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With $17.4B, automakers must try to get back on the road

BY TOM INCANTALUPO | tom.incantalupo@newsday.com; The Associated Press

December 20, 2008

With a three-month grace period, now comes the hard part for General Motors and Chrysler.

The $17.4 billion in emergency loans granted Friday by President George W. Bush won't solve their problems - nor were they intended to - but will buy them three more months to prove that they can be viable businesses again.

They'll have to reduce their production levels, retailing network, debt and labor costs to reflect their reduced share of the American market - only about 50 percent even with Ford included - while they try to halt that decline with new models.

And by March 31 the carmakers will have to convince Washington that they're on the right financial road - or lose their government help.

"It's not a solution," said auto analyst Steven Spivey in the San Antonio office of the consulting firm Frost & Sullivan. "This money will just barely get them to March 31 and at that point they will only be addressing some of their problems."

Spivey and other experts think the two carmakers, who say they are weeks away from insolvency, will ask for more federal money in March. Ford has said it's in better shape financially, for now.

Working against the automakers is the U.S. economy that seems still headed downward, with rising unemployment that has left many consumers reluctant to make major purchases. New cars sales last month were the lowest in 26 years.

And tight credit has made it difficult or impossible for many consumers who are ready to buy cars to get loans to pay for them. "I think it's going to be a very tough road in the next couple of months," said Mark Schienberg, president of the Greater New York Automobile Dealers Association.

Jesse Toprak, executive director of industry analysis for auto information company Edmunds Inc. based in Santa Monica, Calif., notes that January and February typically are the weakest months of the year for auto sales. "This problem will not be solved by pumping money into the [auto] companies," he said. "If you're not selling product, you're going to run out of cash."

Edmunds is forecasting new vehicle sales this month of about 852,000 vehicles - 38.4 percent below a year earlier.

But, experts say, there's reason for optimism, too, that the two carmakers can emerge from winter with brighter futures. The three-year, low-interest loans - $13.4 billion now and another $4 billion later for GM if Congress agrees - is expected to ease concerns among prospective GM or Chrysler buyers about future resale values and parts availability, although the restructurings are likely to include cutting some brands, models and more dealerships.

Further, while the strings attached to the federal loans are significant - including a requirement to obtain more givebacks from the UAW over the next 12 months - none were unexpected and they will be subject to interpretation when March rolls around by then-President Barack Obama, who has been more supportive than the Bush administration of federal aid for the carmakers.

Kevin Tynan, senior auto analyst for Argus Research in Manhattan, said one string, a provision for the government to call back the loans after March 31 if the carmakers can't prove financial viability, is virtually meaningless. "Where do they think this money is going to be in three months - in certificates of deposit?" he said. "That money is going to be gone - it's not coming back and, if anything, you'll be giving them more after March 31."

WHAT THEY MUST DO

Conditions for automakers, union

Automakers will get $13.4 billion in short-term financing from the Troubled Asset Relief Program, with an additional $4 billion to be made available in February.

The United Auto Workers union will be asked to rework contracts to make wages and work rules comparable with those at nonunion plants in the United States owned by foreign automakers by Dec. 31, 2009.

Auto companies must use the money to become financially viable.

If a company has not become financially viable by March 31, 2009, its loan will be called and all funds returned to Treasury.

Auto companies must accept limits on executive compensation and eliminate perks such as corporate jets.