash costs, including their own salaries, and to accelerate the design and construction of fuel-efficient cars if Congress coughs up tens of billions to bail them out.

The CEOs of Detroit, who enraged Congress last month by showing up in private jets and holding tin cups, this time came with detailed plans they claim will save their foundering businesses. Added together, the separate proposals include $18 billion in loans and credit sought by GM, $7 billion sought by Chrysler and $9 billion sought by Ford - $9 billion more than the automakers sought earlier in November.

Along with their plans for recovery, the automakers offered a stark warning that the taxpayer money is essential to Detroit.

"There isn't a Plan B," said Chief Operating Officer Fritz Henderson today, arguing that taxpayer aid is essential to GM's future. "Absent support, frankly, the company just can't fund its operations." In its submission to Congress, GM warned "the company will default in the near term, very likely precipitating a total collapse of the domestic industry and its extensive supply chain, with a ripple effect that will have severe, long-term consequences to the U.S. economy."

House Speaker Nancy Pelosi, D-Calif, said late this afternoon that she believed the automakers would receive government help. Senate Majority Leader Harry Reid, who before Thanksgiving would not guarantee that the auto bailout would get a vote, today said he will put a legislative vehicle for the bailout on the Senate floor on Monday.

"I believe that an intervention will happen either legislatively or from the administration. I think it's pretty clear that bankruptcy is not an option," Pelosi said at a press conference on Capitol Hill. Pelosi said she hoped that Congress would take action on the automakers' plan, but she also emphasized that under the government's $700 billion financial rescue plan, the Bush administration could also act on its own. The administration, she said, has "full authority" to grant loans under the Troubled Asset Relief Program.

Any plan that passes Congress will have to be strong enough to convince lawmakers that it can succeed -- a tall order.

"We are looking to make sure that we're doing everything we can to take care of the auto industry, if in fact it's viable that it is it's not just throw them a rope that doesn't get them to shore," said Reid after a round table discussion on renewable energy in Washington.

The automakers' plans will be reviewed during Congressional hearings on Thursday and Friday and their performance and the taste it leaves could determine if lawmakers can pass legislation when they return to Capitol Hill next week. It remains to be seen what exactly will be in the bill and, asked on a conference call today, Sen. Carl Levin, D-Mich, who has spearheaded the bailout effort for Democrats, admitted that it was unclear if there were enough votes for a bailout to pass Congress.

"We'll have to wait and see," he said.

Automakers Plea for Bailout

Ford was the first out of the gate with a request this morning for a $9 billion line of credit from the federal government that the company said would help backstop its restructuring plans, including plant closures and the introduction of more fuel-efficient vehicles.

This afternoon, General Motors, which analysts say faces greater cash woes than Ford, asked for $12 billion in loans for 2009 as well as a $6 billion line of credit "to provide liquidity should a severe market downturn persist." Like Ford, the company also plans on continuing with plant closures and launching more fuel-efficient cars.

Both automakers' business plans call for cutting their CEOs' salaries to just $1, although Ford's Alan Mulally -- who earned $21.6 million in 2007 -- will only see his salary reduced if Ford does use the proposed government loans.

Chrysler, which is requesting $7 billion in government loans, said that its CEO, Robert Nardelli, already receives a $1 salary. The salary cuts are just one step that Detroit's automakers are taking to demonstrate their humility while asking for a public bailout. When the executives for Detroit's Big 3 visited Congress last month, each flew to Washington in a corporate jet, a move that provoked heavy backlash.

This time, all three CEOs -- Chrysler's Nardelli, GM's Rick Wagoner and Ford's Mulally -- plan to drive down to D.C. in hybrid cars made by their respective companies. Ford said its new business plan also includes putting its entire fleet of corporate planes up for sale.

The plans came in response to orders last month by Senate Majority Leader Harry Reid, D-Nev., and Pelosi., who said that aid for the automakers was contingent on their success in outlining "a path to viability."

"It is all about accountability and about viability," Pelosi said. "Until they show us the plan, we cannot show them the money."

Ford, the first to publicly disclose its plan today, has said that it would ask Congress for $9 billion in financing as it continues "to accelerate through aggressive restructuring actions," including the closing or sale of 10 plants and the introduction of more new fuel-efficient vehicles.

But the company, which expects to return to profitability or at least break even by 2011, hopes it won't actually have to use the funding.

"For Ford, government loans would serve as a critical backstop or safeguard against worsening conditions," Mulally said in a statement issued by the automaker today.

Mulally Takes Tactic From Iaccoca

On top of Mulally's pledge to work for $1 a year, a move that echoes that of former Chrysler CEO Lee Iaccoca who also accepted a $1 salary as the automaker lobbied government aid in the late 1970s, Ford would also cancel 2009 bonuses for all management employees and will sell five corporate aircraft to raise cash.

Veteran auto industry analyst Ron Harbour, of the consulting firm Oliver Wyman, said Mulally's paycut pledge is largely symbolic. The CEO will likely get compensated in other ways, such as through stock options, just as Iaccoca did, Harbour said.

Overall, Ford's approach toward a government rescue is different than that of General Motors and Chrysler, Harbour said.

"Ford's a little bit different than the other two in that they're making the claim that they don't really need (government loans) right now, that'd it be basically a rainy day fund for them should things become more adverse in the marketplace than they are right now," he said.

GM, Ford and Chrysler -- the country's Nos. 1, 2 and 3 automakers -- have all seen their profits and their sales plummet in recent months, as high gas prices earlier this year, financial hardship and the credit crunch kept would-be auto buyers at home.

GM and Chrysler reported today that their November U.S. auto sales tumbled more than 40 percent compared to a year before, while Ford's sales dropped nearly 31 percent. (Japanese automakers also saw double-digits drops with Toyota sales down 34 percent and Honda down 32 percent.)

Analysts have predicted that one or more of the U.S. automakers could run out of cash and face bankruptcy within months. But Ford is in better shape than its cross-town rivals, Harbour said, because it took out loans before the start of the credit crunch, spends less on retirement benefits because it has fewer retirees and, in general, operates more efficiently with fewer brands than GM. Since 2007, Ford has sold off ownership or stakes in several major brands, including Jaguar and Land Rover. The company announced Monday that it was also considering the sale of its Sweden-based Volvo brand.

But, like its rivals, Ford is still burning through cash. Last month, Ford said it had spent $7.7 billion in the third quarter of the year, while GM spent $6.9 billion. (Chrysler chief executive Robert Nardelli has said that reserves for the privately owned automaker are also low.)

The plan GM proposed today includes reducing its workforce by 20,000 to 30,000, closing nine plants and cutting 1,750 dealerships by 2012.

There had been speculation that GM would cut some of its brands. The statement issued by the company today offered some, but not total, clarity on the issue. GM said that it would focus its "product development and marketing efforts on four core brands Chevrolet, Cadillac, Buick and GMC" and that Pontiac would become a "specialty brand" with a smaller line of products. The Hummer brand, the company said, may be sold.

But it remains unclear what will become of GM's Saab and Saturn brands. The company said that Saab will be subject to "a global strategic review" and that it is working with Saturn retailers to "explore alternatives" for that brand.

Congress On the Brink

Rescue plans for the automakers face a skeptical, bailout-weary Congress.

As one senior auto-industry executive told ABC News, "Even if the plans are well received and even if we have perfect hearings, I am not sure how this can be done legislatively." Many in Congress oppose any bailout for the auto industry, and those who favor helping Detroit disagree about where the money should come from.

The No. 3 Democrat in the House called for the CEOs of GM, Ford and Chrysler to be fired.

"If I had my way, all three of those guys would be in the unemployment line, and I think that ought to be one of the conditions for us doing this," House Majority Whip Jim Clyburn, D-S.C., told reporters Monday. "We need to have new leadership. That's what we would do if we had this kind of failure on a football field. We would be getting a new coach, sometimes a new athletic director," he said.

With reports from ABC News' Charles Herman and the Associated Press.

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