GM and Chrysler were both required to develop business plans to make themselves viable again as a condition of federal bailouts, with a deadline of February 17th set after the December bailout.
Fears are therefore growing that General Motors’ and Chrysler’s viability plans will include plant closures or massive job cuts and layoffs. Chrysler temporarily shut three plants in Michigan and Canada last week. Both companies are required to gain concessions from bondholders and unions like the UAW (making workers’ salaries competitive with those of foreign automakers); a GM insider reports to Newsweek that GM’s plan includes further plant closures, salary wage cuts and layoffs.
The federal government requires evidence from Chrysler and GM that they can repay the federal bailout loans from December, despite the worst atmosphere for new car sales in 26 years. GM received a $9.4 billion and hopes for $4 million in additional loans, while Chrysler is on the hook to the Treasury for $4 billion and wants another $3 billion.
Newsweek explains:
“The companies are required to show the government they can achieve ‘positive net present value,’ which means that the present value of a company’s expected net cash flows exceeds the initial investment in the company.”
What Could Happen?
That means that GM and Chrysler workers with “white-collar” jobs may not get buyouts or be able to take early retirement as was offered in the past. Wage cuts could reach 5%. As far as plants with fates on the line, GM has closed four SUV and pickup truck-producing plants in the past year, without closing the corresponding part-supplying plants that produced engines and transmissions for the closed plants.
GM has been running some plants unprofitably, for only one shift, with a slow-moving assembly line. Some of the at-risk plants include the truck plant in Pontiac, Michigan that produces the GMC Sierra and Chevy Silverado. Observers point out that other factories have excess truck capacity and could pick up the slack for a closed Pontiac plant. The Orion Township, Michigan plant produces the Chevy Malibu and Pontiac G6 and could also face an axing. GM could move production of those vehicles to its Kansas City, Kansas plant.
GM’s Vice-Chairman, Bob Lutz, said that GM would have to shrink in size domestically in order to meet government viability requirements. At the same time, it’s on track for growth in other countries, including China. “We may have to take a step back in General Motors to find the right-sizing that’s going to permit a profitable existence in a much smaller market.”
Last year, GM closed plants in:
Moraine, Ohio
Janesville, Wisconsin
Oshawa, Ontario
Toluca, Mexico
Since the closing of those plants, US auto sales have collapsed from over 16 million to about 13 million. In 2009, industrywide sales could drop to a number closer to 10 million. At the same time, GM is looking to possibly gain some more factories as it talks to Delphi, one of its top auto parts suppliers, about taking back certain factories that provide it key auto parts as Delphi experiences financial problems of its own. An insider outlines that the talks have been ongoing for many weeks and may not end with GM-owned Delphi plants.
Not just GM, but Chrysler, too, might have to close plants due to its lagging auto sales.
What about the bondholders and UAW? UAW is waiting to see what other unions agree to in the way of concessions, and GM is holding a summit with its bondholders this week to come to an agreement on switching debt for equity.
Government Decides.
At least some details of the automakers’ plans are expected to be announced February 17th. However, the plans don’t have to be put into place until a government-set March 31st deadline.
If the two companies can’t compete by that date, the government will recall its billions in loans. The not-yet-appointed “car czar” will decide whether the companies meet government standards for viability; some members of Congress have discussed extending the deadline for the carmakers.