Fears of further plant closures and other cuts which could cost thousands of jobs are spreading through General Motors Corp and Chrysler LLC as the companies approach a 17 February deadline to show the government they can be viable.
Failing this, the US government is likely to place the two Detroit companies in Chapter 11 bankruptcy protection in an effort to safeguard the $17.4-billion in loans extended to the two ailing car manufacturers.
The move, which is one of a range of options being considered by government advisers, would ensure that taxpayers would be paid out first in the event that either company actually collapsed.
Chapter 11 is designed to allow a company to undertake drastic restructuring measures while protecting it from its creditors. However, both companies have in the past said that a move into Chapter 11 would destroy them, as customers would lose confidence and many suppliers would cease working with them.
Both companies' restructuring plans are presumed to include concessions from bondholders and the United Auto Workers union. GM's plan will include shuttering additional factories as well as salary and job cuts.
Both GM and Chrysler must prove to the government that they are able to repay the federal loans that are keeping the companies afloat in the worst US auto sales climate in 26 years. GM has received $9.4 billion and expects to get $4 billion more, while Chrysler has received $4 billion and is hoping to get another $3 billion.
To avoid bankruptcy or Chapter 11 proceedings, the automakers will have to make substantial cost cuts. The companies are required to show the government they can achieve "positive net present value," which means that the present value of a company's expected net cash flows exceeds the initial investment in the company.
As the current loan agreements stand, the US Treasury's loans stand behind those from other creditors, including banks such as Goldman Sachs and Citigroup, as those lenders have first position on some assets.
It is thought that Treasury officials are aiming to renegotiate their position in the debt chain ahead of a March 31 deadline. By then, both car manufacturers must show that they have begun to restructure their operations to such an extent that they will be able to return to profitability. If not, the government can demand return of the loans.
White-collar workers may not get buyouts or early retirement offers like they have in the past, and pay cuts could go beyond five per cent, according to various reports. It is being noted that while the company has announced the closure of four pickup truck and SUV plants in the past year, it hasn't shut down a corresponding number of the engine, transmission and parts stamping factories that feed the assembly lines.
GM vice-chairman Bob Lutz, told The Associated Press in an interview yesterday, that GM will have to get smaller in the US before it can grow again.
"It's going to be a smaller company in the US," he said, adding that GM will grow in other parts of the world such as China. "We may have to take a step back in General Motors to find the right-sizing that's going to permit a profitable existence in a much smaller market."
GM and Chrysler must present their plans to the government by 17 February, but they do not have to have them completed until 31 March, when the government can demand repayment of the loans if it decides the companies can't become viable.
Some of the targets in the loan terms require bondholders to swap part of the companies' debt for equity. The car makers also must make concessions that will reduce labor costs to the level of Japanese automakers' plants in the US.
GM is to hold a big meeting of its bondholders this week, while the union has been waiting to see what concessions other parties make before agreeing to anything.
A so-called car-czar will ultimately decide on the companies' viability, but that person has not yet been appointed by the Obama administration. There also has been talk in Washington of extending the auto companies' deadlines.
Among the GM assembly plants at risk is the Pontiac, truck plant in Michigan, which makes the Chevrolet Silverado and GMC Sierra. Analysts say GM has plenty of pickup truck capacity at other factories. Also at risk is the Orion Township plant, also in Michigan that makes the Chevrolet Malibu and Pontiac G6. GM has enough capacity to satisfy demand for the midsize cars at its plant in Kansas City, according to analysts.
GM last year announced it would close pickup truck and SUV plants in Moraine, Ohio; Janesville, Wis.; Oshawa, Ontario; and Toluca, Mexico. But that was before the U.S. auto market shrunk from an annual sales rate of around 16 million vehicles to 13.2 million last year. Analysts and automakers are predicting industry-wide sales to drop as low as 10.5 million this year.
Meanwhile, GM is reported to be in talks with Delphi – the parts supplier which it spun off ten years ago – to buy back large parts of the business in order to qualify for more government funding.