Deadline looms for US automotive aid debate
By: Ian C. Graig, Monday, March 23, 2009, AutomotiveWorld.com
Facing a 31 March deadline, President Obama's auto industry task force continues to explore whether to approve further federal aid for General Motors (GM) and Chrysler. Recent developments have offered a glimmer of hope that GM and Chrysler are starting to take the steps needed to ensure their viability – and possibly secure more federal aid. Last week’s decision to offer federal assistance to automotive suppliers is widely seen in Washington as a sign that GM and Chrysler will likely receive more aid. But these glimmers of hope cannot obscure the very difficult challenges facing the two OEMs.
The recently created Presidential Task Force on the Auto Industry, chaired by Treasury Secretary Tim Geithner, is currently reviewing restructuring plans submitted by GM and Chrysler last month. The task force faces a 31 March deadline to determine whether the OEMs are taking the steps required to ensure their long-term financial viability and, if so, whether additional federal aid is justified. The two automakers have requested over US$22bn in additional assistance. If the task force determines that GM and Chrysler are not moving toward long-term viability, Treasury Secretary Geithner has authority not only to deny their requests for more aid, but also to call in the US$17.4bn in federal loans already made to the two companies.
The situation clearly remains grim, but the past few weeks have seen some small inklings of hope. Most notably, GM told the task force that it would not need the US$2bn in federal aid that it had requested to make it through March. GM also reached agreement with its Canadian workers, potentially opening the door for the automaker to receive aid from the Canadian government. An agreement between Ford and the UAW to reduce labour costs could set the stage for similar savings at the other Detroit OEMs.
These developments offered Washington policy makers the first real sense in months that the Detroit Three were making progress to address some of the stubborn issues they confront. Many exceedingly difficult challenges remain: for example, GM still needs to reach an agreement with its bondholders, which is proving very difficult. But even Senator Bob Corker, the Tennessee Republican who almost single-handedly derailed auto industry aid legislation last year, recently said that he was hopeful about the progress being made by the Detroit Three.
Washington allies of GM and Chrysler grew even more optimistic last week when the auto task force announced a US$5bn federal programme to help Tier 1 suppliers address a severe cash-flow crisis. The programme, which involves federal guarantees of or loans against suppliers' receivables, is similar to ideas offered by GM in its restructuring plan and by the supplier industry itself last month. While the programme is smaller than many suppliers had hoped, the willingness of the auto task force to extend aid to the supplier industry was widely seen in Washington as a sign that it would also support further aid for GM and Chrysler.
It is clear that neither the Obama Administration nor most members of Congress want to see GM or Chrysler declare bankruptcy, fearing the potentially devastating impact. At the same time, however, it remains unclear what type of deal will emerge and how it will be funded. In light of Congressional resistance to approving further bailout funds, the most likely funding source remains the US$750bn Troubled Asset Relief Program. But the government already has extensive commitments under TARP – including the existing programmes to aid GM, Chrysler, and the supplier industry – and is under pressure to use the programme to aid other troubled industries. The Chrysler situation also poses a unique challenge in light of the pending deal with Fiat, which has not yet received a clear green light from the auto industry task force. Most Washington policymakers recognize that such a deal may be necessary for Chrysler to survive, and it is widely seen in Washington as making business sense. There would be resistance in Congress, however, to any deal that allowed Fiat to take a majority stake in Chrysler while Chrysler still had significant outstanding loans from the US government.
There is also little public appetite for further bailouts of big companies, and the OEMs' request for assistance may be hurt by the increasingly intense public backlash against the federal bailouts of financial firms like Citigroup and, in particular, AIG. Many Republicans, in addition, continue to believe that bankruptcy is the best answer to the problems faced by GM and Chrysler, and the task force is clearly considering a structured bankruptcy as one option. But it remains an option that task force members seem reluctant to embrace.
The task force thus faces an extremely difficult situation. While it faces a 31 March deadline, it seems unlikely that there will be a single ultimate decision on federal aid to the auto industry. Instead, the task force may offer a series of assessments about the industry's efforts to become competitive and a series of actions to help OEMs and suppliers return to viability. Those actions could include approval of all or some of the loans and financing assistance requested by GM and Chrysler, but they could also include steps to revive consumer demand for cars – the bottom-line requirement for a viable industry – and to help the OEMs move toward producing cleaner and more fuel-efficient vehicles.
Ian C. Graig, chief executive of Global Policy Group, Inc., has written in AutomotiveWorld.com in the past on such topics as the biofuels boom and US government policy to aid the auto industry. Global Policy Group is a Washington-based research and government relations consultancy whose clients include leading US, European, and Japanese firms in the automotive, energy, utility, information technology, and financial services sectors. For more information, visit www.globalpolicy.com or contact Ian Graig directly at ian.graig@globalpolicy.com.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.
Published on Monday, March 23, 2009
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