IHS Global Insight Perspective | |
Significance | U.S. President Barack Obama has made several comments regarding upcoming announcements on a restructuring plan for the American auto industry; such a plan is expected to be announced either today or Monday, 30 March. |
Implications | A sweeping restructuring of the industry is expected to be announced, with significant help being provided in exchange for dramatic restructurings above and beyond what has already been requested. |
Outlook | If the government can provide the necessary legal framework to perform tasks that a bankruptcy would solve but do so outside a bankruptcy court, significant and dramatic changes to the industry could be just days away. |
Several news sources have indicated that the U.S. government is nearly ready to announce its plan for restructuring the American auto industry. President Barack Obama made several comments during an online town-hall meeting yesterday regarding the topic, leading to intense speculation that announcements from the Presidential Task Force on Autos may be ready for release. Obama let several hints slip in his comments during the town hall session, and said that he personally would announce plans in the next few days to help the auto industry, but only if it undertook significant steps to restructure itself and how the very automotive economic model works in the United States. "I think it is appropriate for us to say are there ways for us to provide help to the U.S. auto industry to get through this very difficult time, but the price is you've got to finally restructure to deal with these long-standing problems," he said during an online question-and-answer session. "That means that everybody's going to have to give a little bit—shareholders, workers, creditors, suppliers, dealers—everybody is going to have to recognize that the current model economic model of the U.S. auto industry is unsustainable."
Obama admitted that providing additional capital to the auto industry was not a very publicly popular position, but that the penalty of letting the companies fail would be far more damaging to the national economy. But that additional capital will certainly come at a price, according to the President. "If they're not willing to make the changes in the restructuring that are necessary, then I'm not willing to have taxpayer money chase after bad money," Obama added. "A lot of it is going to depend on their willing to make some pretty drastic changes, and some of those are still going to be painful." He also blamed part of the automakers' predicament on historical "mismanagement," stating that "trying to build more and more SUVs and counting on gas prices being low, and that's your only profit margin—that's just not a model that's going to work."
Outlook and Implications
It is generally thought that the announcements for the future of the auto industry will come on Monday, given the President's travel schedule, and the fact that he has suggested that it will be he who announces the next steps in the recovery. His remarks have echoed those of the Task Force itself to some extent, but also hints that he may be getting more rhetoric than facts from staffers who are not as well informed about the current state of the industry. Suggesting that the auto industry has not actually performed any restructuring yet and will need to do so if it expects further cash support is an obsolete position, and one not far removed from the public statements made by Obama's chief of staff Rahm Emanuel. Suggesting that the automakers might not be receptive to it is downright strange, given the hoops that the industry has already jumped through in order to appease what have been comparatively huge government demands for details and plans compared to what has been required of Wall Street recipients of far more government money. Or, it could be that this is simply tough language necessary to ease an apprehensive public, which has swung negatively on the topic of giving more government bail-out loans to the domestic auto industry. The suggested abuse of funds by financial firms like AIG and Citigroup with practically no accountability or government oversight has left a bad taste in the American public's mouth regarding further government involvement in bailing out big business; it is thought that Obama understands the need for further involvement, but may be playing some smart politics to distance the automotive effort from the banking efforts.
Other top Washington officials are confident that there will be plans announced very soon as well, such as senior Michigan Senator Carl Levin, who has stated that while he personally has not been briefed on any aid plan, he is optimistic that the Task Force will present a plan that does indeed rescue the industry. The plan will not come without significant strings, however, with Levin stating that it is clear to him that any assistance plan will place new conditions on restructuring.
Which then begs the question: what further restructuring changes could the companies undertake that they are not already performing? Already General Motors (GM) and Chrysler are closing plants, shedding employees, ending programmes, cancelling investment, divesting brands, and generally shrinking themselves dramatically. With yesterday's announcement of 7,600 additional blue-collar buyouts accepted, GM has officially shed over half of its factory workforce since 2006. Chrysler has eliminated 35% of its white-collar workforce, and is down to just 22,000 hourly employees. But there are several steps left undone that can be more easily accomplished with government help; these are steps that would best be done in bankruptcy, but with government help, could potentially be done in an out-of-court restructuring. Debt restructuring would be a big step, lending itself to healthier balance sheets, but would require an intervention by Congress to allow that to happen without actually and officially declaring bankruptcy. Cancellation of dealer franchise contracts would enable the companies to cancel slow-selling brands, while cancellation of labour contracts would allow the companies to dramatically restructure their labour costs. Government assistance could be provided to workers affected by these changes, but the fears are that such strings would come with the requirement to build specialised fuel-efficient vehicles that may be politically popular with environmental fringe groups, but play less well with mainstream American car buyers. Time will tell what the U.S. government has cooked up for the American auto industry, and that time is rapidly becoming short.