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Auto makers step up call for aid

From Thursday's Globe and Mail

Just hours after winning the presidential election, Barack Obama was already feeling the full force of lobbying on Wednesday by Detroit's struggling auto makers who are anxious to secure financial support.

Senior representatives of embattled potential merger partners Chrysler LLC and General Motors Corp. pressed for government assistance on Wednesday amid indications that time is running short to avoid seeing either or both companies tumble into Chapter 11 bankruptcy protection.

Roger Altman, a former U.S. Treasury official advising GM in the merger discussions, made exactly that point, while at the same time joining the Center for Automotive Research in warning that a collapse of the largest Detroit auto maker or all three companies would be catastrophic.

A failure in the industry would be “devastating,” added John Snow, chairman of Chrysler's parent, Cerberus Capital Partners LP.

“What we need is to make sure that a vital industry like autos … which is such a big part of the overall economy, doesn't lead us into a deeper and harsher downturn,” Mr. Snow said during an interview Wednesday on broadcaster CNBC.

The question is whether Chrysler and GM have enough cash to hang on until Mr. Obama takes office on Jan. 20, 2009. If not, he will face the task of trying to manoeuvre a solution through a lame-duck U.S. Congress.

He may also have to deal with the dilemma of backstopping a merger between two companies that would lead to the elimination of up to 35,000 jobs, or standing on the sidelines while one of the companies plunges into bankruptcy protection.

Cerberus and GM heated up merger talks in September and reports have said that GM approached Washington for a $10-billion (U.S.) financing package to facilitate the deal.

The Bush administration refused to provide the aid, but the outlook for the industry has since become more grim, with sales results released earlier this week showing that the U.S. market plunged to 17-year lows in October.

“The calamitous fall in the market has really raised the sense of urgency,” said David Cole, who heads CAR, an industry think tank based in Ann Arbor, Mich. One of the options for Mr. Obama is to make available some of the $25-billion already appropriated to help auto makers develop new, environmentally friendly technologies.

“I think both Republicans and Democrats are poised to do something,” he said. “The Democrats obviously are really being pushed hard by labour and I think that may be a more important force than anything else.”

GM's cash position will be made clear Friday when it releases its third-quarter financial results. A GM memo obtained by several media outlets on Wednesday said senior GM executives will brief employees before the results are released on “important changes” designed to deal with challenges “brought on by the volatile global economic situation.”

The auto maker's financial position may deteriorate to unacceptable levels by the end of the year, Merrill Lynch auto analyst John Murphy warned.

“If the government does not step in with a massive bailout package … the company may be forced into bankruptcy even though it has reportedly not considered it an option,” Mr. Murphy wrote in a report called The Big Bang Theory, which outlines a transformation of the industry.

“The day of reckoning is near for the U.S. automotive value chain, which we expect will culminate in the ‘Big Bang' and include the recapitalization, restructuring and extinction of at least one of the Big Three,” he wrote.

Mr. Cole's group, meanwhile, issued a research memorandum warning of the dangers a collapse of Detroit poses to the U.S. economy. It looked at two potential outcomes: a doomsday scenario involving Chrysler, Ford Motor Co. and GM ceasing all U.S. operations next year, or the slightly less grim possibility of a 50-per-cent reduction in production and Detroit Three employment.

“The circumstances are such that either of these scenarios is possible and indeed probable, within the next 12 months,” CAR said.

If all three companies shut down, the U.S. economy would lose three million jobs in the first year. About 2.5 million jobs would disappear in the first year of a 50-per-cent production cut.

For its part, GM issued a statement Wednesday congratulating Mr. Obama on winning the election.

With files from AP, Bloomberg


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