"The Economy and the Markets at Mid-Year"-Big Ticket Failures & Auto Giants Fall
Friday, July 03, 2009PAUL KANGAS: The effects of the recession continue to be felt across the nation and the world. As we await official word on economic growth since April, there have been some hopeful sign for the economy with upturns in home sales and durable goods orders, but otherwise there hasn't been much to cheer about in first half as housing prices continue to drop off and layoffs sent unemployment soaring past 9 percent to a 26-year high. Consumers responded by delaying buying big-ticket items like cars. As Dana Bate reports, that helped drive Chrysler and General Motors into bankruptcy.
DANA BATE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Back in January, at the Detroit auto show, GM and Chrysler seemed hopeful about the future. Chrysler's CEO at the time, Robert Nardelli said the company was making progress.
ROBERT NARDELLI, CEO, CHRYSLER CORPORATION: I think we're doing all the right things. It isn't that we haven't made some mistakes over the 83 years. You know people who do things make mistakes. They never make the biggest mistake all of which is doing nothing. And so we're doing a lot to try to cement our viability for the future.
BATE: But neither company was prepared for sustained double-digit sales drops, as the worst economic downturn in decades intensified. In February, they appealed to the government for additional money to stay afloat -- up to $16.6 billion for GM and $5 billion for Chrysler. The companies submitted restructuring plans that show the money would be well- spent. But the White House found those plans lacking and rejected them.
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: We cannot make the survival of our auto industry dependent on an unending flow of taxpayer dollars. These companies and this industry must ultimately stand on their own, not as wards of the state.
BATE: The administration's auto task force concluded Chrysler could not survive as a stand-alone company and arranged a quick bankruptcy and shotgun marriage with Italian car maker Fiat. It also ousted GM CEO Rick Wagoner and gave the company 60 days to come up with a new cost-cutting plan. GM's interim CEO Fritz Henderson admitted he had a lot of work to do.
FRITZ HENDERSON, CEO, GENERAL MOTORS: The conclusion is, the environment has done nothing other than be equally difficult if not more difficult than it was even let's say late last year. And so we need to do more.
BATE: On June first, after tough negotiations with auto workers and bond holders, the company entered bankruptcy and the new restructuring plan went into effect, giving the government a 60 percent stake in General Motors. GM's original plan assumed only modest declines in market share and had the company in the red for six more years. Its new plan assumes an 18 percent market share by 2012 and gets the company to positive cash flow. Chrysler and GM plans call for closing a combined 889 dealerships -- a move that drew harsh criticism from Capitol Hill. But GM's Henderson said his company needs a drastic overhaul.
HENDERSON: No matter how you look at it, whether professionally and personally, you have to realize that this is a new beginning for GM. It's a reinvention of the corporation.
BATE: Even if their reinventions result in big changes, the future of the new GM and the new Chrysler hinges on one question: will they come out of bankruptcy as profitable companies? Dana Bate, NIGHTLY BUSINESS REPORT, Washington.
