Additional Bailout Funds May Be Necessary for Automakers

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Researched by Industrial Info Resources (Sugar Land, Texas)--For the first time in recent memory, the Detroit Auto Show, the premier show of the year for automakers, began with more of a whimper than a roar. It quickly became obvious as the show opened that all of the automakers are not only cutting back on costs associated with the show but also that the focus would be on fuel efficiency. While the automakers began the show in a much more subdued manner than in past years -- last year, Chrysler LLC (Auburn Hills, MI) introduced its new Ram pickup with bull-whip toting cowboys and a stampede of 120 cattle past the Cobo Hall -- Fritz Henderson, Chief Operating Officer of General Motors Corporation (NYSE:GM) (Detroit, Michigan), said that the automaker is preparing a "worst case" scenario for Congress that may include a request for additional bailout dollars.

Negotiations have already begun between the automakers and the United Auto Workers (UAW) union (Detroit) on plans to reduce labor costs and additional concessions that will be necessary if the automakers are going to right their respective ships in the coming months. The automakers, GM, Ford Motor Company (NYSE:F) (Dearborn, Michigan) and Chrysler, have until February 17, 2009, to finalize amendments to their current labor contracts in the hopes that they can further reduce costs and come up with firm plans for restructuring that can save all of the Detroit Three from going under.

However, the UAW is resisting some of the requests, feeling that it is being unfairly singled out as a major portion of the problems that face the American automakers. UAW President Ron Gettelfinger has said that the union will approach President-elect Obama after the inauguration to end what he calls unfair requirements in the loan terms for concessions from the union. The union has already agreed to end its costly jobs bank program that would allow laid-off workers to collect 95% of their pay and benefits for a period of years while not working.

Some progress was made during the last round of contract negotiations on reducing the cost per worker for the automakers. According to GM, its current set of hourly wages are already in line with the average of $30 per hour paid to workers at Toyota Motor Corporation's (NYSE:TM) (Toyota City, Japan) older U.S. assembly plants. However, GM's overall cost per hourly worker is about $69 per hour when including benefits and the cost of healthcare. Toyota's all-inclusive cost is $53 per hour.

In 2010, when a UAW-administered trust fund begins paying retiree healthcare costs, GM's all-inclusive cost will be reduced to $62 per hour; however, this is not enough of a reduction for the struggling automaker, and it will occur too late to help the automaker out of its current financial mess. Chrysler is in a similar state and is also in negotiations with the UAW on similar issues while Ford has said it has enough cash to see its way through 2009, but may require financial help in 2010.

With sales tanking across the board for the automakers, not only the Detroit Three have been suffering. Toyota recently announced it would suspend car production in Japan for six days in February this year and then again for an additional five days in March. These stoppages will occur at all 12 of Toyota's Japanese facilities and are on top of the three-day work stoppage occurring in January.

The current state of the automotive sector has also virtually eliminated all capital spending in North America for the foreseeable future. Projects that had been under way, such as Toyota's new plant in Mississippi, have been placed on hold while no new project activity is being planned. Maintenance has continued, but all of the automakers, both foreign and domestic, had extended normal maintenance periods in December since additional production was not needed. Simply put, the automakers could not sell the vehicles they had already produced so there was no point in making new ones until sales caught up.

All in all, the state of the automotive sector in North America is one of chaos. Until the Detroit Three can develop concrete rebuilding plans that are approved by Congress, not much good will come out of Detroit. While all of the automakers are now debuting new fuel-efficient vehicles this week at the Detroit show, not many of them will be available this year and thus are essentially nonissues when it comes to the immediate problems facing the automakers. We will have to see what, if any, concessions will be granted by February 17 and then see what plan the automakers develop by the March 31 deadline imposed by Congress. It is going to be a long year for the automakers and the lackluster start to the Detroit show is a good sign that not much is going to change in the near future.

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