• by Karl Greenberg , November 20, 2008

As lawmakers consider a $25 billion bridge loan to domestics, the Detroit automakers have weighed in. Rick Wagoner, Alan Mulally and Robert Nardelli of GM, Ford and Chrysler, respectively, have been trying to convince legislators that a $25 billion loan beyond the $25 billion the government earmarked for Detroit automakers last year for R&D, is necessary to tide them over until credit markets thaw. 

On Thursday, Ford CEO Mulally argued that the domestics have a competitive and sustainable future, and that government-proffered liquidity for the domestics will cost less than doing nothing. "As a relative newcomer to this industry, I have the benefit of seeing the auto business and its transformation clearly. I see parallels with what I witnessed at Boeing after the 9/11 tragedy and the steps we took to transform the commercial airplane business," he said.

Efraim Levy, an automotive analyst at Standard & Poor's, speaking at the International Motor Association luncheon, said his firm believes the cost of a bailout now is far less than the cost to the real economy of domestic-automaker bankruptcy next year.

"Bankruptcy would potentially put GM out of business; customers would flee to competitors rather than buy from a company that might not be able to support its products," he said--conceding there is the risk the Fed will not get repaid for what it invests, and that the cash assistance will only delay the inevitable. "But funding bankruptcy during a recession would be very expensive. It would take out suppliers and competitors with those same suppliers. Could the U.S. economy absorb this stress, especially if it is weak?"

In his written statements before the House Committee on Financial Services and U.S. Senate Committee on Banking, Housing and Urban Affairs, Nardelli, CEO of Chrysler, answered that question by saying "no."

"Given our common supplier base--at Chrysler, 96 of our top 100 suppliers are common to Ford and GM--the bankruptcy of any one domestic automaker would place enormous pressure on the supply chain and consequently, our company's competitors."

Also at stake, he said, were Chrysler's obligations--including a $20 billion total health care obligation, $2 billion in annual pension payments to retirees and surviving spouses, $7 billion in current payables, $35 billion in future annual supplier business, and 56,600 in direct Chrysler employees earning $6 billion in wages. "The impact to the industry would mean 2.3-3 million in lost jobs, $275-400 billion in lost wages, and $100-150 billion in lost government revenue," he said.

GM Chairman and CEO Rick Wagoner said last year, the automaker purchased more than $30 billion in goods and services from more than 2,000 suppliers in 46 states. "Our pension program covers nearly 475,000 retirees and spouses, and our health benefits extend to about one million Americans."

He said that since 2005, the company has reduced annual structural costs in North America by 23% or $9 billion--and expects to reduce them by about 35%, or $14-15 billion, by 2011. The company also negotiated a labor agreement with the UAW last year. "That will enable us to virtually erase our competitive gap," he said.

GM will offer 20 models in the U.S. that get at least 30 mpg highway--"twice our nearest competitor," he said, and nine hybrids. He noted that the company has restructured to boost GM's liquidity by $20 billion by the end of 2009.

Nardelli said Chrysler would use some of the $25 billion to thaw dealer-financing offers. "Twenty percent of our revenue disappeared overnight when our finance company was unable to offer leases," he said. "These sales literally vanished."

He said that 75% of Chrysler's 3,200 dealers rely on Chrysler Financial to finance their business, and 50% of all customers finance their vehicle purchases through the Chrysler Financial. "Money is not available for dealers to finance their wholesale orders, invest in their facilities, and hire and train employees. Competitive loans for the average working American--our customers--are virtually nonexistent. This has directly and dramatically depressed vehicle sales, putting at risk not only auto manufacturers, but also the widespread network of suppliers, vendors."

All three of the executives touted recent restructuring efforts. Ford, said Mulally, has closed 17 plants, reduced the workforce by 51,000 employees and negotiated a new contract with the UAW to improve competitiveness.

He said the Ford Fusion Hybrid--introduced on Thursday at the L.A. Auto Show--is emblematic of the company's product direction aimed at wresting share back from Toyota versus the Toyota Camry Hybrid.

"On Friday, we end large-SUV production at our Michigan Truck Plant and begin converting to fuel-efficient small car production," he said.

Nardelli said that since last year, Chrysler has reduced 1.2 million units of capacity, or 30% of Chrysler's previous capacity. "Over the past 10 months alone, we've reduced our fixed costs by $2.2 billion, and unfortunately, by the end of the year, we will have furloughed over 32,000 employees."

Levy said even if they get the bailout, the picture is grim for Detroit, at least in North America. "We predict total U.S. sales will be 13.5 million light vehicles in 2008 and 12.8 million units next year. Detroit will continue to lose share to imports next year as well."