The big three have released their individual plans for a government backed "bailout" plan. In this diary I am going to summarize and comment specifically upon the GM plan. The excitement begins below...
GM says the key elements of The Plan include:
• 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.
The goal is to have a company that is profitable with annual sales of 12.5-13 million units. To put that into perspective, 16 million units annually was the typical year. We will examine some of the above points in greater detail below.
In multiple places in The Plan, GM admits to making mistakes, but it provides "an excuse" with each apology. The first time, the excuse is that the ongoing "business model transformation" of the last few years has "consumed a substantial amount of resources" and this accounts for a large percentage of the financial problems. GM claims that if the economy had not soured it would not require any government assistance. In another instance, the "mistake" made by GM was entering untenable collective bargaining agreements. Again, the "blame the union" argument is trotted out as a lame excuse. GM did, however, admit that it did not sufficiently invest in more fuel-efficient vehicles, which is a mild change in tune from previous statements.
So, let’s get into the details of what exactly GM is requesting and on what time frame. Here are the details from The Plan:
• up to a $4 billion immediate loan from the Federal Government, to ensure minimum liquidity levels through December 31, 2008;
• a second draw in January, 2009, of up to $4 billion to ensure adequate liquidity
balances through January 31, 2009; and a third draw of up to $2 billion in the February-March time frame based on recent market developments, for a total draw of $10 billion by the end of the first quarter;
• a total term loan facility of up to $12 billion, including the three draws, to ensure minimum liquidity levels through December 31, 2009, under a Baseline U.S. industry annual sales volume of 12 million units;
• a $6 billion committed line of credit from the Federal Government to ensure adequate liquidity under more severe U.S. industry conditions (a 10.5 million unit "Downside" industry sales scenario for 2009) or a more challenging near-term dealer order situation;
• a total of $18 billion in term loan and revolving credit facilities, which is larger than the amount discussed during the Congressional hearings of November 18-19, 2008, that includes provision for the "Downside" industry sales scenario, the subject of considerable inquiry during the hearings;
• the creation of a Federal Oversight Board to monitor and authorize draws, including timing, amounts and performance metrics consistent with the Plan outlined below. The Oversight Board will support and facilitate an expedited, Administration-led, successful restructuring, ensuring that taxpayer investments are fully protected; and
• providing the taxpayer benefits as the company‘s condition improves, and shareholder value increases through the provision of warrants.
So the total amount of the various loan packages would be $18 billion. They have also embraced the concept of a Federal Oversight Board, which most have said is crucial to provide the oversight and management of such efforts.
So what are the concessions? What management changes will GM implement to make the company profitable in the 12 million unit range? What taxpayer protections are included? Great questions, intrepid reader.
First, the taxpayers. The Plan says the taxpayer, through warrants, will be able "to participate in growth in the company’s share price" if the The Plan is successfully employed. Also, GM will continue the dividend suspension (dividends were suspended in Aug 08) while the loan program is in effect.
For the senior management the following concessions were proposed:
• The Chairman and CEO will reduce his salary to $1 for 2009. He will not receive an annual bonus for 2008 and 2009.
• Consistent with this action, members of the GM Board of Directors will reduce their annual retainer to $1 for 2009.
• The next four most senior officers (Executive Vice Presidents and above) will reduce their total cash compensation by approximately 50% in 2009, which includes no bonus paid for 2008 and 2009 and a 30% salary reduction for the
• President and COO, and 20% salary reductions for the remaining three.
GM will also cease use of all corporate aircraft activities. I found that an odd concession as I didn’t really begrudge the use of corporate air transportation, but I know others disagree.
One of the other big pushes in The Plan is for GMAC’s conversion to a Bank Holding Company in order for it to survive. GMAC used to back 50% of vehicle loans, but now that number is down to 6% because it does not have access to the secondary markets for funds. Currently, GMAC can only back loans to customers with a FICO score above 700, which severely limits the market.
GM predicts no changes to pension and healthcare considerations because of recent changes (such as the establishment of the VEBA for health care costs). GM said the pension plan is fully funded and is not in jeopardy. I would also like to point out that GM repeatedly refers to the competitive disadvantage of a work force in a country without a national healthcare, but never builds upon that. Here is a golden opportunity to make a statement about the importance of universal healthcare and how it can make GM more competitive.
GM will reduce the number of "nameplates" to decrease competition within its own lines. The number of nameplates will decrease from 48 to 40. Unfortunately, the major "green" effort in the near term (2009-10) seems to involve flex fuel vehicles and larger hybrid truck models (Sierra and Silverado models in 2009). I don’t think relying upon flex fuel is going to be a real winner here. Another tactic mentioned is the switch from 6-cylinder engines to more fuel-efficient, smaller turbo-charged engines. In addition, switching to a 6-speed automatic transmission in more models will also increase fuel efficiency in a broad range of vehicles. There is mention of the Volt, but I think this vehicle will be priced well out of the range of the average consumer. GM did request taxbreaks or other policies to encourage the purchase of more fuel efficient vehicles. I am sure the Volt will require large deductions or even credits to make it anywhere near reasonable. By 2012 the projected car fleet average MPG will be 37.3, which is considerably better than the current 31.8. For trucks it will go from the current 24.6 MPG to 27.5. By 2012 there will be 15 hybrid models, which would be almost a third of the car nameplates. GM projects to invest almost $3 billion between 2009-12 in alternative fuel and propulsion systems. I think GM is banking on improving its hydrogen fuel-cell technology that it is already fielding.
GM will decrease the number of dealerships from the the current 6450 to 4700 by 2012. That is a HUGE reduction of dealerships. In addition, the number of hourly and salaried will be reduced from the current 96,000 to 65-75,000. So significant reduction in the number of employees. The number of US powertrain, stamping, and assembly plants will be reduced from 47 to 38.
UAW gave in to major concessions in the 2007 contract negotiation, so the total labor costs will be dropping dramatically by 2012.
Other structural changes mentioned were the possibility of selling or restructuring the Hummer, Saab, and Saturn lines. Saturn was described as under performing expectations, so maybe they will end that line altogether.
Well, I hope that clears it up for people (if you are indeed still reading).