Bill Pugliano/Getty Images
The Ford Motor Co. world headquarters in Dearborn, Mich. Analysts say Ford and GM will need to restructure, regardless of whether a bailout is approved.
The Ford Motor Co. world headquarters in Dearborn, Mich. Analysts say Ford and GM will need to restructure, regardless of whether a bailout is approved. Bill Pugliano/Getty Images
Bill Pugliano/Getty Images
The General Motors world headquarters in Detroit. The Big Three automakers are petitioning Congress for $25 billion in aid.
The General Motors world headquarters in Detroit. The Big Three automakers are petitioning Congress for $25 billion in aid. Bill Pugliano/Getty Images
As the Big Three automakers struggle to survive, a number of questions loom on the horizon. If they endure, what will the future companies look like? And if there is a bailout, will General Motors, Ford and Chrysler keep knocking on the government's door when things get rough again?
The debate has already heated up in Congress, which called an emergency session to address the issue. Democrats favor dishing out a $25 billion slice of the $700 billion bailout pie. Republicans — and the Bush administration — prefer instead to tap a $25 billion loan that Congress approved in September for developing energy-efficient cars.
As a bailout begins to look more uncertain, here's a look at some of the issues at stake and the options for Detroit.
Why not let Detroit go bankrupt?
There are some critics who say that's exactly what should happen. Even if one of the Big Three automakers goes bankrupt, it "doesn't stop the workers from coming to work, people from buying the cars, the cars from being serviced," Douglas Baird of the University of Chicago Law School told NPR last week. "The big problem is [consumers have] already stopped buying General Motors cars," he added. "If General Motors makes cars people want, people are going to buy them. And whether they're in Chapter 11 or not isn't really the big issue."
But industry advocates say the Big Three cannot be allowed to fail. "Would you buy a car from a bankrupt company?" United Auto Workers President Ron Gettelfinger asked in an interview with NPR. "We've been through enough of these bankruptcies that I can tell you, that is the worst possible path for this industry to go in." The union chief argues that bankruptcy protection is not a viable option because it will just lead to the liquidation of the automakers.
He blames the industry's woes on slumping sales resulting from consumers' inability to secure loans. Gettelfinger says the solution is securing a low-interest bridge loan to help automakers stay viable.
Would a bailout save the Big Three?
The problems facing the auto industry — especially General Motors and Chrysler — go back much further than the current financial crisis. The Big Three face a "lack of consumer acceptance for their cars," says Brian Johnson, a senior equity analyst who watches the auto industry for Barclays Capital. He says U.S. automakers have long failed to produce the fuel-efficient cars that Americans want to buy.
Both Ford and GM will need to restructure their balance sheets and continue their efforts to focus and improve their product lineup, regardless of whether a bailout is at hand, Johnson says.
Are all of the automakers in terrible shape?
"Ford is in a better position because its balance sheet is stronger," Johnson says. Without going to the government for a bailout, the company may have enough cash on hand to survive through 2009, factoring in the $10.6 billion that Ford can borrow from a line of credit it negotiated with banks, he says.
Ford has already begun to restructure its balance sheet by swapping its debt for equity, Johnson says. It plans to bring its European small and midsize product lines to the U.S. in 2010. But declining car sales means that more measures, such as factory closings and layoffs, are on the horizon to balance supply and demand, he says.
GM is likely to run out of cash during the first quarter of 2009, which would lead to a bankruptcy filing, Johnson says. So without bailout funds, any restructuring will occur during bankruptcy proceedings, if GM is able to survive.
Can GM avoid bankruptcy without a bailout?
That's unclear. Even if GM receives up to $15 billion from a government bailout (GM asked for $10 billion to $12 billion in hearings Tuesday), it would still have about $70 billion in debt, leaving the company in a "very highly leveraged" position, Johnson says. Like Ford, GM also has plans to bring over its European cars, but its dilemma is how to sell them, because it has "too many brands, [and] too few sales in each brand," he says.
Paul Eisenstein of The Detroit Bureau, an independent auto news service, says a bailout would likely bring a restructuring with some management changes and a shift toward more fuel-efficient vehicles. He predicts that any bailout would also give taxpayers a stake in seeing the automakers turn things around by issuing warrants — a type of guarantee — or a direct ownership interest.
Proposed bailout legislation in the House would require the companies to reduce costs, create more fuel-efficient vehicles and restructure their debt. This type of plan mirrors the 1979 bailout of Chrysler, Johnson says. The Senate version does not currently require such a plan.
What about Chrysler?
Chrysler, a privately held company, is in a weaker position.
"Dodge and Chrysler cars don't seem to have great market acceptance," Johnson says. Also, Chrysler doesn't have the ability to reach into European or Asian markets to duplicate cars that are made there for the U.S. marketplace. This may hasten the merger of Chrysler with a global automaker; however, it's uncertain whether anyone sees value in the company beyond its minivans and the Jeep brand.
If Congress approves a bailout, what type of controls would it create?
Congress will likely want more control over any funds it might allocate. Eisenstein says strings may not be enough: "It's going to be possible that it's something closer to steel chains." He thinks it's likely that Detroit's senior management will be ousted.
The government has already set some precedents: When it took over Fannie Mae and Freddie Mac and bailed out American International Group, it ushered in new management teams.
Eisenstein says Ford's CEO, Alan Mulally, who moved into the auto industry from Boeing, may have a better chance of surviving because of Mulally's decision to mortgage assets, rather than just borrow money, which gave the company more cash than any of its rivals.
Exactly what type of oversight might be put in place for the auto industry is a delicate decision. "Detroit has traditionally been an industry that said, 'Government: Stay out," Eisenstein says.
What impact are gas prices having on all of this?
Wild fluctuations in gas prices don't help the situation. Eisenstein says consumers have a habit of returning to light trucks, like SUVs, when fuel prices decline. That behavior could cripple the U.S. auto industry as it restructures to produce energy-efficient cars, leaving the field open to competitors like Toyota, Honda or Nissan to seize business opportunities in this arena.
Honda has car manufacturing plants that can produce a wide variety of vehicles on a single assembly line. "As the fuel prices go up and down, they can flex their product mix easier than even Toyota," Johnson says.