Auto Industry Bailout Progress Report

GM sits with a $31 billion loss for 2008 after exhausting the original $4 billion loan approved by Congress last quarter. Chrysler’s woes are almost as dire with an $8 billion loss last year. In December of 2008, GM and Chrysler received a total of $17.4 billion and began restructuring by means of radical reductions in personnel and expenses. They are now asking for an additional $21.6 billion. While Ford Motor Company is not doing well, it has not yet requested federal aid.

Not Just a Problem for The Big Three

What makes the situation even more tenuous is the fact that the loss of revenue by automakers also translates into similar chaos for car parts vendors, dealers and auto unions which depend on a steady flow of car sales. With an estimated one out of every ten jobs in America relying on the well-being of the auto industry, there is much riding on the survival of the Big Three automakers. When industry analysts offer their opinions, they express doubt that the current course of action will resolve the situation, proposing that filing Chapter 11 makes more sense.

March 31 Deadline

Short of appointing a “car czar,” President Obama has created an auto restructuring task force which has set a deadline of March 31, by which time GM and Chrysler need to show substantial improvement in their decision-making. Otherwise, Congress will withdraw further funding and force the carmakers into bankruptcy. A weakness in the current solution is that it provides carmakers with a safety net which lessens their need to self-administer responsibly. The Big Three automakers have for some time been working to reduce waste and trim expenses, most notably by negotiating with the United Auto Workers Union in 2007 to cut costs. Unfortunately, this did not happen in time to have much effect.

GM’s Long-Term Viability Plan

GM, in a bid to receive a share of the new auto bailout money, promises to cut 10,000 salaried jobs and 37,000 blue-collar ones. Brands that GM is planning to eliminate include Saturn, Pontiac, Hummer, and Saab. GM also plans to reduce its dealer count by 2000 by 2014. By 2012, the automaker is planning to close 14 production plants while proceeding with the construction of a new plant to produce lithium-ion battery packs, while ramping up its alternative-fuel fleet by 60%. This set of actions form the backbone of GM’s plan to restore its long-term viability.

Chapter 11 Not a Bed of Roses

The downside of the bankruptcy option is that it could have an adverse effect on sales, with buyers fearing that their warrantees would not be honored, and replacement parts would become scarce. Burdens which automakers now must shoulder, like maintaining an unwieldy number of brands and contracts with an over-abundance of dealers, can be more easily jettisoned in the bankruptcy courts. March 31 is the “make it or break it” deadline for the future of GM and Chrysler.