With the clock ticking on the hemorrhaging U.S. auto industry, the Bush Administration agreed to come to its rescue by offering a total of $17.4 billion in loans in exchange for concessions from the ailing companies and their workers. A majority of the funds will be offered to General Motors and Chrysler LLC immediately, with another $4 billion to be made available pending what the White House considers a viable recovery plan.
"Allowing the auto companies to collapse is not a responsible course of action," Bush said in his announcement, in which he also mentioned the consideration of letting the automakers go into bankruptcy: "Given the current state of the auto industry and the economy, Chapter 11 is unlikely to work for American automakers at this time."
The move followed a week in which the Big Three announced plant closures or sharp cutbacks in operations in advance of the holidays. Chrysler announced on Wednesday that it is preparing to shutter all 30 of its manufacturing plants, starting Friday, through Jan. 19. "Part of this was planned already," said Lori McTavish, Chrysler's director of communications. (See pictures of the remains of Detroit.)
In a statement about the extended holiday shutdown, Chrysler said the lack of financing for car loans contributed to the move. "Due to the continued lack of consumer credit for the American car buyer and the resulting dramatic impact it has had on overall industry sales in the United States," the action was needed, the company said. At a recent meeting between Chrysler management and dealers at Chrysler's headquarters, the dealers asserted that they have willing buyers for Jeep and Dodge vehicles but are unable to close the deals due to lack of financing. "The dealers have stated that they have lost an estimated 20% to 25% of their volume because of this credit situation," the statement said.
Last week General Motors also announced deep cuts in production. The company will close all of its passenger-car plants for the month of January and reduce the company's production of new cars and trucks 30% during the first quarter. Chrysler and GM have asked the U.S. government for $14 billion in bridge loans to weather the current credit crunch. (See the 50 worst cars of all time.)
Automakers waited all week for news of the expected bridge loan, which finally came on Friday. "The longer we wait, the worse the situation becomes," said one auto executive close to the situation. The Wall Street Journal reported that GM and Chrysler restarted merger talks, but both companies have flatly denied it. "We certainly are not in any merger talks with Chrysler," says Tom Wilkinson, a GM spokesman. "The report was simply wrong."
Ford, while not seeking federal aid, has announced plans to extend its holiday shutdown at 10 assembly plants next month. Lewis Booth, Ford's chief financial officer, declined to make predictions about industry-wide sales for 2009, but noted, "We're seeing weak sales in Western Europe and in Eastern Europe, where sales in Russia dropped." Russia's weakness prompted Ford to trim production at its new assembly plant near St. Petersburg. "We're even seeing weakness in South America, where sales were very strong right through September," he said. Ford, however, has enough cash to make it through 2009. "We have sufficient liquidity unless a crisis happens," he said.
Auto dealers are putting out their own message of distress. Annette Sykora, chairwoman of the National Automobile Dealers Association, said that with each passing day, more dealerships are closing and more people are losing their jobs. "We've heard encouraging words from the White House, but time is of the essence," Sykora announced in a written statement on Wednesday. This year alone, 900 dealerships out of 19,700 are expected to close. (See pictures of the most important cars of all time.)
Meanwhile, Johnson Control Inc. of Milwaukee, a major supplier to Asian automakers operating in the U.S. such as Toyota, said it expects to report a loss for the quarter ending Dec. 31. "Global automotive production is significantly worse than just two months ago," said Johnson Controls chairman and chief executive officer Stephen A. Roell. "Our customers continue to announce production reductions and plant shutdowns on a weekly basis. Every region of the world is down by a double-digit rate," he added.
Rebecca Lindland, an analyst with Global Insight in Lexington, Mass., echoed the industry's concern, noting that a lack of credit combined with sinking consumer confidence is leaving automakers with little margin for error. "I don't think it's a surprise anymore if manufacturers cut production," Lindland says. "We don't expect to see anything but bad news."