Auto Industry
Summary of Government Efforts and Automakers' Restructuring to Date Gao ID: GAO-09-553 April 23, 2009The turmoil in financial markets and the economic downturn has brought significant financial stress to the auto manufacturing industry. The economic reach of the auto industry in the United States is broad, affecting autoworkers, auto suppliers, stock and bondholders, dealers, and certain states. To help stabilize the U.S. auto industry and avoid disruptions that could pose systemic risk to the nation's economy, in December 2008 the Department of the Treasury established the Automotive Industry Financing Program (AIFP) under the Troubled Asset Relief Program (TARP). From December 2008 through March 2009, Treasury has allocated about $36 billion to this program, including loans to Chrysler Holding LLC (Chrysler) and General Motors (GM). GAO has previously identified three principles to guide federal assistance to large firms: define the problem, determine the national interests and set goals and objectives, and protect the government's interests. As part of GAO's statutorily mandated responsibilities to provide timely oversight of TARP activities, this report discusses the (1) nature and purpose of assistance to the auto industry, (2) how the assistance addresses the three principles, and (3) important factors for Chrysler and GM to address in achieving long-term viability and the challenges that they face to become viable. To address these objectives, GAO reviewed Chrysler's and GM's restructuring plans and financial statements, as well as Treasury documents related to AIFP. GAO also reviewed the terms and conditions of the federal loans to identify risks to the government and compared these loan provisions to GAO's principles for providing federal financial assistance to large firms. In addition, GAO interviewed representatives of Chrysler, GM, Ford Motor Company (Ford) and the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW), and officials from the Departments of the Treasury, Transportation, and Energy. GAO also conducted semistructured interviews with a panel of individuals identified by the National Academy of Sciences for their expertise in the fields of auto industry trends and data, labor relations, vehicle manufacturing, and corporate restructuring. GAO provided a draft of this report to the Departments of the Treasury, Transportation, and Energy for their review and comment. These agencies provided technical clarifications, which GAO incorporated as appropriate. GAO also made a draft of this report available to Chrysler and GM officials for their review and comment. Chrysler and GM officials provided technical corrections and clarifications, which GAO incorporated as appropriate. GAO is not making recommendations in this report.
From December 2008 through March 2009, the Treasury Department established a series of programs to help bring relief to the U.S. auto industry and prevent the economic disruptions that a sudden collapse of Chrysler and GM could create. In December 2008, Treasury provided bridge loans of $4 billion to Chrysler and $13.4 billion to GM and required both automakers to submit restructuring plans in February 2009. In March, Treasury determined that the automakers' restructuring plans were not sufficient to achieve long-term viability and required that they take more aggressive action as a condition of receiving additional federal assistance. At the same time, Treasury also established programs to ensure payments to suppliers of parts and components needed to manufacture cars and to guarantee warranties of cars Chrysler and GM sell during the restructuring period. In addition to these programs, the President announced a new White House initiative to help communities and workers affected by the downturn in the industry. In the coming weeks, Treasury will determine whether the additional steps Chrysler and GM have taken or plan to take are sufficient to warrant further assistance. If the companies are successful in implementing the additional steps toward restructuring, then Treasury may provide additional assistance. In providing assistance to the auto industry, Treasury identified goals and objectives and took steps to protect the government's interest. Provisions to protect the government's interest include requiring automakers to submit periodic financial reports and to gain concessions from stakeholders such as the UAW, creditors, and bondholders. To date, however, Chrysler and GM have not reached agreements with these stakeholders. In addition, Treasury included provisions to secure collateral from the automakers. However, because many of Chrysler's and GM's assets were already encumbered by other creditors, the amount of assets on which Treasury could secure senior liens was limited. An additional area of risk is the financial health of the automakers' pension plans. In the event that Chrysler or GM cannot continue to maintain its pension plans--such as in the case of liquidation--the Pension Benefit Guaranty Corporation, a government corporation, may be required to take responsibility for paying the benefits for the plans, which are not fully funded. GAO's panel of individuals with auto industry expertise identified a number of factors for achieving viability, including reducing the number of brands, reassessing the scope and size of dealership networks, reducing production capacity and costs, and obtaining labor concessions. However, Chrysler's and GM's restructuring plans submitted in February do not fully address these factors, according to GAO's panelists. In its assessment of the plans, Treasury identified concerns similar to those identified by the panelists, and concluded that Chrysler and GM need to establish a new strategy for long-term viability in order to justify a substantial additional investment of federal funds. Achieving viability is made more difficult because of many additional challenges facing the automakers, some of which are outside their control--such as the weak economy and the limited availability of credit. The condition of the U.S. economy will likely continue to affect the financial health of Chrysler and GM, as historically automobile sales almost always decrease during periods of economic recession. Given these challenges, Treasury, Chrysler, and GM are considering a range of options available for the automakers to achieve viability, including restructuring under the bankruptcy code.
GAO-09-553, Auto Industry: Summary of Government Efforts and Automakers' Restructuring to Date
This is the accessible text file for GAO report number GAO-09-553
entitled 'Auto Industry: Summary of Government Efforts and Automakers'
Restructuring to Date' which was released on April 23, 2009.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to Congressional Committees:
United States Government Accountability Office:
GAO:
April 2009:
Auto Industry:
Summary of Government Efforts and Automakers' Restructuring to Date:
GAO-09-553:
GAO Highlights:
Highlights of GAO-09-553, a report to congressional committees.
Why GAO Did This Study:
The turmoil in financial markets and the economic downturn has brought
significant financial stress to the auto manufacturing industry. The
economic reach of the auto industry in the United States is broad,
affecting autoworkers, auto suppliers, stock and bondholders, dealers,
and certain states. To help stabilize the U.S. auto industry and avoid
disruptions that could pose systemic risk to the nation‘s economy, in
December 2008 the Department of the Treasury established the Automotive
Industry Financing Program (AIFP) under the Troubled Asset Relief
Program (TARP). From December 2008 through March 2009, Treasury has
allocated about $36 billion to this program, including loans to
Chrysler Holding LLC (Chrysler) and General Motors (GM).
GAO has previously identified three principles to guide federal
assistance to large firms: define the problem, determine the national
interests and set goals and objectives, and protect the government‘s
interests. As part of GAO‘s statutorily mandated responsibilities to
provide timely oversight of TARP activities, this report discusses the
(1) nature and purpose of assistance to the auto industry, (2) how the
assistance addresses the three principles, and (3) important factors
for Chrysler and GM to address in achieving long-term viability and the
challenges that they face to become viable.
To address these objectives, GAO reviewed Chrysler‘s and GM‘s
restructuring plans and financial statements, as well as Treasury
documents related to AIFP. GAO also reviewed the terms and conditions
of the federal loans to identify risks to the government and compared
these loan provisions to GAO‘s principles for providing federal
financial assistance to large firms. In addition, GAO interviewed
representatives of Chrysler, GM, Ford Motor Company (Ford) and the
International Union, United Automobile, Aerospace and Agricultural
Implement Workers of America (UAW), and officials from the Departments
of the Treasury, Transportation, and Energy. GAO also conducted
semistructured interviews with a panel of individuals identified by the
National Academy of Sciences for their expertise in the fields of auto
industry trends and data, labor relations, vehicle manufacturing, and
corporate restructuring.
GAO provided a draft of this report to the Departments of the Treasury,
Transportation, and Energy for their review and comment. These agencies
provided technical clarifications, which GAO incorporated as
appropriate. GAO also made a draft of this report available to Chrysler
and GM officials for their review and comment. Chrysler and GM
officials provided technical corrections and clarifications, which GAO
incorporated as appropriate.
What GAO Found:
From December 2008 through March 2009, the Treasury Department
established a series of programs to help bring relief to the U.S. auto
industry and prevent the economic disruptions that a sudden collapse of
Chrysler and GM could create. In December 2008, Treasury provided
bridge loans of $4 billion to Chrysler and $13.4 billion to GM and
required both automakers to submit restructuring plans in February
2009. In March, Treasury determined that the automakers‘ restructuring
plans were not sufficient to achieve long-term viability and required
that they take more aggressive action as a condition of receiving
additional federal assistance. At the same time, Treasury also
established programs to ensure payments to suppliers of parts and
components needed to manufacture cars and to guarantee warranties of
cars Chrysler and GM sell during the restructuring period. In addition
to these programs, the President announced a new White House initiative
to help communities and workers affected by the downturn in the
industry. In the coming weeks, Treasury will determine whether the
additional steps Chrysler and GM have taken or plan to take are
sufficient to warrant further assistance. If the companies are
successful in implementing the additional steps toward restructuring,
then Treasury may provide additional assistance.
Table; Components and Funding Levels under Treasury‘s AIFP:
Component: Loans to automakers;
Funding level: $22.9 billion.
Component: Assistance related to auto finance companies; Funding level:
$7.4 billion.
Component: Supplier Support Program;
Funding level: $5.0 billion.
Component: Warranty Commitment Program; Funding level: $1.1 billion.
Component: Total;
Funding level: $36.4 billion.
Source: GAO analysis of Treasury information.
[End of table]
In providing assistance to the auto industry, Treasury identified goals
and objectives and took steps to protect the government‘s interest.
Provisions to protect the government‘s interest include requiring
automakers to submit periodic financial reports and to gain concessions
from stakeholders such as the UAW, creditors, and bondholders. To date,
however, Chrysler and GM have not reached agreements with these
stakeholders. In addition, Treasury included provisions to secure
collateral from the automakers. However, because many of Chrysler‘s and
GM‘s assets were already encumbered by other creditors, the amount of
assets on which Treasury could secure senior liens was limited. An
additional area of risk is the financial health of the automakers‘
pension plans. In the event that Chrysler or GM cannot continue to
maintain its pension plans”such as in the case of liquidation”the
Pension Benefit Guaranty Corporation, a government corporation, may be
required to take responsibility for paying the benefits for the plans,
which are not fully funded.
GAO‘s panel of individuals with auto industry expertise identified a
number of factors for achieving viability, including reducing the
number of brands, reassessing the scope and size of dealership
networks, reducing production capacity and costs, and obtaining labor
concessions. However, Chrysler‘s and GM‘s restructuring plans submitted
in February do not fully address these factors, according to GAO‘s
panelists. In its assessment of the plans, Treasury identified concerns
similar to those identified by the panelists, and concluded that
Chrysler and GM need to establish a new strategy for long-term
viability in order to justify a substantial additional investment of
federal funds. Achieving viability is made more difficult because of
many additional challenges facing the automakers, some of which are
outside their control”such as the weak economy and the limited
availability of credit. The condition of the U.S. economy will likely
continue to affect the financial health of Chrysler and GM, as
historically automobile sales almost always decrease during periods of
economic recession. Given these challenges, Treasury, Chrysler, and GM
are considering a range of options available for the automakers to
achieve viability, including restructuring under the bankruptcy code.
What GAO Recommends:
GAO is not making recommendations in this report.
View [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-553] or key
components. For more information, contact Katherine A. Siggerud or
Susan Fleming at (202) 512-2834.
[End of section]
Contents:
Letter:
Scope and Methodology:
Background:
Treasury Has Established Programs to Help Stabilize the Auto Industry:
In Providing Assistance to the Auto Industry, Treasury Identified Goals
and Objectives for the Assistance and Took Steps to Protect the
Government's Interest:
Automakers Have Addressed Some of the Factors Important for Achieving
Viability, and Many Challenges Remain:
Agency Comments and Our Evaluation:
Appendix I: Members of GAO's Auto Industry Panel:
Appendix II: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: GAO's Principles for Government Assistance as Applied to the
Auto Industry Financing Program:
Table 2: Components and Funding Levels under the Automotive Industry
Financing Program:
Table 3: Loan Terms and Conditions Designed to Manage Risk and Protect
the Government's Interest:
Table 4: Individuals with Auto Industry Expertise Identified by NAS Who
Were Interviewed:
Figures:
Figure 1: Key Financial Relationships in the Auto Industry:
Figure 2: Monthly Light Vehicle Sales, 1976 to 2009 (Seasonally
Adjusted Annual Rate):
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
April 23, 2009:
Congressional Committees:
The United States is experiencing stress in financial markets and a
severe economic downturn, affecting many sectors of the economy,
including the automotive industry. The economy has been in a recession
since December 2007, and several economic indicators, including
economic growth and the employment rate, worsened at the end of 2008.
Economic growth is expected to continue to decline in 2009. Automakers
selling cars in the United States, including the three major domestic
automakers--Chrysler LLC, Ford Motor Company, and General Motors
Corporation (the Detroit 3)--as well as Japanese automakers with
production facilities in the United States--Honda, Nissan, and Toyota
(transplant automakers) and others, have seen dramatic decreases in
sales and idling of factories. Sales have been trending downward since
2006, but the decrease has become markedly sharper in the past year.
Although most automakers experienced declining sales in 2008 and early
2009, recent economic conditions have particularly hurt sales of the
Detroit 3, resulting in significant financial losses and necessitating
the use of billions of dollars of borrowed money or cash reserves to
keep operating. The drop in sales has a cascading economic effect as
autoworkers are laid off, the revenues of dealerships and automotive
parts suppliers decline, and shareholders in the companies lose the
value of their investment.
To help stabilize the U.S. automotive industry and avoid disruptions
that would pose systemic risk to the nation's economy, in December 2008
the Treasury Department established the Automotive Industry Financing
Program (AIFP) under the Troubled Asset Relief Program (TARP).[Footnote
1] Through AIFP, Treasury in December extended loans of $4 billion and
$13.4 billion, respectively, to Chrysler Holding LLC (Chrysler)--for
use by its automotive manufacturing subsidiary, Chrysler LLC--and
General Motors Corporation (GM) and may provide substantially more
financial assistance.[Footnote 2] As required by the loan agreements,
Chrysler and GM submitted restructuring plans to Treasury on February
17, 2009. These plans were to identify how the companies plan to repay
government assistance, meet fuel economy standards, become competitive,
and achieve and sustain long-term financial viability. On March 30,
2009, the President announced that the restructuring plans Chrysler and
GM submitted did not establish a credible path to viability and do not
justify substantial new investment of taxpayer dollars. The President
outlined a series of actions that each company must undertake within a
specified time frame--30 days for Chrysler and 60 days for GM--and
Treasury agreed to provide working capital to fund the companies'
operations during this time. After these time periods expire and
depending on the adequacy of the actions taken by Chrysler and GM,
additional federal assistance may be provided.
As part of our statutorily mandated responsibilities for providing
timely oversight of TARP, we have been monitoring Treasury's assistance
to automakers, including reporting on conditions under which assistance
should be provided.[Footnote 3] In December 2008, for instance, we
testified on the principles that guided previous federal assistance to
large firms and municipalities and their applicability to assistance to
automakers.[Footnote 4] These principles include identifying and
defining the problem, determining the national interests and setting
clear goals and objectives that address the problem, and protecting the
government's interests. In this report, we describe the (1) nature and
purpose of federal assistance to the auto industry, (2) how the federal
assistance to the auto industry addresses these three principles, and
(3) important factors for Chrysler and GM to address in achieving long-
term viability and the challenges that they face to become viable.
Scope and Methodology:
To describe the nature and purpose of the federal assistance provided
to the auto industry, we reviewed Department of the Treasury documents
related to AIFP--including white papers on the Supplier Support Program
and the Warranty Commitment Program, terms and conditions of the loans
provided to Chrysler and GM, and disbursement reports on the amount of
funding allocated and disbursed under the AIFP. We also interviewed
Treasury officials to obtain further information and clarification on
these programs.
To identify how the federal assistance to the auto industry addresses
our three principles for government assistance, we obtained and
reviewed program information and loan documentation from Treasury to
identify the goals and objectives of the assistance and the problems
the assistance was intended to address. We reviewed the terms and
conditions of the loan agreements to determine mechanisms in place to
protect taxpayers from excessive or unnecessary risks and compared
these mechanisms to the principles we have previously identified for
providing financial assistance to large firms. We also obtained and
reviewed financial information of the automakers to ascertain the
automakers' financial position. We reviewed the reports that GM and
Chrysler periodically submitted to Treasury, as required by the loan
terms, and interviewed Treasury officials about their reviews of these
reports. We conducted interviews with Treasury about the loan program
and agreements to identify the procedures established to oversee,
monitor, and enforce the terms and conditions of the loan agreements.
We also conducted interviews with officials from the Departments of
Energy and Transportation to obtain information on their coordination
with Treasury in providing and overseeing assistance to automakers;
representatives from Chrysler, GM, Chrysler Financial Services Americas
LLC (Chrysler Financial) and GMAC LLC (GMAC) to obtain information on
how they determined the level of funding needed and their plans for
using the funding; and representatives from Ford Motor Company and Ford
Motor Credit Company to determine why they have not sought federal
assistance.[Footnote 5]
To identify important factors for Chrysler and GM to address to achieve
long-term viability and the challenges they face to become viable, we
contracted with the National Academy of Sciences (NAS) to identify a
diverse group of individuals with expertise about the past and current
financial condition and operations of the domestic automakers, the
restructuring of distressed companies, labor relations issues,
financial management and analysis of distressed or restructuring
companies, factors influencing competitiveness in the auto industry,
and engine and vehicle technologies that may affect the auto
manufacturing industry today as well as in the near future. We selected
a panel of 17 individuals from among those NAS identified based on
achieving a variety of expertise and avoiding any potential conflicts
of interest. We conducted individual semi-structured interviews with
the panelists to identify factors influencing the current condition of
the auto industry; factors affecting future viability; obstacles to
achieving long-term viability; and elements that, according to members
of our panel, if contained in the plans, would positively or negatively
influence the potential for successful restructuring and future
viability. (Appendix I lists the panel of individuals whom we
interviewed.) We used a content analysis to systematically analyze
transcripts of these interviews to identify principal themes that
emerged from the interviews. We also reviewed comments on the content
of the restructuring plans that panelists provided to us once the plans
had been submitted. We compared the content of the automakers'
restructuring plans to the criteria identified by our panel and the
requirements in the loan agreements. To further identify challenges to
achieving long-term viability, we reviewed Treasury's assessment of the
restructuring plans Chrysler and GM submitted in February.
The views expressed by the members of our panel should be interpreted
in the context of the following qualifications. Although we were able
to secure the participation of a balanced, highly qualified group of
individuals, other individuals with expertise in relevant fields could
not be included because of the need to limit the number of interviews
conducted. Although many points of view were represented, the panel was
not representative of all potential views. Nevertheless, the members of
our panel provided rich information on the current state and future of
the auto industry and insightful comments.
To provide additional information and context on all issues examined in
this report, we conducted interviews with other stakeholders, including
a representative of the International Union, United Automobile,
Aerospace and Agricultural Implement Workers of America (UAW),
representatives of the Association of International Automobile
Manufacturers, and other knowledgeable individuals including financial
analysts specializing in the auto sector, a lawyer knowledgeable about
state franchise laws, and an economist specializing in labor issues.
To ensure the accuracy and completeness of the information contained in
the report, we asked representatives of Chrysler, Ford, GM, the UAW,
and the Pension Benefit Guaranty Corporation (PBGC), and two members of
our panel to review portions of a draft of this report. We also
provided Chrysler and GM with the opportunity to review the complete
draft and discuss their comments with us. They offered some technical
corrections and clarifications, which we incorporated as appropriate.
We conducted this performance audit from January 2009 to April 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings, based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings based on our
audit objectives.
Background:
GM, a publicly traded company, was incorporated in 1916 and employs
about 240,000 people worldwide. It has manufacturing facilities in 34
countries and sells more than a dozen brands of vehicles in about 140
countries.[Footnote 6] Chrysler is a privately held company that was
established 9 years later, in 1925, and employs about 54,000 people
worldwide, including at manufacturing facilities in 4 countries and
vehicles assembled under contract in 4 others.[Footnote 7] Chrysler and
GM reported losses in 2008 totaling $8 billion[Footnote 8] and $31
billion,[Footnote 9] respectively, and there are significant concerns
about the future of both companies. For instance, in GM's 2008 audit
report, its independent registered public accountant raised
"substantial doubt" about GM's ability to continue as a going concern
due to "recurring losses from operations, stockholders' deficit, and
inability to generate sufficient cash flow to meet its obligations." In
addition, Chrysler stated in its restructuring plan that additional
federal funds will be needed this spring to prevent the company from
having to file for bankruptcy.
The automakers themselves are not alone in suffering the effects of
declining automotive sales and revenues. The economic reach of the auto
industry in the United States is broad, with many groups affected by
its downturn and the financial condition of the automakers. Some key
groups include the following.
* Autoworkers: At the end of 2007, Chrysler, Ford, and GM employed
about 240,000 hourly and salaried workers in the United States.
Thousands of workers have been laid off, retired, or taken buyouts in
the past months as the automakers seek to cut their costs and excess
production capacity. Most hourly workers are represented by the UAW,
which is in discussions with Chrysler and GM to modify existing labor
agreements to achieve cost reductions.[Footnote 10]
* Suppliers: More than 500,000 workers are employed by companies in the
United States that manufacture parts and components used by automakers-
-both domestic automakers and transplants. According to the Motor and
Equipment Manufacturers Association, many suppliers are in severe
financial distress, with a number having filed for bankruptcy in 2008.
Some members of our panel said that because many of these suppliers
have relatively high costs and depend on the business of the Detroit 3,
some of them may not have enough revenue to survive if one of the
automakers were to cease production. This, in turn, could affect the
automakers' ability to obtain parts needed to manufacture vehicles.
This dynamic has the potential to affect all automakers with production
facilities in the United States, regardless of home country.
* States and localities in auto manufacturing regions: The automotive
manufacturing industry, including the Detroit 3, transplant automakers,
and suppliers, is concentrated in certain states in the Midwest and
South. For instance, in Michigan, 28 percent of manufacturing jobs are
in the automotive sector, as of March 2008. Other states with a high
proportion of jobs in this sector include Kentucky (19 percent),
Indiana (14 percent), Ohio (13 percent), Alabama (10 percent), and
Tennessee (9 percent). A December 2008 Brookings Institution report
identified 50 metropolitan areas, clustered primarily in the Midwest
and South, that rely heavily on Detroit 3-related jobs.[Footnote 11]
Although any loss of output due to the difficulties of the auto
industry could be felt nationwide, the geographic concentration of the
industry means certain regions will be harder hit than others as
residents in these regions lose their jobs and the tax base shrinks.
* Automaker retirees: About 600,000 individuals currently receive
pension payments from Chrysler and GM.[Footnote 12] Due to the
retirement benefits--including pensions and healthcare--provided to
autoworkers, established and enhanced through several decades of
collective bargaining, the Detroit 3 are facing a significant financial
commitment. In an effort to reduce costs and become more competitive
with the transplants, the Detroit 3 in 2007 reached an agreement with
UAW to transfer responsibility for administering the health plans to
the union. Under this agreement, voluntary employee beneficiary
associations (VEBAs) were created to manage retiree health plans
starting January 1, 2010, and the automakers agreed to make several
cash contributions of specific amounts (totaling about $10.3 billion
for Chrysler and up to $26 billion for GM) on specific dates to fund
the VEBAs. Chrysler and GM are currently negotiating with the union to
provide a portion of their monetary contribution as equity in the
companies rather than cash.
* Dealerships: The Detroit 3 have about 14,000 U.S. dealerships, most
of which are independently owned and operated. Many are struggling
financially due to low sales and lack of credit to purchase inventory
from the automakers. In addition, in comparison to transplants, the
Detroit 3 automakers generally have more dealers and sell fewer
vehicles per dealer. According to Automotive News, more than 900
dealers have closed during the last year, due in part to the current
economic conditions. Employment at dealers--with more than 1 million
jobs--has also fallen.
* Bondholders and other creditors: Individual and institutional
investors hold about $27.2 billion of unsecured GM bonds, and GM is
currently engaged in negotiations with its bondholders to reduce this
debt by at least two-thirds through an exchange of the bonds into
company equity, or other appropriate means. Chrysler, which does not
have significant unsecured public debt,[Footnote 13] has proposed debt
restructuring to three creditor groups, which would convert $5 billion
of debt to equity.
* Shareholders: GM, as a publicly traded company, has experienced a
significant decline in the price per share of its common stock. In
October 2007, GM's equity traded at levels over $40 per share; in March
2009 the equity traded for a low of $1.45 per share. Chrysler, which is
privately owned, currently has two shareholders.[Footnote 14] Chrysler
reported in its restructuring plan that these shareholders have
expressed willingness to relinquish their current equity and to convert
their debt to equity. To the extent that restructuring efforts result
in additional equity, the interest of GM's and Chrysler's current
shareholders' will be diluted, which would affect the voting of shares
and any future dividends.
The sharp downturn in the U.S. auto industry has been influenced by a
convergence of factors, including both those within and outside the
control of the automakers. According to reports on the auto industry
and individuals with expertise in the industry, the following factors
contributed to this downturn.
* Economic factors contributing to the downturn include the weak
economy and competition from transplants, which have led to decreased
sales and market share. The U.S. economy has been in recession since
December 2007, with increasing unemployment and declining personal
wealth. During this time period, light vehicle sales in the United
States--including domestic and foreign brands--have dropped by about
half, with the decrease disproportionately affecting the Detroit 3.
[Footnote 15] For example, Detroit 3 sales in the United States dropped
by 49 percent from February 2008 through February 2009, whereas U.S.
sales for Honda, Nissan, and Toyota dropped 39 percent during this
period. Additionally, the Detroit 3 have been losing U.S. market share
to foreign automakers for several years. For instance, GM's U.S. market
share for total light vehicle retail sales fell from 27.2 percent in
2004 to 22.1 percent in 2008, while during the same period, the market
share of Japanese auto manufacturers grew from 29.8 percent to 38.9
percent. In addition, the recession has made credit less available,
which may have limited the ability of auto manufacturers and suppliers
to finance their businesses, consumers to purchase cars, and dealers to
obtain loans to sustain their inventories. Figure 1 illustrates the
financial relationships among suppliers, automakers, dealers,
consumers, and financing companies.
Figure 1: Key Financial Relationships in the Auto Industry:
[Refer to PDF for image: illustration]
Financing companies (such as GMAC and Chrysler Financial) provide
financing to help dealers pay for their inventories and consumers
purchase vehicles.
Dealers are paid when consumers purchase vehicles;
Automakers are paid when dealers purchase vehicles;
Suppliers are paid by automakers 45-60 days after receipt of parts.
Source: GAO.
[End of figure]
* Management decisions that, according to members of our panel, have
contributed to the automakers' financial condition include labor
agreements that resulted in wages and retiree benefit costs higher than
those of transplants and a heavy reliance on sales of light trucks and
sport utility vehicles (SUV), which are more profitable than
cars.[Footnote 16] Additionally, offering consumer incentives and
discounts over the past few years stimulated demand but contributed to
an erosion of the value of the brands and to average purchase prices
that are lower than comparable foreign cars. As a result of the lower
purchase prices, Chrysler and GM have to sell more cars in order to
cover costs.
In December 2008, the chief executive officers (CEOs) of Chrysler,
Ford, and GM testified before Congress to request financial assistance
from the federal government.[Footnote 17] In their testimonies, the
CEOs from Chrysler and GM stated that without federal assistance, their
companies would likely run out of the cash needed to continue
operating. The Chrysler and GM CEOs further testified that they
believed it would be difficult or impossible to return to financial
solvency while operating under bankruptcy because consumers would be
reluctant to make a long-term purchase such as an automobile from a
company whose future was in question.
We have previously identified three fundamental principles that can
serve as a framework for considering federal government financial
assistance to large firms. According to these principles, the federal
government should (1) identify and define the problem, (2) determine
the national interests and set clear goals and objectives that address
the problem, and (3) protect the government's interests.[Footnote 18]
Table 1 provides a description of these principles as they apply to the
assistance provided to the auto industry.
Table 1: GAO's Principles for Government Assistance as Applied to the
Auto Industry Financing Program:
Principle: Identify and define the problem;
Applicability to AIFP: Clearly identify and define the problems
confronting the industry, separating out those that require an
immediate response from structural challenges that will take longer to
resolve.
Principle: Determine the national interests, and set clear goals and
objectives that address the problem;
Applicability to AIFP: State the objectives and goals of the program to
help determine which financial tools are best, provide criteria for
program decisions, and serve as a basis for monitoring progress.
Principle: Protect the government's interest;
Applicability to AIFP:
* Achieve concessions from management, labor, suppliers, dealers, and
creditors;
* Institute controls over management. The government must have the
authority to approve an aid recipient's financial and operating plans
and new major contracts;
* To the extent feasible, the government should require that the
recipient provide adequate collateral and that the government be in a
first lien position;
* The government should receive compensation through fees or equity
participation for risk;
* Accountability should be built in so that Congress and the public can
have confidence that the assistance is used in a manner consistent with
the identified objectives.
Source: GAO.
[End of table]
Treasury Has Established Programs to Help Stabilize the Auto Industry:
In an attempt to help stabilize the U.S. automotive industry and avoid
disruptions that would pose systemic risk to the nation's economy, in
December 2008 Treasury established AIFP and agreed to provide Chrysler
and GM with loans of $4 billion and $13.4 billion, respectively.
[Footnote 19] These loans were intended to allow the automakers to
continue operating through the first quarter of 2009 while working out
details of their plans to achieve and sustain long-term viability,
recognizing that after that point, additional loans or other steps
would be needed. According to Chrysler and GM officials, the companies
have been using the loans to cover routine operating costs.
As a condition of the December loan agreements, Chrysler and GM were
required to submit restructuring plans to Treasury in February that
describe actions the automakers would take to achieve and sustain long-
term viability. These plans were required to show how the automakers
would repay the loans, comply with federal fuel economy requirements,
develop a product mix and cost structure that are competitive in the
U.S. marketplace, and become financially viable. Chrysler and GM
submitted these plans on February 17, 2009, and requested up to an
additional $5 billion and $16.6 billion in federal financial
assistance, respectively, because of the continued sluggish economy and
lower than expected revenues.[Footnote 20]
To oversee the federal financial assistance--including evaluating the
restructuring plans--and to make decisions about future assistance to
the automakers, the loan agreements provided for a presidential
designee. Rather than appoint a presidential designee, President Obama
on February 20, 2009, announced that he was establishing the
Presidential Task Force on the Auto Industry to advise him and the
Secretary of the Treasury on issues impacting the financial health of
the industry.[Footnote 21] Under the terms of the loan agreements,
since no presidential designee was appointed, the Secretary of the
Treasury will make decisions on all matters involving financial
assistance to the automakers, including future decisions about
providing additional assistance to Chrysler or GM.
[Text box: Treasury‘s Key Findings on the Viability of Chrysler and GM:
Treasury determined that Chrysler‘s and GM‘s restructuring plans did
not establish a credible path to viability. For Chrysler, Treasury
identified the following challenges:
* A limited global presence that leads to greater vulnerability to
local economic fluctuations and the inability to leverage economies of
scale.
* Quality scores that lag behind those of competitors.
* A product mix that does not cover smaller-car segments.
* Lack of investment in manufacturing practices that are critical to
long-term profitability.
For GM, Treasury identified the following challenges:
* Over reliance on trucks and SUVs for a large share of profits.
* Substantial costs associated with retiree benefits, which will
continue to grow through the restructuring period.
* Closing under performing dealers at too slow a rate. End text box]
On March 30, 2009, the President announced that the restructuring plans
submitted by Chrysler and GM did not establish a credible path to
viability and do not justify substantial new investment of taxpayer
dollars. The President outlined a series of actions that each company
must undertake to receive additional federal assistance. The
President's announcement further said that Treasury officials will work
closely with Chrysler and GM as the companies take steps to achieve the
following.
Chrysler: According to the Task Force, Chrysler is not viable as a
stand-alone company and must find a partner to achieve long-term
viability. Chrysler and the European automaker Fiat are in discussions
about such a partnership, but additional work must be completed to
result in a binding agreement and gain the necessary support of
stakeholders. Treasury agreed to provide Chrysler with up to $500
million in loans under TARP to fund its operations for 30 days while
the company takes additional steps toward restructuring. If Chrysler is
successful in completing the additional steps, Treasury said it will
consider investing up to an additional $6 billion in Chrysler. If not,
Treasury will not provide further federal assistance, which, according
to Treasury officials, would likely result in a liquidation bankruptcy.
GM: The Task Force concluded that GM can be a viable company if it
develops a more aggressive restructuring plan and implementation
strategy. Treasury agreed to provide GM up to $5 billion in loans under
TARP to fund its operations for 60 days while it undertakes the
additional work. Treasury also announced this restructuring effort
would entail leadership changes at GM and increased involvement by
Treasury and its outside advisers. If GM submits a satisfactory
restructuring plan and implementation strategy by the end of the 60
days, Treasury will invest an unspecified amount of additional federal
funds to help with GM's restructuring efforts. If, however, GM fails to
meet these conditions, according to Treasury, it will not invest
additional federal funds, creating the possibility that GM will file
for a reorganization bankruptcy. GM's CEO stated that the Treasury's
determination makes a bankruptcy filing for GM more "probable" than
prior to the announcement.
Several new initiatives to help stabilize the auto industry and bring
relief to those affected by the industry were announced in March 2009.
The first two initiatives will be administered through AIFP and will be
funded under TARP. The third initiative will seek to leverage federal
funding available through other programs.
* Supplier Support Program: Under this program, Chrysler and GM will
receive funding for the purpose of ensuring payment to suppliers. The
program is designed to ensure that automakers receive the parts and
components they need to manufacture vehicles and that suppliers have
access to credit from lenders. The automakers will designate certain
suppliers who are most critical to their operations to receive
guaranteed payment for delivered supplies. After agreeing to
participate in the program, the supplier sells eligible receivables to
a special purpose entity established by the automaker to fund the
program. Prior to the sale of the receivable, the automaker owes the
supplier a payment for the receivable at a due date. If the supplier
sells a receivable to the program, it receives payment from the special
purpose entity, which becomes the owner of the receivable. If the
supplier chooses to receive cash up front, a service fee of 3 percent
is deducted from the payment; if the supplier chooses to receive
payment on the receivable's due date--typically 45 to 60 days after
delivery--the service fee is 2 percent. On the due date, the automaker
is responsible for paying the program servicer the amount due for the
delivery. Treasury has made up to $5 billion available through this
program.[Footnote 22]
* Warranty Commitment Program: This program is intended to mitigate
potential consumer reluctance to buy a vehicle from a financially
distressed company by providing funding to guarantee the warranties on
new vehicles purchased from participating auto manufacturers during the
restructuring period.[Footnote 23] Under this program, participating
automakers (currently Chrysler and GM) and Treasury will contribute
cash to a separate special purpose company. The total amount of cash to
be contributed will equal 125 percent of the expected cost of paying
for warranty service on each covered vehicle, with the automakers
contributing 15 percent of the projected costs and Treasury providing a
loan to contribute 110 percent of the projected cost. Should a
participating automaker go out of business, a program administrator
will be appointed to identify a qualified service provider to supply
warranty services for vehicles sold during the restructuring period in
exchange for the assets of the special purpose company. Treasury
officials estimate the cost of this program to be about $1.1 billion.
According to several members of our panel, addressing consumers'
concerns about warranties is important because, unlike buying a plane
ticket from a bankrupt airline, purchasing a vehicle is a significant
and long-term investment. Thus, consumers may avoid purchasing vehicles
from an automaker facing the possibility of bankruptcy because they are
concerned their warranties may not be honored, further depressing
vehicle sales.
* Initiative to Support and Revitalize Auto Industry Workers and
Communities: This initiative is intended to coordinate government
efforts in providing assistance to communities and workers affected by
the loss of auto manufacturing jobs. The director responsible for the
initiative is tasked with working with all parties to ensure that
communities and workers take advantage of all available government
resources and to work with government and elected officials in helping
retool and revitalize the economies of affected communities. In
carrying out his duties, the director is charged with exploring all
possible strategies, including seeking to maximize the use of funds
from the American Recovery and Reinvestment Act of 2009 (Recovery Act),
deploying rapid response units to communities facing plant closings,
attracting new industries to the region, and working with stakeholders
on legislative efforts to direct emergency support to the affected
communities.[Footnote 24]
The programs that Treasury has announced for the auto industry--
including the automakers, auto financing companies, and other
stakeholders--as of April 2009, are summarized in table 2.
Table 2: Components and Funding Levels under the Automotive Industry
Financing Program:
Component: Automaker loans;
Description: Loans to Chrysler and GM to fund their operations while
they take steps to restructure their companies;
Funding level: $22.9 billion[A].
Component: Assistance related to auto finance companies;
Description: Funding to assist Chrysler Financial and GMAC;
Funding level: $7.4 billion[B].
Component: Supplier Support Program;
Description: The program will provide funding to guarantee suppliers
are paid for the products they ship to participating automakers;
Funding level: $5.0 billion[C].
Component: Warranty Commitment Program;
Description: The program will set aside funds to guarantee warranties
for vehicles Chrysler and GM sell during restructuring;
Funding level: $1.1 billion[C].
Total:
Funding level: $36.4 billion.
Source: GAO analysis of Treasury information.
[A] This includes the $17.4 billion in loans agreed to in December
2008, which have been fully disbursed, and the up to $500 million and
up to $5 billion that Treasury is providing to Chrysler and GM during
their additional 30-and 60-day restructuring periods. Treasury may
provide more assistance based on the outcome of the restructuring
efforts.
[B] This amount includes an $884 million loan to GM to allow the
company to participate in GMAC's new rights offering related to its
reorganization as a bank holding company; a $5 billion purchase of
preferred stock investment plus warrants from GMAC; and a loan of $1.5
billion to a special purpose entity created by Chrysler Financial to
finance the extension of new consumer automotive loans. A separate
subsidiary of the Chrysler Holdings, Chrysler Financial Company
provides financing to automotive dealers and consumers. Chrysler and
Chrysler Financial operate independently from each other under separate
managements. In April 2009, Treasury offered additional financial
assistance to Chrysler Financial, but the company declined the
assistance.
[C] These amounts are Treasury's estimated costs of the programs.
[End of table]
In Providing Assistance to the Auto Industry, Treasury Identified Goals
and Objectives for the Assistance and Took Steps to Protect the
Government's Interest:
Treasury identified as a problem of national interest the financial
condition of the U.S. automakers and its potential to affect financial
market stability and the economy at large. In determining what actions
to take to address this problem, Treasury concluded that Chrysler and
GM's lack of liquidity needed immediate attention and, in order to
prevent a significant disruption of the automotive industry, provided
short-term bridge loans to the automakers. To address the industry's
structural challenges, which will take more time to resolve, Treasury
required Chrysler and GM to prepare restructuring plans that describe
the changes the automakers intend to make in order to achieve long-term
financial viability.
Treasury established goals and objectives for the federal financial
assistance in the loan agreements and other program documentation. For
example, the loan agreements state that funding should be used to
enable the automakers to develop a viable and competitive business and
develop the capacity to produce energy-efficient advanced technology
vehicles, among other things. Although Treasury identified goals for
the assistance, it will need to determine how to assess goals that rely
on concepts that are not clearly defined and to evaluate the relevant
trade-offs associated with the goals that appear to conflict. For
example, the goals stated in the loan agreements include concepts that
were not defined, such as rationalized manufacturing capacity and
competitive product mix.
If additional assistance is provided to the automakers, it will be
important for Treasury to clearly articulate what it intends to achieve
with this assistance. We have previously reported that it is important
for policymakers to identify objectives and goals for federal
assistance that are clear, concise, and consistent. Such objectives and
goals can help program administrators and Congress determine which
financial tools are needed and most appropriate for the industry and
for company-specific circumstances; provide criteria for program
decisions; and serve as a basis for monitoring progress. In addition to
lacking clear definitions, some of Treasury's goals may work at cross
purposes, at least in the short-term, and thus will require an
assessment of the relevant trade-offs among the goals. For example,
according to members of our panel, producing advanced technology
vehicles has the potential to conflict with the goal of developing a
viable business in the near term because the costs of designing,
developing, and producing these types of vehicles are greater than the
revenue generated in the initial years of sales. We have previously
reported that it is important that policymakers choose clearly among
potentially conflicting goals of providing federal financial
assistance.[Footnote 25] Without knowing the primary goal, it is
difficult to decide what steps are appropriate and to judge whether a
program has succeeded.
In developing the terms and conditions of the loans to Chrysler and GM,
Treasury included provisions to manage risk and protect the
government's interest. Table 3 describes these provisions. Treasury
also established an internal working group--referred to as the auto
team--to oversee the AIFP and provide analysis in support of the Task
Force and the Secretary.
Table 3: Loan Terms and Conditions Designed to Manage Risk and Protect
the Government's Interest:
Concessions from stakeholders.
* Executive compensation limitations: Restrictions on compensation for
senior executive officers include recovery of any bonus or incentive
payments based upon materially inaccurate statements of earnings,
limiting tax deductions on executive compensation over $500,000 per
executive, and prohibiting golden parachute payments[A];
* Agreements with debt holders: The automakers must use their "best
efforts" to convert at least two-thirds of their unsecured public debt
through a bond exchange or other appropriate means;
* Labor concessions: The automakers must use their "best efforts" to
reduce the compensation of their workers to be comparable to workers at
transplant facilities, align their work rules[B] more closely with
those of transplants, and close the Jobs Bank programs[C];
* Retiree concessions: The automakers must use their "best efforts" to
reach agreement with the union to provide at least one-half of the
automakers' future payments or contributions for retiree health plans
(VEBAs) in the form of company stock.
Controls over management:
* Approval of material transactions: Treasury must approve any
fundamental changes to the automakers' companies and certain
transactions for more than $100 million in value and outside the
ordinary course of business;
* Restrictions on expenses: The automakers must maintain and implement
an expense policy with limitations on, among other things, sponsoring
conferences and events, travel costs, office renovations, and
entertainment. In addition, the automakers must provide for oversight
and mechanisms to ensure compliance with the expense policy;
* Restructuring plans: The automakers are required to prepare
restructuring plans outlining the actions they will take to meet the
requirements set forth in the loan agreements, including concessions
from various stakeholders. Treasury must approve these plans and the
actions the automakers have taken toward implementing the plans before
additional assistance is provided[D];
* Periodic reporting requirements: The automakers must submit periodic
financial reports including weekly rolling cash forecasts[E] and
biweekly liquidity status reports,[F] as well as monthly certifications
of expense policy conformance and quarterly certification of compliance
with executive compensation provisions.
Collateral:
* Liens: In negotiations prior to signing the loan agreements, Treasury
attempted to obtain senior liens on all unencumbered assets at both GM
and Chrysler.[G]
Compensation for risk:
* Compensation: The automakers agreed to provide Treasury with
compensation in the form of warrants and notes in the case of GM and
additional notes in lieu of warrants in the case of Chrysler. Both
automakers are required to repay the loans with interest.
Source: GAO analysis of Treasury information.
[A] A golden parachute is defined as any payment in the nature of
compensation to a senior executive officer made on account of
involuntary termination or in connection with any bankruptcy filing,
receivership, or insolvency of the institution to the extent that the
present value of the payment equals or exceeds three times the
executive's average annual compensation over the preceding 5 years.
[B] Work rules generally refer to those sections of a contract that
define issues such as hours to be worked and what work is done by what
employees.
[C] Under their Jobs Bank programs, the Detroit 3 continue to provide
wages and benefits to workers that have been laid off.
[D] As discussed above, Chrysler and GM submitted these plans on
February 17, and Treasury announced on March 30 that additional steps
must be taken before further assistance is provided.
[E] This forecast outlines for each of the thirteen weeks both
operating and non-operating cash receipts and disbursements which
result in a net cash flow for the week that increases or decreases the
previous week's ending cash balance and results in the current cash
balance.
[F] This report details the company's current liquidity profile;
expected liquidity needs; any material changes in the company's
business since the date of the last status report; any transfer, sale,
pledge or other disposition of any material asset since the date of the
last status report; and any changes to the company's capital structure.
[G] A lien is a legal right that a creditor has in another's assets,
usually lasting until a debt is repaid. Senior liens have priority over
other liens on the same asset.
[End of table]
While the loan agreements include a number of terms and conditions to
help protect the government's interests, some potential risks, as
described below, remain.
Concessions from stakeholders. The loan agreements called for
stakeholder concessions, including agreements from creditors to reduce
overall debt, from labor for more competitive wage structures, and from
retirees for modifications to VEBA contributions, as well as limits on
executive compensation.
Agreements with debt holders: According to Chrysler officials, the
company does not have substantial public debt, but it said in its
restructuring plan that it would work with three groups of creditors,
including Treasury, senior lien bank lenders, and the UAW VEBA, to
reduce debt by $5 billion. GM stated in its restructuring plan that it
was negotiating a potential debt-for-equity exchange with an unofficial
committee of GM bondholders.[Footnote 26] As of April 22, although the
automakers have begun negotiations with their bondholders (in the case
of GM) and creditors (in the case of Chrysler) agreement has not been
reached.
Labor and retiree concessions: Chrysler's and GM's negotiations with
the UAW continue, and tentative agreements have been reached on
modifications to labor costs and work rules. For instance, General
Motors and the UAW reached a tentative agreement modifying wages,
benefits and work rules to become more cost competitive with
transplants. The net effect of these changes is a reduction in the
company's annual hourly-related cost by approximately $1.0 billion to
$1.1 billion, and potentially more, according to GM. As of April 22,
agreements on restructuring Chrysler and GM's monetary contributions to
fund retirees' health care plans have not been reached.
Executive compensation: According to Treasury officials, they are
waiting for the Office of Management and Budget to approve additional
regulations that Treasury has drafted on executive compensation as
required by the Recovery Act before establishing a process to monitor
compliance with the executive compensation requirements. Establishing
procedures to oversee compliance with such requirements is important to
help ensure that the automakers adhere to conditions set forth in the
loan agreements.
Collateral. Treasury's goal in its negotiations with Chrysler and GM
prior to signing the loan agreements was to obtain senior liens
whenever possible and, for assets already encumbered, to obtain junior
liens. For Chrysler, because most assets were already encumbered with
senior liens, Treasury was only able to obtain a senior lien on a
portion of the company's parts inventory, known as Mopar.[Footnote 27]
For GM, Treasury obtained a senior lien on cash, inventory, real
property, equity in domestic and foreign subsidiaries, and intellectual
property. Treasury also received junior liens on additional assets from
both companies. According to Treasury officials, Treasury cannot put an
estimated dollar value on either company's pledged collateral because
the value of certain items, such as cash and inventory, is constantly
changing. Treasury officials said that the limited amount of assets on
which the government has senior liens could become an issue if the
companies enter bankruptcy or otherwise liquidate their assets,
although the situation differs somewhat for the two companies.[Footnote
28] According to Treasury, in the case of Chrysler, the sale of the
assets would result in cash equal to only a small percentage of the
value of the loans. Moreover, because Treasury placed liens on all
unencumbered assets to secure the December loans, it will be difficult
or impossible for the government to obtain additional collateral for
any new loans that may be provided. In its restructuring plan, GM
proposed that additional federal assistance could be in the form of a
preferred equity investment in the company, a revolving facility,
[Footnote 29] and a loan secured by the collateral already used to
support the current $13.4 billion loan. Chrysler did not propose
collateral options for any additional federal assistance in its
restructuring plan.
In considering whether the federal government should provide additional
assistance to Chrysler and GM, it is important to assess the
government's overall financial exposure should one or both of the
automakers fail to achieve long-term viability. A potential area of
significant financial exposure is the government's liability for
terminated pension plans. Specifically, the Pension Benefit Guaranty
Corporation (PBGC)--a self-funded government corporation--insures
private-sector defined benefit plans.[Footnote 30] When PBGC takes over
a terminated pension plan, it assumes responsibility for future benefit
payments to the plan's participants, up to the limits set in law.
[Footnote 31] An underfunded pension plan that is insured by PBGC may
be terminated only if certain statutory criteria are met. In general,
an employer is permitted to terminate an underfunded plan only if it
can demonstrate that it is in serious financial distress and cannot
continue in business or reorganize (if in bankruptcy) unless the
pension plan is terminated.
The pension plans of Chrysler and GM pose considerable financial
uncertainty to PBGC. In the event that Chrysler or GM cannot continue
to maintain their pension plans--such as in the case of liquidation or
an asset sale--PBGC may be required to take responsibility for paying
the benefits for the plans, which are currently underfunded by a total
of about $29 billion.[Footnote 32] Although it is impossible to know
what the exact claims to PBGC would be if it took over Chrysler's and
GM's pension plans, doing so would likely strain PBGC's resources,
because the automakers plans' represent a significant portion of the
benefits it insures. Further, from an administrative standpoint, PBGC
would be presented with an unprecedented number of assets to manage as
well as benefit liabilities to administer.[Footnote 33] To the extent
these additional claims markedly increase PBGC's accumulated deficit
and decrease its long-run liquidity, there could be pressure for the
federal government to provide PBGC financial assistance to avoid
reductions in guaranteed payments to retirees or unsustainable
increases in the premium burden on sponsors of ongoing plans.[Footnote
34]
Automakers Have Addressed Some of the Factors Important for Achieving
Viability, and Many Challenges Remain:
In general, we found that Chrysler's and GM's February restructuring
plans contain some of the key factors our panel of individuals with
auto industry expertise identified as important for achieving
viability, such as reducing the number of models and brands and
rationalizing dealerships. However, the plans do not fully address all
of the considerations that members of the panel identified, which are
discussed below. Treasury identified similar concerns and concluded
that Chrysler and GM need to establish a new strategy for long-term
viability in order to justify substantial additional investment of
federal funds. Achieving viability may be difficult because of a number
of challenges facing the automakers, including some outside of their
control.
Chrysler's and GM's February Restructuring Plans Do Not Fully Address
Factors Needed to Achieve Viability:
Reducing the number of brands and models:
About half of the members of our panel said that reducing the number of
brands and models would be a key factor in achieving financial
viability. Some of the cited advantages of eliminating brands and
models include reducing intracompany competition for sales of similar
models, eliminating associated costs such as factory tooling and
product development, and focusing remaining resources on fewer models
for greater improvements in quality, brand image, and performance. One
panelist further noted that eliminating brands and models also
eliminates dealers, another cost savings, although as discussed below,
there are costs associated with closing dealers that can be difficult
to estimate.
According to its February plan, Chrysler has reduced its number of
vehicle models by seven. However, some members of our panel criticized
Chrysler's product mix; for example, one panelist noted that most of
Chrysler's product line contains older models and that to be
competitive the company needs to introduce more new products in 2009.
Another noted that Chrysler has plans for only one midsize model and no
luxury models to compete with models from other companies. GM's
February plan proposes to reduce its brands to the four core brands
that account for more than 90 percent of the company's U.S. aggregate
contribution margin (revenue less variable cost) by selling or phasing
out three brands.[Footnote 35] One panelist noted that GM's focus on
the remaining four brands is a good long-term strategy, although
another noted that this may cause difficulties in short-term sales
because consumers may be unlikely to buy cars from a brand that is
being discontinued. GM's plan also includes a total reduction in the
number of models by 25 percent, including the reduction of models from
brands that GM is planning to sell or phase out. Within the planned
overall reduction in the number of models, GM is planning to introduce
five new hybrid and plug-in models by 2012, bringing the total of such
models to 14. These new models would include at least one extended
range electric vehicle;[Footnote 36] however, members of our panel
cautioned that this electric model may not sufficiently improve GM's
viability because the car is expected to be priced too high to result
in substantial sales.
Treasury identified similar challenges related to both Chrysler's and
GM's product mixes. According to Treasury, given that Chrysler and GM
rely on profits from trucks and SUVs, which typically have higher
profit margins than smaller vehicles, both companies face challenges
due to the vulnerability of demand for these vehicles based on fuel
prices.[Footnote 37] Treasury also concluded GM is currently burdened
with under performing brands and models and that GM's plan does not act
aggressively enough to curb these problems. Treasury noted that
although the decision to sell or phase out three brands is an important
step, GM is late in taking this step. Additionally, Treasury determined
that GM's current plan retains too many unprofitable models that have
negative effects on GM's operations.
Rationalizing dealership networks:
Half of the panelists considered decreasing the size of the domestic
automakers' dealership networks to be an important factor for future
viability, with several noting that the networks are too large to be
supported by the sales levels of recent years. Today, Detroit 3
dealerships--many of which are independently owned and operated--are
more numerous and, in general, sell half or fewer vehicles per
dealership than transplant dealerships. As one panelist noted, higher
sales per store allow for a greater return on the dealer's fixed costs
of running the business, allowing for more investment in facilities and
advertising--which ultimately benefits the automaker by improving the
price for which its cars can be sold.
Chrysler's plan for reducing dealerships includes merging its three
brands--Chrysler, Jeep, and Dodge--into combined dealerships rather
than having separate dealerships for each brand. Although the plan
indicates that Chrysler has reduced its number of dealerships by about
700 since 2004, the plan does not indicate how many additional
dealerships can be eliminated through combined dealerships. A Chrysler
official also noted that because of unfavorable market conditions, many
dealers are choosing to close or consolidate with other dealers. GM has
already reduced the size of its dealership network and plans to further
reduce it from its 2008 level of 6,246 to 4,100 in 2014. GM's plan also
indicates specifically which brands and locations (metropolitan or
rural markets, for instance) will be targeted for reductions. Several
members of our panel told us that eliminating dealerships against their
will would be challenging due to state franchise laws that protect
dealers, as discussed later in this report, and therefore the companies
would need to negotiate with the dealers. Chrysler's plan does not
discuss such negotiations and associated costs, such as buying back
dealer inventory; however, GM's plan acknowledges that each negotiation
is unique depending on factors such as the individual state law, the
dealer, possible union contracts, and associated finance and warranty
business, and that the costs of terminating a dealership can vary
greatly.
Treasury concluded that although GM has been successfully pruning
dealerships for several years, more aggressive restructuring is needed.
According to Treasury, GM's current pace for reducing the number of
dealerships will burden the company with too many unprofitable or under
performing dealerships for a long period of time, which hurts brand
equity and the prospects of stronger dealerships.
Reducing production costs and capacity:
According to our panel, the companies have excess production capacity
and their cost structures do not facilitate the companies' profitable
operation in a market in which sales volumes are significantly lower
than they have been in past years. Panelists told us that the
companies' cost structures were established during a time when they
dominated the U.S. market, and as foreign competition grew, their
market shares decreased. Some of the panelists added that rather than
adjust their cost structures, such as by reducing fixed costs, the
companies pursued higher sales volumes to try to profitably operate
under their existing cost structure. Given the forecast for continued
decreased sales volumes, members of our panel said that they expected
the restructuring plans to identify significant reductions in fixed
costs. Additionally, these individuals said the automakers could
benefit from incorporating efficiencies used by some of the foreign
automakers into their production processes, such as manufacturing
multiple types of vehicles at the same production facility or relying
more on common vehicle architectures for the production of vehicles.
Common vehicle architectures can allow automakers to plan, design,
engineer and source vehicles for all global markets, whereas previously
these efforts may have differed based on whether a car was to be sold
in the United States or Europe, for example.
According to Chrysler's February plan, the company began restructuring
in 2007 to reduce fixed costs, and, by the end of 2009, these costs
will have been reduced by $3.8 billion (27 percent), which includes a
reduction of its salaried workforce by 35,000.[Footnote 38] In
addition, Chrysler is requesting a 3 percent reduction in suppliers'
prices. However, some members of our panel said that reliance on
supplier price cuts is a problematic assumption because the suppliers
are struggling financially and cannot afford to reduce their prices.
Chrysler's plan does not address specific plans for production
flexibilities. According to GM's February plan, the company plans to
reduce its North American fixed costs by about $6 billion from 2008 to
2011 and keep those cost levels constant through 2014. These savings
are largely the result of the initiatives outlined in the plan and
include the reduction of U.S. employment levels (hourly and salaried)
by about 20,000 from 2008 to 2011, acceleration of labor cost parity
with transplants, idling of 14 additional manufacturing facility in the
United States by 2012, and reduction of 12 models offered in the United
States by 2012. However, some members of our panel cautioned that the
company may not be able to "cut its way to prosperity" and that GM
needs to have a plan for how remaining salaried workers will carry out
the restructuring efforts. GM's plan also indicates that the company
plans to increase production flexibility by increasing the number of
plants that can produce multiple vehicle models and that by 2012, more
than half of its U.S. passenger car sales will be derived from common
architectures.
Treasury concluded that although both Chrysler and GM have made
progress related to manufacturing, Chrysler still faces challenges in
this area. Treasury noted that Chrysler's plan identified opportunities
for reducing the company's cost structure, including fixed-cost
reductions; however, manufacturing is still a key challenge for
Chrysler because it has not invested significantly in common
architectures and manufacturing flexibility. In contrast, Treasury said
that GM has made material progress in creating common architectures and
has worked to create greater flexibility in its facilities. According
to Treasury, GM's actions in this area allow it to spread its product
development and fixed costs over a large range of vehicles; in
contrast, Treasury identified Chrysler's scale as a challenge because
the company must spread fixed costs over a smaller number of vehicles,
which may limit funding for the research and development needed to
maintain competitiveness.
Obtaining labor concessions:
A number of panelists attributed the domestic automakers' current
financial condition in part to the labor agreements with the existing
workforce, as well as health-care and pension costs associated with the
companies' retirees. Several of them noted that Chrysler's and GM's
labor costs are higher than those of transplants primarily because of
more generous healthcare benefits for workers. Others noted that work
rules contained in the labor agreements can increase costs and limit
production flexibility.[Footnote 39] According to the companies' plans,
the UAW, and our panelists, previous labor agreements reached between
the UAW and the automakers are helping to restructure labor costs to be
competitive with transplants, by, for instance, bringing in new hires
in nonskilled trades at a substantially lower wage rate than current
workers, but some members of our panel said that more needs to be done
in this area.[Footnote 40]
Both Chrysler's and GM's February restructuring plans discuss proposed
labor concessions, but no final agreements have been reached to date.
According to Chrysler's plan, it has a tentative agreement with the UAW
to implement labor terms competitive with those of transplants. The
tentative agreement includes adjustments to levels of compensation,
work rules, and severance provisions such as elimination of the Jobs
Bank program, which provided income and benefit protection in lieu of
layoffs. Similarly, GM's plan indicates that the company has reached
agreement with the UAW to implement competitive work rules and to
reduce labor costs. GM's plan also discusses some labor concessions
that are in the process of being implemented, namely reducing costs
through buyouts. Neither company has reached an agreement with the UAW
to reduce cash contributions to the VEBAs to fund retirees' healthcare
plans, also part of Chrysler's and GM's plans to achieve viability.
According to the UAW, union members will not vote to ratify the labor
modifications (e.g., compensation and work rules) until a tentative
agreement has been reached on the modification to VEBA contributions.
[Footnote 41]
Treasury concluded that neither company has satisfied the terms of the
loan agreements, in part, because neither reached approval on labor and
VEBA modifications. Treasury also identified liabilities associated
with pensions and health care for retirees as a challenge for GM, given
that the company would need to sell 900,000 additional cars per year to
cover its future cash payments for these costs. According to Treasury,
these costs leave GM aiming to maximize sale volumes rather than
focusing on return on investment.
Relying on realistic estimates for sales volumes, market share, and
other assumptions:
Members of our panel said that the success of the plans would depend on
whether the underlying assumptions for sales, market share, and
possible future financial assistance were realistic. They cautioned
against basing estimates for viability on assumptions of an immediate
increase in sales volumes or in the Detroit 3's market share. Some of
the panelists attributed the automakers' financial struggles, in part,
to the companies' historical reliance on unrealistic expectations of
sales volumes and market share that were not later met. As previously
discussed, given their existing cost structure, the companies must have
high sales volumes in order to achieve profitability. However, if the
companies' forecasts for sales volumes and market share are too
optimistic compared to actual consumer demand, the restructuring plans
may not result in financial viability without further modifications to
the restructuring plans. Therefore, some panelists said that
restructuring efforts need to rely on realistic or conservative
assumptions about sales volumes and market share.
Regarding sales assumptions, Chrysler's baseline plan relies on 10.1
million unit sales in the United States for cars and light trucks in
2009, and GM's baseline plan relies on 10.5 million unit sales. Both
plans include 2009 downside scenario sales estimates that are 1 million
unit sales lower than their 2009 baseline scenario sales estimates (9.1
million, for Chrysler; and 9.5 million, for GM). Some panelists told us
that they thought the automakers' baseline sales estimates were
realistic. With respect to market share, they said the companies should
provide analysis to support their market share assumptions, given that
the companies have been losing market share for decades while
continuing to project gains in market share. GM's plan includes some
key assumptions that drive its market share analysis; however the plan
does not indicate to what extent each of these assumptions affects
market share estimates. Chrysler's plan does not identify the
assumptions that contribute to its market share estimates. One panelist
commended GM for acknowledging the potential for dropping from its 2008
U.S. market share of 22 percent to below 20 percent market share,
although another cautioned that GM may not be able to maintain more
than 16 percent market share. A few of the panelists noted that sales
projections may not be realized due to the effect of eliminating or
discontinuing brands because buyers interested in those brands may turn
to competitors' products, rather than to other brands of GM and
Chrysler.
The February plans also assume assistance from other entities,
including loans from the Department of Energy (DOE), an alliance with
another automaker (in the case of Chrysler), and loans from foreign
governments (in the case of GM).[Footnote 42] In addition to the AIFP
funding the automakers requested in their February restructuring plans,
Chrysler's plan assumes $6 billion in DOE loans and GM's plan assumes
$7.7 billion in DOE loans. However, DOE has not completed its review of
either company's application, in part, because DOE's program rules
require loan recipients to be financially viable. DOE officials told us
that they cannot finish reviewing Chrysler's and GM's applications
until Treasury makes a final determination on the companies' viability,
and that DOE will coordinate with Treasury in making that
determination. Additionally, Chrysler's plan indicates that to be
viable on a long-term basis, the company must pursue strategic
alliances and includes a scenario based on a proposed alliance between
Chrysler and Fiat, a European car company. Chrysler states in its plan
that this alliance would provide Fiat with an equity stake in Chrysler
and will provide Chrysler access to Fiat's smaller, fuel-efficient
platforms and technologies, as well as Fiat's international dealer
network. However, the alliance does not provide any financial
resources, for example, through equity contributions to Chrysler.
Chrysler also states in its plan that even with a Fiat alliance, the
company would struggle if sales fall below its downside estimate.
In its plan, GM assumes it will receive about $6 billion in financial
assistance from foreign governments to be able to maintain adequate
cash balances for its global operations through the beginning of
economic recovery. The company's restructuring plan details the
progress of ongoing discussions with governments in Australia, Canada,
Europe, and Asia in order to achieve viable operations in those
regions. GM submitted a separate restructuring plan to the Canadian
government on February 20, 2009, which the Canadian government found to
be insufficient.
Treasury criticized several of the automakers' assumptions as being too
optimistic or too aggressive. Treasury noted that Chrysler assumes it
will maintain its market share even though it has lost market share
over the last decade and there are few signs it can reverse this trend.
Similarly, Treasury determined that GM's market share assumptions are
too optimistic. GM has been losing 0.8 percent market share annually
over the last 30 years and its plan assumes a slower rate--0.3 percent
per year--of market share decline. With regard to pricing assumptions,
Treasury stated that it will be challenging for Chrysler to maintain
pricing as projected in its plan given what Treasury characterized as
the perception of poorer product quality. With respect to GM, Treasury
noted that its plan does not assume a decreased contribution margin
despite a severely distressed market and the company's plan focuses on
passenger cars and crossovers, which traditionally have earned lower
contribution margins than trucks and SUVs. Additionally, Treasury
concluded that GM's assumption of European assistance represents a risk
to the viability of its plan because funds from European governments
have not been allocated.
Automakers Face Many Challenges to Successful Restructuring:
The automakers are confronting a number of challenging conditions in
their efforts to restructure in a way that will achieve and sustain
long-term viability, according to members of our panel and research we
reviewed. Some of the challenges are the same ones that led to the
automakers' current condition, such as the weak economy and changing
consumer preferences. Although Chrysler and GM acknowledged many of
these challenges in their restructuring plans, many are beyond their
control.
Weak economic conditions:
The poor condition of the U.S. economy will likely continue to affect
the financial health of Chrysler and GM. As figure 2 shows, over the
past 30 years, automobile sales almost always decreased during periods
of economic recession. Chrysler and GM officials, as well as some
panelists, noted that the current recession has had a similar effect on
consumer confidence in general and automotive purchases in particular.
Some panelists attributed this pattern to the discretionary nature of
automobile purchases--that is, these purchases are easily postponed
during periods of economic downturn. Reflecting the current economic
conditions and projected slow recovery, both Chrysler and GM revised
their sales projections downward, as noted above. However, if the
economy recovers more slowly than the companies anticipate and sales
revenues are lower than projected, the companies may not be able to
achieve viability according to schedule and under the conditions laid
out in their plans. For instance, both Chrysler and GM noted that their
downside scenarios, which will occur if sales volumes are lower than
expected, would result in the need for more federal funding than their
baseline scenarios. However, although GM's assumption about economic
growth (measured by gross domestic product) for 2009 was characterized
as more conservative than other estimates, this assumption now looks
optimistic compared to Congressional Budget Office and IHS Global
Insight estimates.[Footnote 43]
Figure 2: Monthly Light Vehicle Sales, 1976 to 2009 (Seasonally
Adjusted Annual Rate):
[Refer to PDF for image: line graph]
Year: 1976;
Monthly sales: 12.5 million.
Year: 1977;
Monthly sales: 14 million.
Year: 1978;
Monthly sales: 13.3 million.
Year: 1979;
Monthly sales: 14.6 million.
Year: 1980 (includes recession period);
Monthly sales: 14.1 million.
Year: 1981;
Monthly sales: 11 million.
Year: 1982 (includes recession period);
Monthly sales: 10.1 million.
Year: 1983;
Monthly sales: 10.7 million.
Year: 1984;
Monthly sales: 14 million.
Year: 1985;
Monthly sales: 15.3 million.
Year: 1986;
Monthly sales: 15.8 million.
Year: 1987;
Monthly sales: 12.2 million.
Year: 1988;
Monthly sales: 15.8 million.
Year: 1989;
Monthly sales: 15 million.
Year: 1990;
Monthly sales: 16 million.
Year: 1991 (includes recession period);
Monthly sales: 11.6 million.
Year: 1992;
Monthly sales: 12.4 million.
Year: 1993;
Monthly sales: 13.2 million.
Year: 1994;
Monthly sales: 15 million.
Year: 1995;
Monthly sales: 14.4 million.
Year: 1996;
Monthly sales: 14.4 million.
Year: 1997;
Monthly sales: 15.3 million.
Year: 1998;
Monthly sales: 14.4 million.
Year: 1999;
Monthly sales: 16.1 million.
Year: 2000;
Monthly sales: 18.2 million.
Year: 2001 (includes recession period);
Monthly sales: 17.2 million.
Year: 2002;
Monthly sales: 16.2 million.
Year: 2003;
Monthly sales: 16.4 million.
Year: 2004;
Monthly sales: 16.3 million.
Year: 2005;
Monthly sales: 16.4 million.
Year: 2006;
Monthly sales: 17.5 million.
Year: 2007;
Monthly sales: 16.3 million.
Year: 2008 (includes recession period);
Monthly sales: 15.3 million.
Year: 2009 (includes recession period);
Monthly sales: 9.5 million.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
Note: According to members of our panel, the spike in sales during
2001, a recession period, is largely attributed to the financing
incentives that the automakers offered consumers.
[End of figure]
Frozen credit markets:
The continuing lack of credit availability--on both a consumer and
institutional level--is a major challenge for the automakers. A
substantial amount of vehicle financing is obtained through asset-
backed securities (ABS) transactions, which provide liquidity to the
automotive financing companies, such as GMAC and Chrysler Financial,
and enable dealer and consumer financing. However, due to conditions in
the capital markets, considerably less of this type of financing is
occurring. In turn, this has affected the ability of dealers to offer
retail financing to consumers. Because almost all consumers rely on
some level of financing to purchase automobiles, this lack of credit
has negatively impacted sales. In addition, the lack of credit
availability has affected dealers' ability to finance their inventory
(referred to as floorplan financing). Since dealers purchase vehicles
from the automakers, the lack of floorplan financing also negatively
impacts the automakers' revenues. Given the role the automotive
financing companies play in vehicle sales, Chrysler and GM indicated in
their restructuring plans that the financial health of Chrysler
Financial and GMAC is critical to their financial viability. As noted
earlier, both GMAC and Chrysler Financial have received federal
financial assistance through AIFP.[Footnote 44]
To increase the availability of credit for consumers, Treasury and the
Federal Reserve have announced the Term Asset-Backed Securities Loan
Facility (TALF) program, which will provide financing to investors for
purchases of ABS and could generate up to $1 trillion in lending for
individuals and businesses.[Footnote 45] Eligible ABS includes newly
issued AAA-rated tranches of securitizations backed by auto loans.
However, officials from the automakers and auto financing companies we
interviewed expressed concern about the AAA-rating requirement, noting
that under such a requirement certain of the auto financing companies'
securities would not be eligible.
Solvency of suppliers:
Officials from Ford, GM, and Chrysler, as well as members of our panel,
stated that the tenuous financial condition of auto suppliers is a
major concern because the solvency of the supply chain is critical to
the automakers' viability. As Ford's CEO noted in his December 2008
congressional testimony, the domestic auto manufacturing industry is
interdependent, especially in the area of suppliers, with an estimated
80 percent overlap in supplier networks. Thus, according to the
automakers and some panelists, the collapse of one or more of the
domestic automakers would affect the remaining automakers because,
among other things, such a collapse could impact the ability of shared
suppliers to continue operations. Ford also noted that a supplier
financing safety net--such as guarantees on payment from the federal
government--would help prevent this situation. Moreover, large
production cuts due to sluggish sales, especially in the first quarter
of 2009, have affected the cash flow and liquidity of many automotive
suppliers. According to the Motor & Equipment Manufacturers Association
(MEMA), more than 40 major suppliers filed for Chapter 11 restructuring
in 2008, with industry surveys indicating approximately one-third of
all suppliers are in imminent financial distress.[Footnote 46] As
previously noted, Treasury announced in March it would provide up to $5
billion in assistance to help suppliers.
Cost of developing advanced technology vehicles:
Several panelists noted that not only is developing advanced technology
vehicles expensive, but also the return on the investment in those
vehicles can be low because the initial demand for new technologies can
be slow to develop. For example, the Toyota Prius was on the market for
10 years before reaching 1 million units sold. According to our panel,
given the high development costs and low initial demand, especially if
gasoline prices remain relatively low, these new vehicles are not
likely to generate a profit for several years. Thus, changing the
companies' product mix to include more advanced technology vehicles may
not be the best way to improve the financial bottom line in the short
term. Furthermore, at least one panelist questioned whether the
necessary energy infrastructure, such as electrical outlets to charge
batteries, will be available to support these new technologies. Without
adequate infrastructure, consumers will be reluctant to purchase these
new advanced technology vehicles. GM officials acknowledged these
challenges but indicated that the company decided to continue investing
in advanced technologies even during the current financial crisis
because they need this technology in their fleet to help meet federal
fuel economy standards in the future. In addition, GM officials said
they are planning for higher oil prices than current futures market
expectations, in order to make GM's plan more robust against oil price
volatility.
Reducing the number of dealerships to align with sales volumes:
Many panelists said that it will be difficult for Chrysler and GM to
resize their dealership networks. The large number of dealers increases
intra-brand competition and thus reduces the pricing power of
individual dealers. One GM official noted that the biggest competition
for a GM dealer is often the other GM dealer down the street. As
previously mentioned, Detroit 3 dealerships sell substantially fewer
vehicles per dealership than transplant dealerships sell. Given these
and other concerns, Chrysler, Ford, and GM are working to "right size"
their dealer networks to better align with automakers' current and
projected sales volumes and market shares. However, panelists told us
state franchise laws make eliminating dealerships difficult because
these laws generally provide strong protections for auto dealer
franchisees. For example, Michigan's law on auto dealer franchises
states that manufacturers must provide adequate notice, act in good
faith, and have good cause in order to terminate an agreement with a
dealer.[Footnote 47] Any action to consolidate or eliminate a dealer--
outside of a bankruptcy court--must be negotiated with the affected
dealers. According to members of our panel, under the best-case
scenarios, the automakers can expect to incur significant costs and
delays in rationalizing their dealership networks. Given the current
depressed level of automobile sales, automakers and panelists also told
us that some dealers are looking either to go out of business
voluntarily or to merge their business with other dealerships.
Uncertainty over future fuel economy standards:
The current uncertainty of future fuel economy standards could
complicate the auto manufacturers' ability to plan for future market
conditions. The National Highway Traffic Safety Administration (NHTSA),
within the Department of Transportation, issues fuel economy standards
for vehicles sold in the United States. Currently, fuel economy
standards are set through model year 2011. NHTSA officials told us they
plan to propose standards for model years 2012 through 2016 this summer
and issue final standards by March 31, 2010. Further, according to
NHTSA, it must coordinate the rule making with the Environmental
Protection Agency (EPA). EPA will be responsible for setting standards
regarding the level of greenhouse gases passenger vehicles can emit if
it adopts its proposed finding that greenhouse gases in the atmosphere
endanger the public health and welfare.[Footnote 48] In addition, NHTSA
officials said they were monitoring events relating to California's and
other states' attempts to set and enforce individual greenhouse gas
emission standards for passenger vehicles. Chrysler and GM officials
told us they would prefer one national standard to individual state
standards. If NHTSA raised the fuel economy standards above what the
automakers have planned for their near-term product line, or if states
are allowed to set individual standards, it could complicate the
viability plans of the auto manufacturers by forcing them to make
faster, more costly technological investments in their vehicles than
they otherwise had planned. NHTSA officials told us that when setting
future fuel economy standards, they would take into account the ability
of the auto industry to make the necessary technological investments in
its products to increase fuel economy.
Reducing debt:
Restructuring the automakers' balance sheets by reducing debt and
related leverage are critical elements to any plan for long-term
viability.[Footnote 49] As of December 31, 2008, GM had total
liabilities of $176.4 billion compared to negative stockholders' equity
of $86.2 billion. GM's liabilities of $176.4 billion included current
liabilities (payable in 2009) of $73.9 billion and noncurrent
liabilities of $54.1 billion for pensions and postretirement benefits
and $29.6 billion of long-term debt.[Footnote 50] The loan agreement
calls for GM's "best efforts" to reduce its unsecured public debt by at
least two-thirds. As of December 31, 2008, GM had about $27.2 billion
of unsecured public debt (consisting of amounts included in GM's debt
payable in 2009 and long-term debt). In its restructuring plan, GM
reported that negotiations were under way with its bondholders to
convert the unsecured debt to equity. This debt restructuring would
reduce interest expense and immediately improve cash flow to GM.
Chrysler, which does not have significant unsecured public debt,
proposed working with creditors, including Treasury, senior lien bank
lenders, and the UAW VEBA, to reduce its debt by $5 billion.[Footnote
51]
According to members of our panel and financial analysts we
interviewed, reaching agreements with bondholders could be difficult
because the value of company stock is less than the value of the bonds.
Bondholders will be trading a known rate of return that is subject to
bankruptcy risk for a completely unknown rate of return that is also
subject to bankruptcy risk. As a Treasury official noted, however, by
not agreeing to the exchange, the bondholders are subject to the risk
that the companies could file for bankruptcy, potentially rendering
their bonds worthless. According to financial analysts we spoke with,
many bondholders are willing to take their chances waiting for more
government assistance. Recognizing these challenges, officials from
both Chrysler and GM told us they will likely need the assistance of
the Presidential Task Force or Treasury to reach agreement with their
bondholders or creditors.
Given Challenges, Treasury and Automakers Are Considering Options for
Restructuring:
Given the substantial amount of debt that both Chrysler and GM have,
and the uncertainty that revenues from car sales will increase in the
near term or that the automakers' stakeholders will reach an agreement
needed for successful restructuring, Treasury and the automakers have
acknowledged the very real possibility that restructuring might be
accomplished through a reorganization under the bankruptcy code. Under
that scenario, according to Treasury, the most likely approach would be
a court-supervised asset sale, in which the company's good assets would
be sold to a new entity,[Footnote 52] and substantial amounts of the
company's debt would remain in possession of the old part of the entity
to be dealt with in bankruptcy court. Treasury said this approach would
help accelerate the turnaround of the companies by allowing them to
quickly exit bankruptcy. According to Treasury, another possibility for
restructuring for GM would be a "prepackaged" bankruptcy, in which the
company's creditors approve a reorganization plan before the company
files for bankruptcy; however, according to Treasury, it appears
unlikely that such an agreement could be reached in the limited amount
of time available. Treasury has said it would consider providing
bankruptcy financing to Chrysler and GM if the companies meet the
conditions Treasury set in its March 30 announcement and if Treasury
and the companies determine that a reorganization bankruptcy is the
best course of action.[Footnote 53]
Agency Comments and Our Evaluation:
We provided a draft of this report to the Departments of the Treasury,
Transportation, and Energy for review and comment. These agencies
provided technical clarifications, which we incorporated as
appropriate.
We also made a draft of this report available to Chrysler and GM
officials for their review and comment. Chrysler and GM officials
provided technical corrections and clarifications, which we
incorporated as appropriate.
We are sending copies of this report to other interested congressional
committees and members, the Departments of the Treasury,
Transportation, and Energy, and others. The report also is available at
no charge on the GAO Web site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact Katherine Siggerud at (202) 512-2834 or siggerudk@gao.gov or
Susan Fleming at (202) 512-2834 or flemings@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made major contributions
to this report are listed in appendix II.
Signed by:
Gene L. Dodaro:
Acting Comptroller General of the United States:
List of Committees:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate:
The Honorable Christopher J. Dodd:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Kent Conrad:
Chairman:
The Honorable Judd Gregg:
Ranking Member:
Committee on the Budget:
United States Senate:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable David R. Obey:
Chairman:
The Honorable Jerry Lewis:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable John M. Spratt Jr.
Chairman:
The Honorable Paul Ryan:
Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Charles B. Rangel:
Chairman:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Members of GAO's Auto Industry Panel:
We contracted with the National Academy of Sciences (NAS) to identify a
balanced, diverse group of individuals with expertise about the past
and current financial condition and operations of the domestic
automakers, the restructuring of distressed companies, labor relations
issues, financial management and analysis of distressed or
restructuring companies, factors influencing competitiveness in the
auto industry, and engine and vehicle technologies that may affect the
auto manufacturing industry today as well as in the near future. We
selected 17 individuals for interviews from among those NAS identified
based on achieving a variety of expertise and avoiding any potential
conflicts of interest (see table 4).
Table 4: Individuals with Auto Industry Expertise Identified by NAS Who
Were Interviewed:
Name: Bruce M. Belzowski;
Company or Institution: University of Michigan, Transportation Research
Institute.
Name: Richard N. Block;
Company or Institution: Michigan State University, School of Labor and
Industrial Relations.
Name: John Casesa;
Company or Institution: Casesa Shapiro Group.
Name: K.G. Duleep;
Company or Institution: Energy & Environmental Analysis Inc.
Name: George Eads;
Company or Institution: CRA International.
Name: Susan Helper;
Company or Institution: Case Western Reserve University.
Name: Rod Lache;
Company or Institution: Deutsche Bank.
Name: Tim Lieuwen;
Company or Institution: Georgia Institute of Technology.
Name: John Paul MacDuffie[A];
Company or Institution: University of Pennsylvania, Wharton School of
Business.
Name: Walter S. McManus;
Company or Institution: University of Michigan, Transportation Research
Institute.
Name: Glenn Mercer[A];
Company or Institution: The International Motor Vehicle Program at the
Massachusetts Institute of Technology.
Name: Henry S. Miller;
Company or Institution: Miller Buckfire & Company.
Name: Justin Mirro;
Company or Institution: Moelis & Company, Transportation Investment
Banking Group.
Name: Nabil Nasr;
Company or Institution: Rochester Institute of Technology.
Name: William A. Niskanen;
Company or Institution: Cato Institute.
Name: Douglas M. Steenland;
Company or Institution: Formerly of Northwest Airlines Corporation.
Name: Marina Whitman;
Company or Institution: University of Michigan, Ross School of
Business.
Source: GAO.
[A] These individuals also reviewed a portion of a draft of this report
to ensure the accuracy and completeness of the information.
[End of table]
[End of section]
Appendix II: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Katherine A. Siggerud, (202) 512-2834 or siggerudk@gao.gov:
Susan Fleming, (202) 512-2834 or flemings@gao.gov:
Staff Acknowledgments:
In addition to the contact names above, the following individuals made
important contributions to this report Marcia Carlsen, Nikki Clowers,
and Raymond Sendejas, Assistant Directors; Alana Finley; Chuck Ford;
Cole Haase; Heather Halliwell; Jennifer Henderson; Joah Iannotta;
Matthew LaTour; Susan Michal-Smith; and Susan Sawtelle.
[End of section]
Footnotes:
[1] The Emergency Economic Stabilization Act of 2008 (EESA) authorized
the Troubled Asset Relief Program (TARP), Pub. L. No. 110-343, 122
Stat. 3765 (2008), 12 U.S.C.§ 5201. Under TARP, Treasury has the
authority to purchase or guarantee up to $700 billion in troubled
assets through its Office of Financial Stability. As of March 27, 2009,
Treasury had publicly announced funding programs under TARP totaling
$667.4 billion, most of which was used to purchase or guarantee
troubled assets from financial institutions, and about $422.4 billion
had been apportioned.
[2] Specifically, Treasury purchased debt obligations of GM and of
Chrysler LLC's parent company, Chrysler Holding LLC. Debt obligations
constitute TARP "troubled assets" under section 3(9) of the Act, 12
U.S.C. § 5202(9). Under the terms of the Treasury-Chrysler Holding LLC
Loan and Security Agreement, Chrysler Holding then provided the loan
proceeds to Chrysler LLC, and Chrysler LLC has carried out the
requirements of the loan agreement.
[3] EESA requires GAO to report at least every 60 days on findings
resulting from, among other things, oversight of TARP's performance in
meeting the purposes of the act; the financial condition and internal
controls of TARP; the characteristics of both asset purchases and the
disposition of assets acquired; TARP's efficiency in using the funds
appropriated for the program's operation; and TARP's compliance with
applicable laws and regulations.
[4] GAO, Auto Industry: A Framework for Considering Federal Financial
Assistance, [hyperlink, http://www.gao.gov/products/GAO-09-242T]
(Washington, D.C.: Dec. 4, 2008) and Auto Industry: A Framework for
Considering Federal Financial Assistance, [hyperlink,
http://www.gao.gov/products/GAO-09-247T] (Washington, D.C.: Dec. 5,
2008).
[5] Ford Motor Credit Company, GMAC, and Chrysler Financial are
companies that provide financing for consumer automotive and dealer
purchases.
[6] GM's core U.S. brands are Buick, Cadillac, Chevrolet, and GMC;
other brands include Daewoo, Holden, HUMMER, Opel, Pontiac, Saab,
Saturn, Vauxhall and Wuling.
[7] Chrysler's brands include Dodge, Chrysler, and Jeep.
[8] Chrysler noted that its losses are preliminary and include non-
recurring impairment and restructuring charges totaling $4.2 billion.
Because Chrysler is privately owned, data on its financial condition
are not currently available to the public. However, Chrysler reported
the unaudited $8 billion loss for 2008 in its restructuring plan
submitted to Treasury on February 17, 2009.
[9] GM's loss was reported in its audited financial statements for
2008.
[10] In March, the UAW ratified changes to its 2007 labor agreement
with Ford.
[11] Detroit 3-related jobs account for 1 percent or more of the
workforce in these 50 metropolitan areas. Howard Wial, "How a Metro
Nation Would Feel the Loss of the Detroit Three Automakers,"
Metropolitan Policy Program at Brooking (Dec.12, 2008).
[12] Data on pension recipients are from March 2009 for Chrysler and
December 2008 for GM.
[13] According to Chrysler, $20 million of unsecured public debt
remains outstanding following a tender offer made by Chrysler in 2007
for the purpose of eliminating all such debt.
[14] An affiliate of Cerberus Capital Management owns 80.1 percent of
Chrysler Holding LLC, and Daimler AG indirectly owns the remaining 19.9
percent. Chrysler Holding LLC, in turn, indirectly owns 100% of
Chrysler LLC.
[15] Light vehicle refers to passenger cars, multipurpose passenger
vehicles, trucks, and buses with a gross vehicle weight rating of up to
10,000 pounds.
[16] A UAW representative, in commenting on this statement, disagreed,
saying that the difficulties facing the Detroit 3 are more a result of
the sharp drop in vehicle sales.
[17] Ford subsequently determined that it would not request loans from
Treasury at this time.
[18] [hyperlink, http://www.gao.gov/products/GAO-09-242T].
[19] Ford requested a $9 billion line of credit to protect against
further industry downturns, but company officials have said that they
do not intend to use this line of credit.
[20] These amounts are in addition to the loans Chrysler and GM are
seeking through the Department of Energy for advanced technology
vehicles. These loan applications are discussed later in this report.
[21] The Task Force is a cabinet-level group that includes the
secretaries of Transportation, Commerce, Labor, and Energy. It also
includes the Chair of the President's Council of Economic Advisers, the
Director of the Office of Management and Budget, the Administrator of
the Environmental Protection Agency, and the Director of the White
House Office of Energy and Climate Change. The President has directed
the Secretary of the Treasury and the Director of the National Economic
Council to lead the Task Force. Also, Treasury has retained two
additional individuals to assist the Task Force--a senior adviser to
the Task Force who has experience in labor-management relations and a
counselor to the Secretary who will advise on issues related to the
auto industry. According to Treasury officials, the Task Force is
advisory and has no decision-making authority.
[22] If Chrysler or GM file for bankruptcy, Treasury has the right to
cease accepting receivables into the program.
[23] In April, the government of Canada announced a similar program to
guarantee warranties on Chrysler and GM vehicles sold in Canada. The
program is valued at about $150 million.
[24] Pub. L. No. 111-5, 123 Stat. 115 (2009).
[25] GAO, Guidelines for Rescuing Large Failing Firms and
Municipalities, [hyperlink, http://www.gao.gov/products/GAO/GGD-84-34]
(Washington, D.C.: Mar. 29, 1984).
[26] According to a GM official, as of March 2009, GM had identified
about 182,000 bondholders. However, they are certain that not all
bondholders have been identified. Therefore, the total number of
bondholders is expected to be higher.
[27] Chrysler reported in its restructuring plan that the Mopar
inventory has a recovery value between $149 million and $261 million.
[28] In commenting on a draft of this report, a GM official stated that
in a normally functioning credit market, the assets GM provided as
collateral would likely have supported similar loans from commercial
lenders, although GM did not have formal valuation data to support this
statement.
[29] A revolving facility is a type of loan allowing a borrower to draw
down and repay amounts (up to a limit) for short periods throughout the
life of the loan. Amounts repaid can be re-borrowed, thereby providing
some flexibility to the borrower.
[30] PBGC was established by the Employee Retirement Income Security
Act of 1974. Pub. L. No. 93-406, 88 Stat. 829 (29 U.S.C.§§ 1001-1461).
[31] PBGC's single-employer insurance program guarantees participant
benefits up to $4,500 per month for age-65 retirees of plans
terminating in 2009, with lower guarantees for those who retire before
age 65. Additionally, benefit increases arising from plan amendments in
the 5 years immediately preceding plan termination are not fully
guaranteed, although PBGC will pay a portion of these increases. A
similar 5-year phase-in limit applies to benefits payable upon the
permanent closing of a plant or similar event. PBGC is also restricted
from paying certain supplemental benefits, such as temporary benefits
payable from early retirement to the date a retiree becomes eligible
for Social Security benefits. These temporary supplemental benefits are
generally not guaranteed.
[32] Estimates of pension funding levels vary based on the methods and
assumptions used. According to PBGC, GM's plans were underfunded by $20
billion and Chrysler's by $9.3 billion on a termination basis as of
November 30, 2008, for GM and January 1, 2009, for Chrysler.
Termination liability reflects the cost to a company of paying an
insurer to meet its pension obligations should the plan terminate. This
is calculated by using actuarial assumptions PBGC makes including
interest and mortality. Termination liability is often higher than
liability calculated for other purposes. According to GM's financial
statements, its U.S. pension plans were underfunded by $13.6 billion as
of December 31, 2008; according to information provided by Chrysler,
its U.S. pension plans were underfunded by $3.6 billion as of December
31, 2008.
[33] For example, we estimate that GM's and Chrysler's plans include
roughly 900,000 participants, both those receiving benefits now and
those who have earned benefits payable in the future, which would
increase the total number of PBGC's current or future beneficiaries by
nearly 80 percent. Additionally, PBGC would pay all the plans' benefit
promises, up to certain limits set by Congress. These limits mean that
some individuals, typically younger retirees, would see reduced
benefits.
[34] PBGC has available a $100 million line of credit from the U.S.
Treasury for liquidity purposes if its self-generated funds are
insufficient to meet operating cash needs in any period.
[35] Additionally, one existing brand would become a niche brand.
[36] An extended range electric vehicle has an electric motor that
turns the vehicle's wheels and is powered by a battery that is charged
from an outlet. It also has a small internal combustion engine that is
fueled with gasoline or other alternative fuel, but, in this case, the
engine acts as a generator for the electric motor.
[37] In commenting on a draft of this report, a GM official noted that
for all automakers, SUVs and trucks generally have higher profit
margins than cars. In addition, the official said that GM's increased
emphasis on smaller cars was evident by 2007 and that GM had promoted
its ability to deliver fuel efficient cars as early as 2004.
[38] Chrysler provided some examples of fixed-cost reductions including
plant closures, improved asset utilization, program deferrals and
cancellations, and healthcare actions related to active and retired
employees.
[39] For instance, some of our panelists told us that transplants have
fewer job classifications for hourly workers, which creates flexibility
in reassigning workers to new or different tasks. In contrast, UAW
contracts establish dozens of job classifications and narrowly define
the roles that each classification can perform, limiting flexibility in
managing staffing.
[40] As previously discussed, the terms of the automakers' loan
agreements require the automakers to try to (1) achieve total
compensation packages (wages and benefits) competitive with
transplants, (2) apply work rules that are competitive with
transplants, and (3) eliminate any compensation or benefits, other than
customary severance pay, to employees that have been fired, laid off,
furloughed or idled.
[41] Although Ford has not accepted federal assistance and is not bound
by the terms of the loan agreements that Chrysler and GM signed, Ford
and the UAW reached agreement in March 2009 on modifications to the
2007 labor contract and to plans for Ford's contributions to the VEBA.
This agreement is noteworthy because, according to the UAW, the
agreement addresses all of the labor and VEBA modifications that
Chrysler and GM must achieve under their loan agreements with Treasury.
[42] Chrysler and GM have both applied for loans from DOE's Advanced
Technology Vehicle Manufacturing Program, which will provide low-cost
loans to auto manufacturers or component parts producers to retool or
build plants to make cars or components that will substantially improve
vehicle fuel economy.
[43] IHS Global Insight is a private sector firm that provides economic
and financial forecasts and industry analysis.
[44] To date, Ford Motor Credit Company (Ford Credit) has not received
financial assistance under AIFP; however, it is a participant in the
Commercial Paper Funding Facility and the Term Asset-Backed Securities
Loan Facility programs. Like Chrysler Financial, Ford Credit has
applied to FDIC to establish an industrial loan company. An industrial
loan company is a financial institution that lends money and may be
owned by nonfinancial institutions. To date, FDIC has not made a
decision on Chrysler Financial or Ford Credit's application.
[45] Up to $100 billion in funding will come from TARP.
[46] MEMA represents motor vehicle parts suppliers. MEMA supports its
members through its three affiliate associations: Automotive
Aftermarket Suppliers Association, Heavy Duty Manufacturers
Association, and Original Equipment Suppliers Association.
[47] Mich. Comp. Laws § 445.1567(1)(a)-(c).
[48] Greenhouse gas emissions in vehicles are directly related to a
vehicle's fuel economy.
[49] Leverage represents the amount of debt in relation to equity plus
reserves and is a critical measure in determining an entity's financial
flexibility and solvency.
[50] The remaining $18.8 billion of liabilities are comprised of
liabilities for financing and insurance operations, other liabilities,
and deferred income taxes.
[51] We reviewed Chrysler's financial statements but because it is not
a public company, information on its liabilities cannot be disclosed in
this report.
[52] The sale would be conducted under 11 U.S.C. § 363, and the
shareholders of the new entity would include the federal government and
the current stakeholders of Chrysler or GM.
[53] Section 364 of the bankruptcy code governs debtor-in-possession
financing and authorizes various kinds of credit after a bankruptcy
petition is filed. If the federal government were to extend credit to
the automakers in a Chapter 11 reorganization bankruptcy, the federal
government could receive priority regarding the payment of such loans
under 11 U.S.C.§ 364.
[End of section]
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "E-mail Updates."
Order by Phone:
The price of each GAO publication reflects GAO‘s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black and
white. Pricing and ordering information is posted on GAO‘s Web site,
[hyperlink, http://www.gao.gov/ordering.htm].
Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537.
Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional
information.
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, dawnr@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
