Saturday, April 4, 2009

Automotive restructuring...


The automakers submitted their restructuring plans to Congress (see links below) in February. Key elements of GM's plan included:
  • a dramatic shift in the company‘s U.S. portfolio, with 22 of 24 new vehicle launches in 2009-2012 being more fuel-efficient cars and crossovers;
  • full compliance with the 2007 Energy Independence and Security Act, and extensive investment in a wide array of advanced propulsion technologies;
  • reduction in brands, nameplates and retail outlets, to focus available resources and growth strategies on the company‘s profitable operations;
  • full labor cost competitiveness with foreign manufacturers in the U.S. by no later than 2012;
  • further manufacturing and structural cost reductions through increased productivity and employment reductions; and,
  • balance sheet restructuring and supplementing liquidity via temporary Federal assistance.
GM calculated that implementation of their plan would result in a company that would be profitable in a U.S. industry with annual sales between 12.5-13 million units (note: U.S. annual sales in the years prior to the recent economic downturn were around 16 million units). In the interim the government assistance would ensure viability until the restructuring was completed.

After examining the plans submitted the administration rejected them as inadequate... Referring to the plans submitted by GM and Chrysler, President Obama said "... after careful analysis, we have determined that neither goes far enough to warrant the substantial new investments that these companies are requesting..." He announced that GM was being given adequate capital to cover them for another 60 days while "... my team will be working closely with GM to produce a better business plan..."

OK, now this blogger has been unable to find any specifics as to what the administration sees as the shortcomings of the GM plan, or what changes they want made over the next sixty days to make the plan acceptable. Statements by the President and his administration have only contained platitudes.

For example from 'Obama Administration New Path to Viability for GM & Chrysler' (see link below), the Key Findings said: "While GM’s current plan is not viable, the Administration is confident that with a more fundamental restructuring, GM will emerge from this process as a stronger more competitive business. This process will include leadership changes at GM and an increased effort by the U.S. Treasury and outside advisors to assist with the company’s restructuring effort. Rick Wagoner is stepping aside as Chairman and CEO. In this context, the Administration will provide GM with working capital for 60 days to develop a more aggressive restructuring plan and a credible strategy to implement such a plan. The Administration will stand behind GM’s restructuring effort."

And re the changes to be made, it said: "... industry and restructuring experts will help focus this process on:
  • Sustainable profitability: A viable GM should be able to generate meaningful positive free cash flowing, a normalized business environment, generate net free cash flow over the course of a business cycle and invest capital in research and development and capital expenditures sufficient to maintain or enhance its competitive position while also earning an adequate return on its capital.
  • A healthy balance sheet: The restructuring must substantially reduce GM’s outstanding debt and existing liabilities to a level where they are consistent with both its normalized cash flow and the cyclical nature of its business. Given the deterioration in the auto market since late last year, this will require substantially greater balance sheet concessions than those called for in the existing loan agreements.
  • More aggressive operational restructuring: The restructuring plan must rapidly achieve full competitiveness with foreign transplants and more aggressively implement significant manufacturing, headcount, brand, nameplate and retail network restructurings.
  • Technology leadership: The new GM will have a significant focus on developing high fuel-efficiency cars that have broad consumer appeal because they are cost-effective, have good performance and are reliable, durable and safe."
Blah, blah... The main reality probably is that having been pummeled by the public over bailouts, AIG bonuses, etc., the administration felt obliged to be seen as taking a strong line with some recipients of government financial aid, and the automotive firms just happened to wander into the cross-hairs (i.e. bad timing, so 'no soup for them')... . Perusing written reports of what administration officials have hinted at it looks like they also want two additional main changes - GM's bond-holders agreeing to reductions in the GM debt that they hold, and a greater emphasis on 'green.' This last point is more an emphasis of the Democrats and the administration than of the market. While many fault GM for focusing on trucks and other gas-guzzlers, the fact of the matter is that this was a direct response to U.S. consumer demand. The public demand for hybrids, etc. is low, and it's not as if this latest big drop (as opposed to the long-term erosion of market share, which has only partially due to their vehicle offerings) in consumer demand has anything to do with this (as it is across the board and has adversely effect all the car companies, even those that have put a greater emphasis on this segment!)

Oh well, looking forward the plan will be tweaked, the administration will say enough changes were made to make the plan acceptable, and a level of government aid will be forthcoming.

Ford Motor Company Business Plan
GM: Restructuring Plan for Long-Term Viability
President Obama's remarks on U.S. car industry
Obama Administration New Path to Viability for GM & Chrysler

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