Can Detroit Be Retooled — Before It's Too Late?

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First Things First
Before planning for the future, however, Detroit still has to get through the present. GM has been on life support since Dec. 19, when the outgoing Bush Administration threw it a short-term loan and told the company that it had until March 31 to come up with a plan for its long-term survival. It did — but its strategy was premised on projections that car sales would begin to pick up this year after last year's dismal industry performance, in which sales sank 18%, to 13.2 million units. But the pickup hasn't happened yet, and analysts see the industry's production "run rate" at or below 9 million units. (Read about Detroit's efforts to reinvent itself.)

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Assignment Detroit

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Assignment Detroit

Even worse, in the eyes of Obama's task force, is that GM was immodest in its assumptions. For instance, GM had forecast a market-share loss of 0.3% per year until 2014. The task force noted that GM has been losing market share at a rate of 0.7% per year for the past 30 years — and GM was planning to drop brands and nameplates. The task force had no reason to think that GM could gain share, and its sales rate proved that point. Industry-wide, March auto sales were down 40% on a seasonally adjusted basis. GM's factory-utilization rate is less than 60%. That's abysmal — the rate needs to be in the 80s for the company to be successful — and it's one reason GM is hemorrhaging cash. "We don't believe the rest of '09 will be strong. We are going to stay soft through the rest of the year," says Lars Luedeman, director of analytics at Grant Thornton, which follows the industry. Dealer inventories are approaching a 100-day supply; 60 days is more typical.

The White House's auto-task-force working group is headed by Steve Rattner, a former reporter who was head of the private-equity firm Quadrangle Group, and Ron Bloom, an investment banker who previously worked for the United Steelworkers union. Staffed by about 15 restructuring and other experts, the task force aims to do two things in the weeks ahead. First, it will try to close the deal on Chrysler's sale to Fiat. Sources familiar with the task force's approach describe Chrysler as "hollowed out" by a succession of owners and largely worthless, with no quality brands other than Jeep and little hope of restructuring itself into a viable concern.

Bloom has taken the lead in trying to negotiate the sale of 20% (at least initially) of Chrysler to Fiat. His position has been undercut by Chrysler's tenuous finances, leaving Fiat holding the cards at the negotiating table. The $6 billion sweetener from the government essentially amounts to a dowry for Fiat to take the ugly bride off America's hands.

The harder job facing the Administration comes when the 60-day window is up for restructuring GM outside of bankruptcy. The biggest challenge for GM remains fashioning a plan acceptable to the UAW, which represent GM's 62,000 workers, and its bondholders, mostly banks and other large institutions, which are owed some $27.5 billion and by law are first in line to get paid back. It's fairly clear the Administration wants to make bondholders eat huge losses — or make them try their luck in bankruptcy court. "No bankruptcy judge is going to rule against GM and its plan. Not for labor, not for bondholders, that's for sure," says Lynn LoPucki, a bankruptcy expert at the UCLA School of Law.

Should GM go into bankruptcy, the plan would involve forming one company around bad assets, such as Hummer and Saturn, and dumping the retiree health-care liabilities into it. That company could be sold off or wound down. A second company would comprise the better performing Chevrolet, Buick, Cadillac, Pontiac and GMC brands. That ongoing firm could be partly owned by the bondholders, the UAW and other creditors.

The bondholders could try to resist bankruptcy, but there would be consequences. Among the bondholders are banks such as JPMorgan Chase and Wells Fargo that themselves have taken money from the government's Troubled Asset Relief Program. Standing in the way of the Administration's plans for the auto industry would win them few friends. One option the bondholders have is to try to seize the factories. But that would jeopardize the partsmakers too, and the banks are also holding the paper for many industry suppliers. If the factories shut down as a result of a legal battle, so would the partsmakers.

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