GM cuts output and jets as U.S. demands turnaround plans

November 22 2008

By David Bailey and John Crawley

Detroit automakers began work on turnaround plans demanded by Congress in return for $25 billion (16 billion pounds) in aid as General Motors Corp said it would cut production more and give up two of its controversial corporate jets.

Pushed to the brink of failure by a plunge in auto sales, GM said on Friday it would shut its truck plant in Oshawa, Ontario, Canada 1-1/2 months early and extend regularly scheduled down time at five North American plants to reduce production and keep inventory down.

GM, the top U.S. automaker based on light vehicle sales, said it would return two of its leased jets after intense criticism this week over GM executives’ deluxe arrangements for traveling to Washington to plead for a federal bailout. GM is still leasing three corporate jets.

Congressional leaders agreed on Thursday to give Detroit automakers until next month to make their case for a rescue, but they demanded that GM, Chrysler LLC and Ford Motor Co show they have business plans that can keep them out of bankruptcy.

House Speaker Nancy Pelosi said she and Senate Majority Leader Harry Reid, leaders of the Democratic majority, were sending a letter to the chief executives of the Detroit Three detailing what the high-stakes turnaround plans need to show.
“This isn’t to be life support for three months,” Pelosi told reporters. “It’s about viability for a long time to come.”

The companies have said federal aid is the only alternative to bankruptcy and massive job losses.

The letter will demand that automakers provide by December 2 details of their financial positions, short term liquidity needs and explain how they will be viable long term.

They must also detail proposals for meeting massive health care and pension liabilities and increasing fuel efficiency requirements, as well as their sales assumptions.

Democratic leaders issued the ultimatum to Detroit after failing to persuade the White House and congressional Republicans to support using some of a $700 billion financial rescue plan for the auto industry.

Commerce Secretary Carlos Gutierrez said on Friday the Bush administration would not offer emergency federal assistant to the industry if it encounters severe problems in the next few weeks and Congress fails to extend it some help.


Analysts said GM, Ford and Chrysler must demonstrate that investors, creditors, management and the United Auto Workers union would share any sacrifices.

“Can the U.S. automakers provide a convincing plan?” Deutsche Bank analyst Rod Lache asked in a note to clients. “Based on the risks involved, we are not willing to place strong odds on the potential for a bailout before January.”

That could leave the decision on whether and how to save Detroit with the administration of President-elect Barack Obama, who supports a bailout hinging on industry reform.

A spokesman for Obama’s transition team said on Friday the incoming administration was not exploring the possibility of having the government support a prepackaged bankruptcy filing for the automakers. Some analysts have urged that as a way for GM and Chrysler to shed excess production capacity, brands, workers and dealers.

“The problem people see with giving them money is what control is there over it … no idea whether the dollars would be sufficient to prevent the companies’ failure and where the money would go,” said Robbin Itkin, a bankruptcy lawyer with Steptoe & Johnson in Los Angeles.

A bankruptcy reorganization would provide a controlled way of monitoring money loaned to automakers, he said.

The high cost in jobs and benefits that would be paid under the kind of sweeping restructuring needed to turnaround the industry poses a political dilemma, analysts said.

“To make them viable again requires that automakers make decisions that are very unpalatable to a lot of people,” said Erich Merkle, a consultant at Crowe Horwath.

The path to viability “basically is going to be firing their constituents and cutting back the retiree benefits their constituents rely on,” he said. “The money will come. I’m very confident it will come, but will it come before one of them files for bankruptcy or after?”

Deutsche Bank’s Lache said a successful restructuring for GM would mean “shrinking to a defendable core” by cutting weaker brands and closing factories.

It will mean lower wages for UAW-represented workers and restructuring GM’s balance sheet by forcing creditors to swap out of secured debt at as little as 25 cents on the dollar plus stock warrants, he said.

Citibank analyst Itay Michaeli said GM would have to race to come up with a new restructuring plan that could include changes to payments into a health care trust negotiated with the UAW and possibly a debt exchange for creditors.

“The burden of proof may not be so simple for GM, in our view,” Michaeli said of the requirement that GM show it can be a viable company.


The debate over an auto industry bailout has been marked by partisan politics, but lawmakers from both sides have been united in their criticism of the industry. A lightning rod for controversy during testimony by the Detroit CEOs this week was their flying to Washington in corporate jets.

GM spokesman Tom Wilkinson said GM had decided before the hearings to return two of its leased jets because of travel cutbacks. In September, GM returned another two of seven jets it had been using, he said.

GM CEO Rick Wagoner and Ford CEO Alan Mulally are required by their companies to fly by private aircraft for security.

Chrysler, owned by private equity firm Cerberus Capital Management LLC, is not required to disclose the policy for Bob Nardelli.

Late on Friday, Ford said it was exploring options for saving money on its corporate air travel, including selling the jets it owns. Ford, which has sold four airplanes and reduced its use of corporate aircraft by about half since 2005, owns five planes. Three are used for executive travel and two primarily for marketing teams.

GM also said late on Friday that it would forego an annual holiday media party and instead make donations to charity.

(Reporting by Poornima Gupta and Soyoung Kim in Detroit; Jeff Mason in Chicago and Kevin Krolicki and Gina Keating in Los Angeles, Editing by Matthew Lewis)


They might also cut the slaries of the CEO’s and executives. They certainly are payed to much. I don’t see them making any sacrifices. Well except for a couple of planes.  Like they really need them. So they say.

Pretty weak pity party.  Workers are more important then the CEO’s and executives pleasure palaces.


One Comment

  1. Excellent Blog. I’ve been reading along and just wanted to say hi. I will be reading more of your posts in the future.

    – Jason.

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