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Living Within Our Means: GM & Chrysler Edition

October 28th, 2008 . by economistmom

If you haven’t heard, the Treasury Department is currently considering a plan to provide $5 billion to $10 billion in aid, ASAP, to GM to help finance its possible merger with Chrysler.  And yesterday, my high school sweetheart was offered $50,000, a car, and 6 months health coverage, to leave Chrysler and his management position at the Detroit-area (Warren) truck assembly plant.  (That would be some of his colleagues pictured above.)

Liz Wolgemuth on the U.S. News and World Report blog (”The Inside Job”), insightfully asks:  doesn’t this mean we’re using “tax dollars to fund layoffs?”

Well, being someone who’s constantly got the “fiscal responsibility” angle on things, I’d edit that slightly to say yes, we’re using future taxpayer dollars to fund layoffs–because we’re talking about another deficit-financed rescue, after all.

There’s something quite ironic and sad about “rescuing” an industry by providing it the cash flow that’s needed to shrink it–for the federal government to effectively say they’ll help these companies eliminate jobs, in the name of “fiscal stimulus” and for the cause of keeping the economy “alive.”

This is an auto industry being forced to “live within its means”–with a little help from the government–by consolidating, downsizing, reprioritizing.  Because the industry for too long catered to our entire nation’s living-beyond-our-means mentality, the “transformation” Detroit needs to survive in the longer run (and grow again) will come too late for many thousands of workers who are now losing their jobs.

A Wall Street Journal article by Jeffrey McCracken and John Stoll describes the ironically devastating “human toll” of this ”rescue” and how the auto companies got so cash constrained–leaving the federal government as the only lender willing to fund a merger and the associated layoffs:

GM and Chrysler estimate that a combined entity would need $10 billion in new equity to lay off workers, close plants, integrate the two companies and provide liquidity, according to several people involved in the talks or briefed on them.

“Without external intervention, from consolidation or government assistance, we expect GM to reach its minimum cash position in under 12 months,” Deutsche Bank auto analyst Rod Lache wrote last week. In an interview, Mr. Lache added that Chrysler is also running dangerously low on funds. “We believe Chrysler is in the same position. It’s either August 2009 or December 2009 they run out. Both have a limited runway.”…

The human toll of such a move could be high. The companies would slash duplicated functions from engineering to marketing. One internal estimate predicts at least 40,000 jobs could be cut from the roughly 166,000 people employed by the two companies in the U.S., Canada and Mexico.

GM’s cash cushion has been eroding for some time. Each month, the company spends $1 billion more than it brings in. At that burn rate, GM could effectively run short of cash next summer, without even taking into account further sales declines.

The 100-year-old company has about $20 billion on hand today, but needs at least $11 billion to $14 billion of working capital at all times so it can keep paying its bills, GM has said. The company has been trying for months, without success, to raise at least $5 billion by selling assets, such as its Hummer brand, and by pledging unencumbered assets…

But lenders are reluctant to invest. GM debt, once considered the highest investment grade, has tumbled to low-rated, junk status. Many lenders approached to invest in a combined GM-Chrysler have also balked…

When Cerberus purchased Chrysler in the spring of 2007, the capital markets were at full throttle. The firm basically bought Chrysler for free, in exchange for taking on its considerable debt. Cerberus expected that once Chrysler was private, the fund could build a smaller, stronger company with the ready help of debt investors.

It hasn’t turned out that way. In two years, Chrysler has fallen from third to fifth in U.S. auto sales. J.P. Morgan estimates it has $11 billion on hand. It uses $3 billion to $5 billion of that as working capital to meet payroll, pay vendors and pay other bills. Its monthly cash burn is estimated at $300 million to $400 million. That figure may grow as vehicle sales slow, suggesting that it could run out of money by late 2009. To conserve cash, Chrysler has halted certain new-product plans, a sign that it sees a deal with GM as the only path out.

The auto makers’ huge obligations, meanwhile, are only growing as revenues and profits shrink. For decades, Detroit’s Big Three have funded generous programs to take care of former workers and surviving spouses…

Obligations growing and revenues shrinking, needs rising and means falling…In this way the auto industry’s woes are just another manifestation of the overextension of the entire U.S. economy.

And thus it is “depressing” (pun inadvertant) to think that if the federal government goes through with this “rescue,” that it will immediately result in more lost jobs, not saved jobs (contrary to what we think short-term “fiscal stimulus” ought to do), and that at the same time being deficit financed, it will also shrink national saving (contrary as well to what we think we should do to encourage longer-term economic growth).

And how will we stimulate the economy in the short term this time around?  More “depressing” news today: consumer sentiment is at an “all-time” (in 41-year history) low.  We’re no longer talking about encouraging folks to shop; that sounds almost ridiculous.  We’re now talking about keeping folks from drowning by helping them hold onto their jobs.  How to keep up that short-term economic activity is a lot tougher to figure out, now juxtaposed with the longer-term economic forces that seem to be telling us–all over the place in our economy–to downsize rather than up-size.

3 Responses to “Living Within Our Means: GM & Chrysler Edition”

  1. comment number 1 by: IdahoSpud

    That is the single most depressing thing I’ve read in a month. The sad thing is the self-evident truth in it.

    I have no idea what non service-sector jobs are supposed to drive an economic recovery. I can guarantee this: Tanning salons, CFPs and poodle groomers aren’t going to be leading us out of this recession.

  2. comment number 2 by: Jason Seligman

    It really does break your heart to see the difficulty that GM and the auto industry in general are going through. I cannot easily forget the well written article from a few days back regarding the plight of the Janesville plant, which shows the arc of SUV sales for GM over time, and tells the story of a community that was at the epicenter of the SUV revolution.
    see: http://www.nytimes.com/2008/10/26/business/26jane.html?_r=1&scp=6&sq=GM&st=cse&oref=slogin
    All of this is pre-amble though to the realities of a severe credit crunch that are not only keeping buyers from purchasing a Suburban or Esca-lard-e, but also making them hold back on the Malibu, Sky, G6, Lacrosse, and CTS. The point of assisting GM and Chrysler through these times is not to lay off people, but rather to keep the majority of their workforce in place while the very large one-time charges associated with a restructuring work their way through cash flow.
    More broadly, I offer that GM still has a tremendous amount going for it though, that it has done a fairly good job of keeping it’s small car platform and four cylinder engine programs plugging away. Much like Ford, it has integrated basic designs across Asian, European and North American markets so that the Saturn you see here in the states and the Opal or Vauxhall you see in Europe are quite similar. GM is wonderfully positioned in China, and though multi-generational investments in Toyota has a stake in the number 1 and number 2 auto production firms in the world. Skipping on hybrid technology in retrospect was not a good move, but GMs investment in alternate energy power plants, including its newest effort, the Chevy Volt are all quite promising. Unlike other domestic and foreign makers they have not outsourced their fuel cell programs to companies like Ballard, nor have they failed to learn from loosing electric vehicle programs like the EV1. It is important too to remember that no automaker is unscathed these days. Here in Ohio we are aware that Honda’s North American sales are down 10 percent, and even its runaway hit, the Fit, with a reported 33 MPG gets lower gas millage than my sporty 1988 Chevy Cavalier RS did (37) over it’s 11 year life with me.
    Longer term, beyond legacy costs, GM does have plenty to do. Perhaps GMs biggest hurdle is its marketing branch - promoting a “Cavalier” and decidedly un-”Fit” image for more than a few years now. Go to a Pontiac dealership as my wife and I did recently in Georgia — the problem was not really the cars (we liked the Solstice a lot); it is the tragically dingy and dilapidated styling of the dealership, the botched desks, the broken Formica, and the dirty fluorescents. The sales staff starts off at a disadvantage, both because sales people are less dynamic in these environs, and because buyers associate the environment with the quality of the relationship they will have with the company over the lifetime of their purchase. Having got its production costs, its quality, and even its styling departments in line it is time to do something about the point of sale. When these guys have a few bucks in their pockets again, that is where I would put in a little more marketing effort. And as long as I’m suggesting things how about a mid-sized station wagon with all wheel drive for us North Americans?

  3. comment number 3 by: JinianVictoria

    How utterly appalling! This just hilites the reverse side of the old saying, “whats good for GM is good for the country”. We now can proudly say “whats bad for the country is bad for GM”. For too long the car makers kept trying to flog merchandise that the public was not buying..can we say HUMMER et al? Now we have to finance their merger and the now recognized purpose of laying off workers? Lets try to lay off some of the corporate types and NOT the workers. OMG i AM A RADICAL!! Once again the taxpayer and workers are finanacing bad management decisions with our money and our jobs. When does reality get to sit in the game?