TOPICS > Economy

Bankruptcy Option Looms as U.S. Automakers Face Shaky Future

March 30, 2009 at 6:20 PM EST
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The Obama administration's call for drastic reforms of GM and Chrysler has sparked new debate on the future of Detroit's "Big Three" automakers. Analysts discuss what the restructuring effort may mean for the auto industry's future.
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GWEN IFILL: First, reaction to the president’s latest terms for the auto companies. It comes from two people who have long studied the industry.

Paul Ingrassia is a former Detroit bureau chief for the Wall Street Journal. He’s working on a book about the industry in crisis and writes for the Journal and Portfolio magazine. And Rebecca Lindland follows the industry at Global Insight, an economic and financial analysis firm.

Thank you both for joining us.

REBECCA LINDLAND, Global Insight: Thank you.

GWEN IFILL: Paul Ingrassia, this seems like a — we heard a lot about stress tests for the banking industry. It seems like G.M. and Chrysler kind of failed theirs.

PAUL INGRASSIA, former Wall Street Journal Detroit bureau chief: Well, Gwen, I think in this case what’s good for General Motors really is good for America.

I was quite impressed today, and perhaps surprisingly so, by the action the president took. What he did was really extend the deadline that the Bush administration had put in place last December. And the risk in doing that is you come across as saying, “Well, you know,” it’s like saying to your kids, “You know, kids, this time I really mean it. You’ve got to behave.”

The difference is he put in leadership changes, not just at the CEO level of General Motors, but also at the board level. And this clearly was a company that needed new approaches. The president also used the word “bankruptcy” potentially to prepare the nation for this sort of thing. And I don’t think with the language he used today he’s going to back down.

GWEN IFILL: Rebecca Lindland, you know, we heard Austan Goolsbee just a few moments ago, who’s a member of this auto task force, basically saying they thought that both G.M. and Chrysler had been too optimistic in their predictions in the plans that they turned in. Is the government being too pessimistic or just about right?

REBECCA LINDLAND: No, I think the government is being pretty realistic. In the preliminary plans that were submitted on February 17, both companies actually used the IHS Global Insight forecasts, but those were our forecasts from a few months ago and we since downgraded them, because the economy is that much worse.

So when you looked at their downside scenario, that’s a little bit more realistic to what they’re facing. And those are numbers in like the 9.5 million unit mark, which is about a 40 percent decline than 2007.

So we are facing an industry that is absolutely being decimated and two companies that weren’t particularly healthy from a financial standpoint back in 2007, and they’re even less healthy now.

G.M. board will be restructured

Paul Ingrassia
Wall Street Journal
The truth is, these are the kind of changes that General Motors' board of directors should have made several years ago, but the board did not step up and do its duty.

GWEN IFILL: Well, let me ask you just about Chrysler, Rebecca Lindland, just stay with you for a moment. Was the administration basically saying today that Chrysler is worth nothing unless it can cut this deal with Fiat?

REBECCA LINDLAND: I wouldn't say it was saying it was worth nothing. I think it's saying that it has a lot of debt. It has about $8.8 billion in debt, $6.8 billion in secured, $2 billion in second lien debt. And that's a lot of debt for a company the size of Chrysler.

So I think that it was basically saying, "Look, we don't see how you're going to make this work." And we certainly agree here in Lexington that Chrysler would have a tough time going it alone.

GWEN IFILL: Paul Ingrassia, we heard Jeff Brown just now ask Austan Goolsbee about whether this is a good or desirable precedent for the government to insert itself so firmly into a private-sector salvage effort. What do you think?

PAUL INGRASSIA: Well, there's a whole lot of what's going on right now between the government and private industry, Gwen, that is not desirable, but probably necessary.

The truth is, these are the kind of changes that General Motors' board of directors should have made several years ago, but the board did not step up and do its duty. Meanwhile, the board came to -- the board and management came to Washington and said, "Look, we'd like you to open the taxpayers' purse to us."

So in return for that, it is quite logical and understandable for the government to insist on new leadership and other conditions.

GWEN IFILL: You actually mentioned, Paul, that they also -- we've heard a lot about getting rid of Rick Wagoner, the CEO, but we didn't hear as much about the fact that the board is also being restructured. Is this significant in and of itself or is this just a signal to American taxpayers that we're not going to keep giving money to the same people?

PAUL INGRASSIA: Well, I think it's both. You know, I think symbolism is important here, but also these were the same folks who basically, on the board of directors, really fiddled while Rome burned.

You know, I don't blame them for anything that's happened over the past year. The economy clearly got far worse than we all thought it would, and car sales nose-dived further.

But let's go back to 2005. In 2005, car sales were at a near-record level. General Motors managed to lose $10.6 billion that year. And the board really didn't do anything, except say, "Stay the course." It's unacceptable.

Negotiating bankruptcy

Rebecca Lindland
Global Insight
You know, at the end of the day, consumers need to buy the products this company produces.

GWEN IFILL: Rebecca Lindland, I want to get back to the b-word, bankruptcy. We heard -- Austan Goolsbee was asked about it once again, and he said the difference between what they're talking about, the structured bankruptcy -- the only difference between this is we're not talking about liquidating the company.

Does that make sense? Is that technically what they're talking about?

REBECCA LINDLAND: Well, I think they're also trying to put a timeline on the bankruptcy, also, to get this through in a very short amount of time, whether it's a 30- or 60-day bankruptcy.

So I don't think that they're talking about the traditional not only just not liquidating, but also not dragging it through the court, because the company couldn't survive that.

You know, at the end of the day, consumers need to buy the products this company produces. And these aren't, you know, consumer goods. These are tens of thousands of dollars worth of an investment that you're asking a consumer to make.

So I think that we need to see a very quick, very structured, surgical bankruptcy addressing very specific issues that are better addressed within the confines of bankruptcy rather than outside of it.

GWEN IFILL: This is something that has to be worked out in advance...

PAUL INGRASSIA: If I could just a point on that?

GWEN IFILL: I'll get to you in a moment, Paul. Just want to follow up one second about this. Does this mean -- is this something that's been done before, this idea of a structured, surgical bankruptcy, or is this just a fantasy?

REBECCA LINDLAND: Certainly not within the automotive industry it hasn't been, and not when you have a product like an automobile that you're dependent upon the consumer buying. So I don't think that there's been -- there has not been a successful bankruptcy within the automotive industry before.

The future of the industry

Paul Ingrassia
Wall Street Journal
[I]t will be a structure much more like the European industry, where you have, you know, five or six companies that have really roughly equal market share.

GWEN IFILL: Paul Ingrassia, you wanted to say something?

PAUL INGRASSIA: Well, you know, I might have misunderstood what Mr. Goolsbee said or perhaps what the president said, but it seemed to me that, in the case of Chrysler, the president did hold forth the possibility of liquidation if they can't get a partner, most likely Fiat, but a partner.

So I think the president outlined that G.M. would be treated differently. The idea is a reorganization, hopefully reorganization of both. But clearly that liquidation is more of a possibility with Chrysler, unless a partnership can be formed.

REBECCA LINDLAND: Right. I agree with Paul. I think the two we're looking at potentially, if Chrysler is liquidated, a lot of scenarios show G.M. picking up Jeep, possibly, or the minivan, something like that. So pieces of Chrysler could be absorbed by other people within the industry.

GWEN IFILL: It's important to make the distinction between how they're treating the two companies, because they are being treated differently.

REBECCA LINDLAND: They are very different.

PAUL INGRASSIA: Yes.

REBECCA LINDLAND: Yes.

GWEN IFILL: So, Paul Ingrassia, what will the auto industry look like, if this sort of thing -- if everything the president puts on the table today is embraced? And assume that, even if Chrysler survives and cuts a deal in the next 30 days with Fiat, are we to see a very different industry now?

PAUL INGRASSIA: Some ways yes, some ways no. I think, in the affirmative on that, Gwen, it will be a structure much more like the European industry, where you have, you know, five or six companies that have really roughly equal market share. In Europe, there's five or six companies with market share between 12 percent and 20 percent. So we'll have four or five companies in that range here without the one dominant player, General Motors, that we had in the past.

What I don't think will happen is the result of anything announced today is that we'll have markedly different kinds of cars on the road. I mean, Americans like to buy cars that generally are not as fuel-efficient as they are in other countries because gasoline is cheap here.

And the only way that's ever changed is when gasoline prices have gone up. So unless the political will is there to muster a gas tax increase over a period of years, I don't see a big change in the kind of cars we're going to be driving.

Changes in store for consumers

Rebecca Lindland
Global Insight
We are still at less than 2 percent of all vehicles sold in the U.S., even last year with the high gas prices, were hybrids. And Toyota sold twice as many Toyota Tundras as they did Priuses.

GWEN IFILL: How about that, Rebecca Lindland? Do we see a difference in the kind of cars we're going to be driving, as well as the kind of industries we're going to be buying them from?

REBECCA LINDLAND: Well, I think that hopefully we won't see government ownership like we see in Germany for Volkswagen, for instance, which is partially owned by Lower Saxony and Porsche.

But I think that we could see some changes in the vehicles that consumers drive, but it is important to understand that, when we look at the European market, about 40 percent of those vehicles are diesel, which is a very, very dirty word in the U.S. when it comes to environmentalists, because they don't -- there's not a comfort level, whether the particulates are carcinogenic or not.

So when we look at what vehicles Europeans buy and the power trains that are in them, it's very, very different here in the U.S.

I think that we also have not seen the surge in hybrid purchases that environmentalists would like to see. We are still at less than 2 percent of all vehicles sold in the U.S., even last year with the high gas prices, were hybrids. And Toyota sold twice as many Toyota Tundras as they did Priuses.

So I think that, when we look at what makes up the U.S. market, it's very different than Europe.

GWEN IFILL: Rebecca Lindland and Paul Ingrassia, thank you both very much.

REBECCA LINDLAND: Thank you.

PAUL INGRASSIA: Thank you, Gwen.