TOPICS > Economy

GM to Idle Plants as Auto Industry Faces Tough Choices

April 23, 2009 at 6:00 PM EDT
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GM will close several plants for up to 10 weeks to help clear its inventory backlog. Analysts and local leaders mull the impact of the move and the industry's path forward.
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JIM LEHRER: There was more bleak news on the American auto front today. General Motors confirmed plans to shut down plants and cut production by nearly 200,000 vehicles.

NewsHour correspondent Kwame Holman has our lead story report.

KWAME HOLMAN: By summer, the hum of activity on assembly lines will cease at most, if not all, G.M. production plants in the U.S. and Mexico. Workers were being informed today that 13 plants will be idled for up to 10 weeks starting in May, well beyond the usual two-week summer shutdown.

Workers still would receive most of their pay.

The move is to gain control of growing inventories clogging dealer lots, as the sales decline continues unabated.

The industry tracking group J.D. Power and Associates reported today industry-wide sales were down 33 percent in the first 16 days of April compared to one year ago. It’s the lowest level in nearly three decades.

The sales slump and the threat of bankruptcy were at the heart of a meeting here at the Treasury Department next door to the White House today. Members of a group representing nearly all the nation’s car dealerships sat down with members of the Obama administration’s auto task force.

John McEleney heads the National Association of Automobile Dealers and first met with the task force last month.

JOHN MCELENEY, Chair, National Automobile Dealers Association: Today, it was an opportunity to follow up, to kind of get current on what’s happening from their end, and also for us to express some thoughts on three areas, really, bankruptcy, the implications of that, also what would happen if there were a dramatic reduction in the number of dealers quickly, and also the — probably most importantly — the importance of credit to really solving this problem.

KWAME HOLMAN: McEleney said dealers want a fair hearing on the potential ripple effects from the industry’s upheaval.

JOHN MCELENEY: From the dealers’ perspective, no doubt there will be fewer dealers. There has been natural attrition, particularly during these last six months.

But our concern is that it just happen in an orderly fashion so that particularly our employees in communities all over the country are not displaced.

We have, in the case of General Motors, over 300,000 employees that work at dealerships, almost 200,000 in Chrysler dealerships. So we’re doing everything we can to preserve those jobs so that we can take advantage of a stronger G.M. and Chrysler when this is all done.

KWAME HOLMAN: But first G.M. could face federal bankruptcy protection before June 1st.

And Chrysler is nearing an April 30th deadline set by the government to ally itself with Fiat. This afternoon, the New York Times reported the Fiat alliance could go forward, even as the U.S. Treasury readies a bankruptcy filing for Chrysler within days. The administration said that’s just speculation.

And on Wednesday, Michigan Governor Jennifer Granholm had strong words for Chrysler’s creditors.

GOV. JENNIFER GRANHOLM (D), Michigan: These are banks that have gotten TARP finance. In fact, the taxpayers have bailed out these banks. They have just reported first-quarter profits. And now what they’re doing is essentially saying you, Chrysler, should go into bankruptcy, like vultures that are swarming around.

KWAME HOLMAN: In the meantime, Washington’s stake in the outcome is growing. A report to Congress today tallied federal aid to the auto industry in all its forms at $36 billion.

Time for clearing inventory

Ronald Glantz
Auto Industry Analyst
General Motors had almost twice the number of cars and trucks and inventory that it should, so one way or the other it had to get rid of this inventory, either by giving it away to consumers or by shutting plants down.

JIM LEHRER: Ray Suarez has more about the potential fallout from the G.M. closings.

RAY SUAREZ: And for that, we turn to Elaine Walker, the mayor of Bowling Green, Kentucky. Her city is one of the 13 where plants will be shutting for an extended period this summer.

And Ronald Glantz, a former auto analyst, he's a former partner at Pantera Capital Management, a hedge fund. He worked in the investment business for three decades.

And, Ronald Glantz, let me start with you. Given the state of G.M. today and April 2009, what does it do for the company to idle those plants for up to nine weeks?

RONALD GLANTZ, Auto Analyst: General Motors had almost twice the number of cars and trucks and inventory that it should, so one way or the other it had to get rid of this inventory, either by giving it away to consumers or by shutting plants down. And this is a natural time to shut the plants down.

I might also add, it could be Machiavellian. It was a way of telling Washington, "This is what's going to happen if we shut down."

RAY SUAREZ: Well, Machiavellian, Mayor Walker, what happens if it shuts down, how exposed is Bowling Green, Kentucky? What happens when a big company decides to close its operations in your town?

MAYOR ELAINE WALKER, Bowling Green, Kentucky: Well, Ray, I woke up this morning to the news that we could see an additional nine weeks of closure at the G.M. Corvette plant in Bowling Green. Fortunately, we are only going to see one additional week.

But already this year, if you look at January through July, out of 30 weeks of production, they will only be in production 14 weeks, and 16 weeks they will be idle.

So we're seeing a dramatic impact on our city budget, because so much of our revenue comes in from our occupational license tax, which is basically similar to an income tax.

RAY SUAREZ: So when people are earning paychecks, Bowling Green is getting a piece of that?

ELAINE WALKER: And when they're not, we are having to cut our budgets, because not only is our G.M. plant affected, but all of our suppliers are affected, as well.

RAY SUAREZ: What about their ability to get along until the plants reopen again? Will workers in Kentucky be eligible for unemployment to supplement the payments that G.M. makes, the partial payments?

ELAINE WALKER: They have a variety of ways that they can supplement their income. First and foremost, the labor union has a fund that's available to them, and they also are able for unemployment.

G.M. is 'technically bankrupt'

Mayor Elaine Walker
Bowling Green, Kentucky
It's critical that we talk to one another, because, you know, not only are we losing -- is our workforce losing work, but we're also being affected because they are one of the largest supporters of the United Way campaign.

RAY SUAREZ: Ronald Glantz, there's not just one place where the impact falls. Talk about suppliers. Do they necessarily have to shut their doors for nine weeks if the tires, if the glass, if the sheet metal is no longer being used by these factories?

RONALD GLANTZ: Yes, they will. The industry operates on a just-in-time inventory system. If a company doesn't build a car on Monday, the supplier doesn't make a part on Monday.

RAY SUAREZ: So we're idling, in fact, many more than just the workers in these 13 plants?

RONALD GLANTZ: There could be tens of thousands of companies involved.

RAY SUAREZ: And as far as G.M. is concerned, they've also hinted that, during this time of closure, they may not make a scheduled debt payment on June 1st. What's that about? Tell us about the state of finances for the company right now.

RONALD GLANTZ: Well, General Motors is technically bankrupt now. Paying the money out is almost foolish, because, at some point in time, they just can't pay their suppliers, how can they pay their bankers?

RAY SUAREZ: And they are scheduled to make this payment. If they are talking about bankruptcy -- and both the federal government and sources inside G.M. are now openly discussing it -- would it be easier? Would it reduce the costs of declaring bankruptcy, if they did it during this time when 13 plants were idle?

RONALD GLANTZ: Not really. Not paying the $1 billion doesn't mean much when you owe $100 billion. And the amount of money the government will have to spend to bail General Motors out will be dependent upon how much the lenders agree to accept.

Right now, the belief is that the lenders will accept somewhere between 15 cents and 25 cents on the dollar. So why pay 100 cents on the dollar on June 1st?

RAY SUAREZ: Mayor Walker, when something like this happens, does somebody from G.M. call you? Do you call them? Is there any communication between a government like yours, that's so heavily hit by a move like this, and the company that's making the decision?

ELAINE WALKER: Absolutely. We have a very good line of communication. As a matter of fact, I received a call today from the headquarters and was very pleased to learn that, rather than the nine weeks, we were going to only see an additional one week. And then I received a call from the local G.M. plant.

It's critical that we talk to one another, because, you know, not only are we losing -- is our workforce losing work, but we're also being affected because they are one of the largest supporters of the United Way campaign. They help our housing authority. Of course, we've got a number of suppliers.

So this is important that we make sure that we're on the right page, as well as the G.M. plant.

Suppliers suffer from closings

Ronald Glantz
Auto Industry Analyst
General Motors is negotiating with all of its stakeholders. And it's the advantage of the bondholders to wait until the last minute to make a decision. The problem is, they could wait a minute too long and General Motors would just fail completely.

RAY SUAREZ: Well, you heard Ronald Glantz say that the suppliers will almost certainly have to close their doors. What kind of other factories do you have in Bowling Green that are related to the auto industry?

ELAINE WALKER: We have about 5,000 people in our area who are employed in supportive industries, making everything from metal frames to interior liners to die casting to Holley Carburetor.

And so we're already seeing a dramatic impact on our income because there have been slowdowns, there have been layoffs in these suppliers.

RAY SUAREZ: You've already seen the front edge of this, though, haven't you? Have you been losing employment already before this closing was announced?

ELAINE WALKER: We have. And that was one of the reasons why I was one of the Mayors Automotive Coalition who went to Washington to say that we needed some type of intervention, because the impact not just on the big three, but on all of the domestic industry is going to be dramatic if the industry goes under.

RAY SUAREZ: Ronald Glantz, General Motors is said to be in negotiations with its bondholders. How does this decision, this announcement today, affect the state of play there?

RONALD GLANTZ: Well, General Motors is negotiating with all of its stakeholders. And it's the advantage of the bondholders to wait until the last minute to make a decision. The problem is, is they could wait a minute too long and General Motors would just fail completely.

RAY SUAREZ: And they would get nothing?

RONALD GLANTZ: So this does put pressure on the bondholders. I think that, if General Motors were to cease operations entirely, there would be hardly anything left for the bondholders.

RAY SUAREZ: Well, who are the bondholders? Are they private citizens? Are they banks? Who owns General Motors' debt right now?

RONALD GLANTZ: Money managers, banks, individuals, in some cases, cities and states.

Town planning for closing

Mayor Elaine Walker
Bowling Green, Kentucky
We're already looking at cutting our budget for the current fiscal year, because we've seen a reduction in our occupational license tax. As we go forward, we are being very cautious about projecting our revenues.

RAY SUAREZ: And what kind of timeframe are we working on here? I mean, the federal government has given some deadlines to General Motors. Does all of this have to be wrapped up in the next month or two?

RONALD GLANTZ: I think it would be to General Motors' advantage to wrap this up in the next month or two, because there are a lot of people out there who just won't buy a car from a company that looks like it's going to enter bankruptcy.

RAY SUAREZ: So the dealers who will have these tighter inventories on their showroom floors aren't even necessarily helped by this closing of the plants?

RONALD GLANTZ: Well, right now, General Motors dealers have about 120 days' supply of inventory; 60 days is normal, which means that you could shut the industry down for two months and then the inventory would return to normal.

RAY SUAREZ: But would it help dealers with pricing if there was a sort of manufactured scarcity of automobiles?

RONALD GLANTZ: Not really, because there are very few people who say, "I'm going to buy a Chevrolet or nothing else." General Motors dealers still have to compete with Toyota and Nissan and Honda.

RAY SUAREZ: Mayor Walker, what about running Bowling Green? Are there decisions that you have to make in the next two, three, four months that really depend on whether or not you have this big factory in your town spinning out wages...

ELAINE WALKER: Absolutely.

RAY SUAREZ: ... and giving money people to spend -- people money to spend?

ELAINE WALKER: We've already started the decision-making. We're already looking at cutting our budget for the current fiscal year, because we've seen a reduction in our occupational license tax. As we go forward, we are being very cautious about projecting our revenues.

Now, the good news is that, this weekend, the Corvette plant unveils its 2010 new Corvette. And so we're hopeful that this is one of those icons, American icons, that will be able to withstand.

RAY SUAREZ: Mayor Walker, Ronald Glantz, thank you both.

ELAINE WALKER: Thank you, Ray.