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Automakers: All for One and One for Parts?
December 10, 2008 6:00 AM
ABC News’ Alice Gomstyn reports: In the dog-eat-dog world of big business, you don’t often hear about a company sticking up for a rival. Yet, earlier this week, Ford declared that it supported government help for General Motors and Chrysler, even while Ford itself said it could do without the short-term loans now under consideration by Congress.
Ford has made clear that it doesn’t want to see its cross-town competition put out of business ... but don’t start singing Kumbaya yet. On Ford’s part, it’s not exactly a selfless move. Among the Detroit 3, there is substantial overlap among auto parts suppliers, and if even one domestic automaker collapses, parts suppliers – which are already struggling because the automakers have cut down on production and their purchase of supplies in recent years – could find themselves going under, too.
“It would be customary for the (bankrupt automaker) not to make checks out to the suppliers for parts that have been shipped over the last two months and the supplier would lose all that cash,” said Craig Fitzgerald, an auto analyst at Plante & Moran PLLC in Southfield, Mich. “For many of them, that would be the straw that breaks the camel’s back -- that will either force them into bankruptcy or force them into liquidation.”
Without the suppliers, a surviving automaker -- ie. Ford -- would find it nearly impossible to get the parts it needs to keep producing its cars.
“It has the risk to potentially shut down many or all of Ford’s plants,” Fitzgerald said.
Ford has another motivation to help keep its competition afloat -- to meet future government fuel economy standards, the automakers may collaborate on developing fuel-saving technology.
“For those kinds of R&D projects, there’s no competitive advantage,” Fitzgerald said. “They’d just as soon share those costs.”
In the meantime, some, including “Bailout Nation” author Barry Ritholtz and Edward Altman, a finance professor at New York University’s Stern School of Business, continue to argue that bankruptcy is still the best option for the auto industry.
Both Ritholtz and Altman say that, through a bankruptcy, the government could take the role of “debtor-in-possession” and lend the bankrupt company money.
Through its DIP status, the government would later be first in line to get its money back, Altman said during testimony before Congress last week, while the bankrupt company would get more time to pay off other creditors and more flexibility to renegotiate its pension and health care claims.
It’s a better alternative, he said, to “a highly controversial government bailout,” which would not offer the same protections as a Chapter 11 bankruptcy filing.
And, Altman said, even with the government bailout, GM and Chrysler are “doomed to eventually file for bankruptcy” anyway.
“The management and boards of these two firms, which until recently have been in a state of denial, should face up to the reality of their dismal outlook,” he said.
Altman is one of many to criticize the management of the automakers and some -- including members have Congress-- have gone as far as to say that the companies' chief executives should resign.
There's at least one person, however, arguing otherwise: Lee Iacocca, the former president of Ford and the former chairman and CEO of Chrysler. Iacocca was at Chrysler's helm when the company lobbied -- and later received -- a government bailout in the late 1970s.
In a statement yesterday, Iacocca defended the Big 3's chiefs, saying that they were "by far the best shot we have for success."
“Having been there, I do not agree with the sentiment now coming out of Congress that the management should be changed as a condition of granting loans to the Detroit automakers. You don’t change coaches in the middle of a game, especially when things are so volatile," Iaccoca said.
“The companies may not be perfect but the guys who are running them now are the only ones with the experience and the in-depth knowledge and understanding of how the car business really works," he said. "...I say give them their marching orders and then let them march."
December 10, 2008 | Permalink | User Comments (10)
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Altman seems like he's completely clueless to the automobile industry. He understands finance, but not cars or the industry or why people buy what they buy. GM is not 'doomed', and everyone knows Chrysler will likely merge with someone else down the road. And why should the government be first in line to get their money back instead of the creditors? Nonsense. Time for him to go back to taxpayer supported academia...
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Posted by: jeff | Dec 10, 2008 8:13:15 AM
Fitzgerald is no smarter. No competitive advantage from developing efficient fuel technology? Then I guess a car that got 100 mpg. wouldn't be especially attractive to consumers. Analysts should stick to what they know -- and with their dismal record in predicting whether a stock should be bought (prior to the collapse, 90%+ said buy or hold), maybe they should just avoid public notice.
Posted by: Fredric Dennis Williams | Dec 10, 2008 8:19:04 AM
In the early '90s sen. Shelby was the driving force behind a $253 million incentive
package to Mercedes. Plus, Alabama agreed to purchase 2,500 vehicles from
Mercedes. While the bridge loan the Big Three is requesting will be paid
back, Alabama's $180,000 plus per job was pure incentive. Sen. Shelby, not
only are you out of touch, you are a self-serving hypocrite, who is prepared
to ruin our nation because of lack of knowledge and lack of due diligence in
making your opinions and decisions. After 9/11, the Detroit Three and
Harley Davidson gave $40 million-plus emergency vehicles to the recovery
efforts. What was given to the 9/11 relief effort by the Asian and European
Auto Manufactures? $0 Nada. Zip!... This is what our nation is hoping for???? Shame! Shame! Shame!
Long before our industries asked for assistance, Sen. Shelby was giving away tax payer dollar and darn near drove his state in the dirt... He had to pay those companies with your tax payer dollars to get these companies to build their factories in his state. Gave them property, gave them money, and gave them promise to purchase vehicles! How are these companies any different? Sen Shelby, You are a disgrace to the working American class...
Posted by: DKD | Dec 10, 2008 8:51:41 AM
Thank you Mr. Elkins.... I can not help, but to show the truth....and you said it best in the following article.....
The financial collapse caused by the secondary mortgage fiasco and the greed
of Wall Street has led to a $700 billion bailout of the industry that
created the problem. AIG spent nearly $1 million on three company
excursions to lavish resorts and hunting destinations. Paulson is saying no to $250 billion foreclosure relief and the whole thing is a mess. So when the Big Three ask for 4 percent of that of the $700 billion, $25 billion to save the country's largest industry, there is obviously oppositions. But does it make sense to reward the culprits of the problem with $700 billion unconditionally, and ignore the victims? As a Ford dealer, I feel our portion of the $25 billion will never be touched and is not necessary. Ford currently has $29 billion of liquidity. However, the effect of a bankruptcy by GM will hurt the suppliers we all do business with. A Chapter 11 bankruptcy by any manufacture would cost retirees their health care and retirements. Chances are GM would recover from Chapter 11 with a better business plan with much less expense. So who foots the bill if GM or all three go Chapter 11? All that extra health care, unemployment, loss of tax base and some forgiven debt goes back to the taxpayer, us. With no chance of repayment, this would be much worse than a loan with the intent of
repayment. So while it is debatable whether a loan or Chapter 11 is better
for the Big Three, a $25 billion loan is definitely better for the taxpayers
and the economy of our country.
Posted by: DKD | Dec 10, 2008 9:07:22 AM
To the people of this Great Nation,
"Yes, we have lost a lot of market share. Where did you think all those
millions of cars and trucks our foreign competitors import and assemble
here in taxpayer-subsidized plants in cheap-labor states would be sold, and
out of whose hides did you think they would come? Consider this. Our Automotive industries did not ask for or get what the competitors had handed to them on a silver platter. Our government has been handing them checks right along at your expence. The only difference is, their exec and sen shelby are not sitting in front of a board explaining where your money is being spent. LOOK AT THE BIG PICTURE!!!
Posted by: DKD | Dec 10, 2008 12:04:20 PM
DKD claimed, "Our Automotive industries did not ask for or get what the competitors had handed to them on a silver platter."
Hey DKD, I'd like to sell my share of "our American industries" for cash, please. Oh, they really aren't ours? Ok, then let's not be sloppy with our words.
Secondly, the Detroit automakers certainly did ask for and get goodies from local governments in exchange for locating facilities in their cities and states. To name just two examples, I remember the competition between states and localities to lure GM's Saturn division to their territories. I remember the goodies Chrysler got for building themselves a new corporate HQ in a particular Rust Belt town. Let's also not be sloppy with our facts.
Posted by: Micha Elyi | Dec 11, 2008 1:30:45 AM
I wonder how long 700 billions would last if it were spent on unemployment benefits? Considering that the Dept Labor and Health and human services budgets for 2007 together was less than 100 billion, let let the big three face the music, file for bankruptcy, and emerge without the constraints of the unions or billions in loans from the government.
Here is the '07 budget numbers in case anyone wonders how much money we a spending on saving dying institutions.
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