Automakers Must Address Five Crucial Issues for Bailout

Dec. 2, 2008— -- DETROIT - When the Detroit automakers lay out their plans for Congress this week to argue for taxpayer money, they'll likely spell out what they've already told shareholders: They plan to cut production (maybe even brands), make high-mileage cars and slash costs.

But that won't be enough. Two weeks ago, when the Detroit 3 CEOs pleaded before Senate and House committees for federal loans, their arguments fell flat amid a public relations debacle. They were sent home empty-handed and told to submit by today "credible restructuring plans" showing loans would not be a waste.

The attitudes expressed in the first round of hearings by many of the politicians -- even some who support loans -- were skeptical, if not hostile. The CEOs were grilled on whether the companies can make a go of it even with loans, whether they deserve to fail. They were accused of building low-quality cars and gas guzzlers and resisting safety and emissions issues until browbeaten by the government or trial lawyers.

It was clear that when Detroit returns to Washington this week, their plans must do more than tally people they'll fire or pencils they won't buy-- they need to win hearts and minds. And quickly: Hearings are set to begin Thursday, and Congress is likely to reconvene Dec. 8 to vote on any proposal that results.

"They have to come back with a very persuasive case. The public is generally so against the idea of bailouts," says David Cole, chairman of the Center for Automotive Research (CAR).

Cole thinks their best argument is the number of lives their failure would touch: "Where you make the case is when you look at the economic impact and look at the consequences, which the average person doesn't think about."

CAR has tried to quantify that case. An automaker-commissioned study found 3 million U.S. jobs would be lost in the first year if the Detroit 3 go under. But that hasn't sold taxpayers on a bailout.

Jack Nerad, market analyst for Kelley Blue Book, says one solution needs to be for their plans to include pay and benefit sacrifices by labor and management.

"A lot of people out there think management and labor went skipping off by themselves and forgot about the American consumer for a long, long time," he says. "They feathered their own nests at the expense of the American consumer."

Auto Industry's Top Issues

1: Overpaid workers

The United Auto Workers union is taking much of the public blame for the automakers' woes. People see UAW members as overpaid and underworked compared with other U.S. workers.

The average hourly wage the Detroit 3 pay union workers is not a lot more than the $26 average for the non-union workers at Toyota's U.S. plants and $24 at Honda's, CAR says. But including benefits for the workers and retirees, the Detroit 3's total hourly labor costs still average more than $70 vs. less than $45 at the foreign-owned plants. The new UAW contract signed in 2007 will bring those costs more in line -- but not fully until 2011 and after payments by the companies to a benefit fund for which the union has agreed to be responsible.

In a recent presentation on the new labor contracts, Sean McAlinden, vice president of research for CAR, wondered, "Will this improvement be too late?"

Despite such UAW concessions -- including buyouts for tens of thousands and lower wages for new workers -- critics say the union still is strangling automakers by forcing them to pay workers not to work with the "jobs bank," a supplemental unemployment benefits program.

The jobs bank was created in the early 1980s to ease the transition into assembly plants with more work done by robots. Workers replaced by robots would be offered a job elsewhere or, if no job was available, would get almost a full paycheck until a job was found.

It's become a symbol of excess. The Detroit 3 have about 3,000 workers in the jobs bank, though the number could rise with more plants scheduled to close within weeks or months.

"There is not a huge number of people in it, but it's one of the most negative things that people across the country hold against the auto industry. They look at it and say, 'This just doesn't make sense,' " Cole says. "I would expect we're going to see the jobs bank be a key factor" in the plans submitted to Congress.

A spokesman for the UAW did not return a call for comment, but UAW President Ron Gettelfinger noted recently that the jobs bank has been scaled back: Workers can stay only two years, rather than indefinitely.

On CNN's Late Edition on Sunday, Gettelfinger said the UAW is "prepared to go back to the table, the bargaining table," but said all affected parties, including dealers and parts suppliers, should be willing to do so, as well.

He also called for the Detroit 3 to "establish that executive compensation is something that they're willing to curtail."

2: Overpaid executives

Like Gettelfinger, members of Congress also have argued that the CEOs haven't made enough personal sacrifice to justify the bailout they seek.

Ford Chairman Bill Ford told National Public Radio that the company is negotiating with CEO Alan Mulally on a cut in pay and perks. In two years, Ford has paid CEO Alan Mulally nearly $50 million and allowed $752,000 worth of personal and family use of company planes. "We're talking to Alan about it," said Ford, who's taken no salary for four years. "We are very sensitive to public opinion."

GM CEO Rick Wagoner has not publicly agreed to a pay cut, although he took cuts in 2006 and 2007. His base pay returned to $2.2 million this year. His total take for 2007 was $14.4 million.

Chrysler CEO Bob Nardelli reportedly agreed to a $1-a-year salary when he arrived at the company, but because it is privately held by Cerberus Capital Management and Daimler, it does not have to make Securities and Exchange Commission filings that would show what other kinds of compensation he may receive.

The industry got a huge black eye at the hearings when politicians chastised the CEOs for flying to Washington on corporate jets to ask for handouts.

Bill Ford said the company is looking at its air fleet. "We're taking a real look at our whole plane operation," he says. "We've sold a number of planes already, and we're taking a good hard look at the rest of them, as well."

GM was the first to respond to the airplane saga, announcing the elimination of two planes days after Wagoner testified. Chrysler says it got rid of company-operated planes earlier this year.

Fuel Efficiency to Auto Dealers

3: Green cars

Although U.S. automakers focused on more profitable SUVs and trucks at the expense of developing more cars and fuel-efficient technologies, they turned that around in recent years. But it's clear lawmakers want more.

Ford was the first automaker to offer a hybrid SUV, its Ford Escape, and has made major upgrades in power and range for its just-unveiled Fusion and Milan hybrids. GM has developed hybrid cars and trucks, as well.

GM and Chrysler are pouring money into developing electric plug-in vehicles, a point they highlighted to Congress.

But Himanshu Patel, an analyst at JPMorgan Chase, cautions automakers to resist attempts by the government to order a wholesale, costly acceleration of such high-tech cars at the expense of nearly as efficient but traditional vehicles that can be profitable now.

"The 2007 energy bill already began this process (of transition to greener cars) and, outside of this legislation, we are deeply skeptical of the commercial prospects for government-dictated product plans," Patel says.

Financial troubles amid the auto sales collapse have led Chrysler and GM to even cut back some current hybrid programs.

Chrysler's hybrid SUVs will go out of production after just 16 weeks because it cannot afford their Delaware plant. GM delayed an advanced Saturn Vue gas-electric hybrid into next year to save money.

But Nerad thinks profit and loss aside, automakers must "green" their plans.

"I think the message that Congress wants to hear isn't necessarily a business case," he says. "It has to do with non-business things like environmental issues and fuel-economy issues. I think to make these plans fly, there probably has to be some of that in there."

4: Too many dealers

The Detroit 3 have too many stores for their market share and far more than foreign automakers. For example, Toyota has fewer than 2,000 U.S. dealers, while Ford has almost 4,000. Result: A typical Toyota dealer sold 1,628 vehicles in 2007, according to a study by Grant Thornton, while Ford stores averaged 236. The average for all new car dealers: 322.

With consolidation efforts by the automakers and overall sales woes, about 700 dealers will have closed this year; more than twice that could close in 2009. But that's not fast enough, and state franchise laws make it tough and costly to cut off dealers who don't want to close or be bought out.

In their plans, the Detroit 3 could make their case for cutting dealers and even ask Congress to override state laws to cut consolidation costs.

However, Van Conway, a restructuring expert in Detroit, says it still would take too long and sees little alternative to buying dealers out: "I don't see any easy way to do that, except for compensating them to go out of business."

Growing Business

Meanwhile, others are even urging federal help to keep more dealers in business. Raul Vasquez, an advertising consultant in Florida, is mounting a grass-roots campaign for federal backing of "floor-plan" loans — dealers' financing for the cars and trucks on their lots.

"We're trying to get Congress to pay some attention to the dealer level," says Vasquez, who runs SaveMyLocalDealer.org.

"They're trying to solve the problem in the auto industry on the manufacturing level, but that's not what consumers are scared about. They're scared when they see their local dealers shut down."

5: Bias in Congress

Many Detroit residents who watched the hearings on C-Span were angered by the grilling some politicians from Southern states heaped onto the Big 3 CEOs. One GM spokeswoman pulled together a list of tax incentives given to "transplant automakers" in the South, showing a total of $3.2 billion, and posted it on her personal Facebook page.

The home state of Sen. Richard Shelby, R-Ala., one of the U.S. automakers' biggest critics, is home to Mercedes-Benz, Honda, Hyundai and Toyota plants.

Shelby "heaped derision on Detroit and its CEOs for having the temerity to ask for a bridge loan to help them through the worst financial calamity to face America in seven decades," says Peter De Lorenzo, editor of Autoextremist.com. But, he says, Shelby didn't mention he helped Alabama come up with $650 million in tax incentives for transplant automakers. It's something the U.S. automakers need to point out, he says.

"Their story is getting lost in the fog of inaccuracy and misperception that's inundating Washington," he says.

Conway says he sees a "massive double standard" in how people view the U.S. automakers vs. the transplants and says the automakers should do a better job pointing out that some critical politicians have a vested interest.

"You can say Carl Levin's vote doesn't matter," Conway says, pointing out that the Michigan Democrat has been a strong supporter of the auto industry, "but then the votes from the guys in Alabama shouldn't matter, either."