No Opel, No Hope?

General Motors needs Opel, but is powerless to help it
As Originally Posted at The Economist

IT WAS exactly 80 years ago, just seven months before Wall Street’s Great Crash, that General Motors (GM) bought Adam Opel AG, Germany’s biggest and most efficient carmaker at the time. By the late 1930s Opel was the largest carmaker in Europe and GM was established as a global automotive giant. This week, against the background of another world financial crisis, a humbled GM offered to surrender up to 50% of its stake in Opel in a bid to persuade the German government to rescue its subsidiary from insolvency.

Opel is not a basket case. But nor is it strong enough to ride out the hurricane wrecking the world’s car industry without help that GM, its own survival hanging in the balance, can no longer provide. GM says it needs another $16.6 billion in federal loan guarantees, on top of the $13.4 billion it has already received from America’s Treasury, to stave off bankruptcy.

After a painful restructuring in 2004 following several years of losses, GM Europe (which includes Opel, Vauxhall in Britain and Sweden’s Saab) looked as though it had turned a corner. Competitive new Opel/Vauxhall models helped make it profitable in 2006, but as the market slowed, GM Europe’s recovery stalled and then reversed. Production fell from 1.83m vehicles in 2007 to 1.55m last year, and losses increased from $524m to $2.8 billion. GM believes its European arm could run out of money as soon as next month.

On March 2nd GM Europe’s boss, Carl-Peter Forster, presented a 180-page rescue plan for Opel to Germany’s economics minister, Karl-Theodor zu Guttenberg. It calls for emergency loans of $4.2 billion from European governments, but most of the money would have to come from Germany, where the majority of GM Europe’s 55,000 employees work.

To reassure political leaders that the funding will stay in Europe, GM proposes to place Opel into a legally separate holding company into which it will transfer about $3.8 billion-worth of non-cash items. Another $1.2 billion will be found from capacity reductions. Two of Opel’s nine factories are thought to be especially vulnerable: Bochum in Germany and Antwerp in Belgium.

GM also hopes the new entity might attract outside investors. Mr Forster says GM is prepared to sell an equity stake in Opel of 25-50%. Fritz Henderson, GM’s chief operating officer, went further on March 3rd, saying that GM might even be willing to cede control to save Opel.

But it is hard to see who might want to take up Mr Henderson’s offer just now. Other carmakers are hoarding their cash, and financial investors will note that GM has ploughed $7.5 billion into Opel since 2001 for little return. Were the German government even to consider taking a stake in Opel, other German carmakers would cry foul. Daimler, BMW and Volkswagen said this week that they would tolerate only short-term bridging loans for Opel.

One possibility that would go down well with Opel’s unions might be for a stake to go to Hesse, the state in which Opel has its Rüsselsheim headquarters. The precedent is the 20% shareholding that Lower Saxony still holds in Volkswagen. However, the “VW law” that gives the state a veto over important decisions is a controversial anachronism which both the European Commission and Porsche, VW’s new owner, are determined to get rid of.

A measure of GM’s desperation is that these options defy industrial logic. Opel is of critical importance to GM’s future. Its products and engineering are tightly interwoven with all the company’s other operations. Both the Epsilon 2 platform, used by the new Opel Insignia, and the Delta 2 platform, intended for the next Astra, were developed at Rüsselsheim and will be used by almost every GM brand in future.

GM can do without Saab, which looks doomed (despite claims that there are several interested bidders). But without Opel, GM’s strong position in the big emerging markets with the highest growth potential would be undermined. Without Opel, GM’s promises to build a fleet of smaller and more fuel-efficient cars in North America would lack conviction. As for Opel, deprived of GM’s scale, it would quickly wither and die.

Ford, which sees the highly rated products developed by its European arm as central to its recovery plans, is puzzled by GM’s willingness to reduce its stake in Opel. One senior executive observed this week that it was “hard to imagine” how GM could both welcome other shareholders into Opel and also tie it tightly into the firm’s operations and strategy.

But Ford is in a very different position from GM. Because it has not had to resort to government aid in America, which comes with many strings attached, Ford still has some freedom of manoeuvre. Ford of Europe is also much healthier than GM Europe, notching up a profit last year of $1.06 billion. Lewis Booth, who ran Ford of Europe before becoming Ford’s finance chief last year, says that because the business was successfully “sized to demand” in 2000, the European operation was profitable from the end of 2003 until a few months ago. By contrast, GM Europe reckons it has 30% more capacity than it needs.

The German government will be very reluctant to allow Opel to fail before the general election in September. But beyond that its future is bleak. GM is powerless to help it. Even if Barack Obama decides to keep GM out of the bankruptcy courts for the time being, he will not stump up money for Opel. Nor does quasi-independence from GM seem a feasible option. If Opel closes, GM’s own prospects, already uncertain, would be dealt a further blow. What began in 1929 could well end in 2009.

GM Makes Sales Pitch To Europe

As Originally Posted in The Wall Street Journal

General Motors Corp. sketched out a proposal Monday for selling a stake in its Opel unit, the core of its European operations, in a bid to win aid from Germany and other countries in the region.

Under the plan, which was presented to German Economics Minister Karl-Theodor zu Guttenberg in Berlin on Monday, GM would sell 25% or more of Opel, and cut $1.2 billion in costs, company officials said.

People familiar with the auto maker's plans said GM may try to close or sell as many as four plants in Europe, including two in Germany. One plant being targeted is part of Saab, the Swedish brand that GM is trying to spin off completely with the help of Swedish government aid, these people said.

In Berlin, Mr. zu Guttenberg confirmed the government has received some details of Opel's restructuring plan on Monday and would hold further meetings in coming weeks. "No initial decision at all has been made," Mr. zu Guttenberg said.

In proposing to separate its sprawling Opel unit in order to win German support, GM is staging a distinct reversal from the strategy Chief Executive Rick Wagoner had pursued in recent years and demonstrates how the company's deepening liquidity problems are forcing the company into once-unthinkable changes. Such a step would be a framework for Opel's independence, potentially encouraging governments to lend money to GM.

In an interview in Detroit Friday, GM Chief Operating Officer Frederick "Fritz" Henderson said the company has been "working furiously" on its plan for European operations, and said he isn't "foreclosing any options" when it comes to fixing the business.

"We need support. We need to be open to options," he said.

GM has asked for as much as $44 billion in support from the U.S. and other governments in order to stay afloat, and is committed to making major changes to Mr. Wagoner's strategy to get the financing.

The German government has raised concerns that aid from Germany could be used to cut rather than save jobs in the country, and that GM could use German aid to restructure its operations in the U.S.

At the same time, German politicians are under pressure from labor unions to bail out Opel, GM's largest European brand by far, to help save the company's 25,000 jobs—a number that more than doubles when including parts suppliers.

Bailing out Opel could give the German government more say in how its funds are used.

GM Europe has been losing money or breaking even for a decade and lost $2.88 billion in 2008. GM's past attempts to recover were based on raising per-vehicle revenue and stabilizing market share.

Opel, which GM acquired in 1929, accounts for about three-quarters of GM Europe's sales and operates under the Vauxhall brand name in Britain. It has emerged as a key developer of passenger cars for GM's far-flung global operations as Mr. Wagoner and his management team have tried to consolidate the company's previously separate European, Asian, North American and Latin American units.

In addition to developing vehicles like the Opel Insignia, the unit has developed technology for high-volume Buick products for China, Saturn products for the U.S., and had been engineering much of the next-generation Chevrolet Malibu.

GM may struggle to find investors for Opel given the state of the credit markets and persistent weakness in the automotive industry. A glut of production capacity and a collapse in revenue in Western Europe and North America have scared investors and banks away from the sector, and led to a severe decline in interest for alliances and other ventures.

Cerberus Capital Management, for instance, was only able to lure Fiat SpA into taking a stake in Chrysler LLC by essentially giving it to the Italian auto maker for free. GM has had a tough time selling Hummer despite some interest among private investors because of a lack of financing.

GM this week plans to show off a new variant of the Saab 9-3 and an entirely new subcompact car called the Chevrolet Spark. Both were meant to further GM's push to become more fuel efficient and were to be sold in most of the markets GM participates in, including North America.

In discussing options with European officials, Mr. Henderson said the auto maker plans to reiterate the importance of keeping Opel tied in to GM's global vehicle portfolio so the unit can benefit from economies of scale. "They need to evaluate whether or not that is acceptable."

Meetings with German officials are expected to continue for several weeks. In its viability plan submitted to U.S. Treasury officials in February, GM said that it expects to resolve solvency issues in Europe by March 31. GM executives expect to meet strong opposition from labor representatives as it attempts to close or sell some of these plants.

In addition, there could be a concerted push by Klaus Franz, head of Opel's labor council, and government officials to desire far less decision making by Detroit-based executives. Germany's economics minister, Mr. zu Guttenberg, said Monday that he expected to discuss GM in meetings with U.S. officials later this month. He added that any decision "must be sensible" and the government wouldn't be pressured.

Earlier, Mr. zu Guttenberg said a key issue to resolve is how independent Opel would be from its parent company in the U.S. His comments followed consultations with governors of the German states of North Rhine-Westphalia, Rhineland Pfalz and Hesse, where Opel factories are located.

GM Europe President Carl-Peter Forster told reporters Friday that investors could take between 25% and almost 50% in Opel. Under this scenario, GM Europe would be treated much like GM's Daewoo operation in Korea. GM controls the unit and uses the operation to feed its Chevrolet brand with fuel-efficient cars and crossover vehicles around the world, but technically owns 50%.

GM has said it needs about $4.2 billion in loans from various government entities to prop up its sagging operation there. About two-thirds of that money would need to come from the German government. GM also plans to submit a plan to state officials in Hesse, where Opel has headquarters.

Would a GM Bankruptcy Crash Its Suppliers?

As Originally Posted in The Wall Street Journal

General Motors Corp. is back in Washington, this time asking for $12 billion to add to the $18 billion loan the government approved last year. The possibility of bankruptcy for GM is very real -- the company posted a loss of $30 billion in fiscal 2008.

GM continues to argue that it couldn't survive a Chapter 11 proceeding, but the truth is that bankruptcy could boost its ability to survive. As the Obama administration considers its response to GM's request for more cash, it should be mindful of the advantages of bankruptcy that haven't been highlighted -- certainly not by GM's management.

Consider two big issues: restructuring GM's roughly $30 billion of bond debt, and the potential collapse of the automotive supply chain. Both are easier to deal with if the company is in Chapter 11.

GM executives have been saying that in Chapter 11 its network of suppliers would collapse, dragging down the rest of the auto industry with their company. But Chapter 11 has well-established procedures to deal with this concern.

Courts know that bankrupt companies need to keep getting supplies, inventory and parts for manufacturing to be viable. Hence, the bankruptcy code and the bankruptcy courts put payments for new supplies at the top of the queue, even ahead of most old lenders. Send in fresh supplies, and the courts have the bankrupt company pay for them, even while prebankruptcy creditors cool their heels.

When that is not enough, courts can do more. Critical vendors can have their prebankruptcy invoices paid if that's what's necessary to keep the supply conduits fluid. A bankruptcy judge has to approve these kinds of payments -- they're not automatic -- but the approvals are regular and quick, sometimes made on the first day of bankruptcy.

GM may run out of cash to pay its suppliers -- whether it files for bankruptcy or not. But GM's supply network is probably more robust with GM bankrupt, as Chapter 11 assures that suppliers get paid out of whatever cash GM has.

As for bond debt, GM has been negotiating with its bondholders for months, thus far unsuccessfully. There's a reason out-of-bankruptcy bond deals often collapse: Outside of Chapter 11, every bondholder gets to decide for himself whether to take the deal. It's not uncommon for some bondholders to hold out and hope that the others take equity or a new debt security, strengthening the company just enough so that the holdouts can be paid in full.

But when a few hold out, other bondholders can decide to hold out as well. Many bondholders may consider the company's offer of an exchange a good enough deal, but conclude that holding out for more is even better. This friction is typically a factor in failed out-of-court workouts.

While holdouts can unravel a recapitalization outside of bankruptcy, inside Chapter 11 bondholders vote on the plan. If a majority of GM's bondholders (actually those holding two-thirds of the bonds by dollar value) think the deal is good enough, it applies to all of them.

There are other reasons why a Chapter 11 resolution may be the best solution for GM. Bankruptcy may be the only way for GM to fully confront its operational problems, deal with its legacy costs, reconfigure its dealer network, and achieve a viable labor agreement.

But one issue that has not been discussed much is that bankruptcy usually leads to a sharp change in management. There are turnaround teams expert at restructuring troubled companies, and they may well be more effective than GM's current management. It's no surprise GM's management isn't advertising this fact, but taxpayers and the government should know about it.

In the end, the administration needs to keep in mind that vital elements in GM's restructuring -- recapitalizing its large bond debt and keeping what cash it has flowing to key suppliers -- are often dealt with successfully by bankruptcy courts. A bankruptcy could save GM -- though maybe not its management.

Moving On Down the Line: Auto Parts Makers Follow Auto Makers To Government Trough

Original Story Posted in The Wall Street Journal.

Beleaguered auto-parts suppliers are following the lead of Detroit's Big Three in seeking aid from the federal government.

In a request dated Monday to the Treasury Department, an industry group representing 400 parts makers asks for $25.5 billion in aid and guarantees.

"Without immediate assistance to suppliers, the country will face massive job losses and the eventual breakdown of the entire automotive sector in the United States," says the 11-page request from the Motor & Equipment Manufacturers Association.

The document says more than 40 car-industry suppliers filed for Chapter 11 bankruptcy protection in 2008.

The request signals a potentially significant broadening of the government's auto-industry bailout efforts. Congress already has provided $17.4 billion to General Motors Corp. and Chrysler LLC, and an additional $7.5 billion to the finance companies associated with the two auto makers.

The request surfaced as U.S. House Speaker Nancy Pelosi and other Democratic leaders met Wednesday with the Michigan delegation to discuss the deteriorating U.S. car industry.

On Tuesday, GM and Chrysler reported steep declines in U.S. vehicle sales in January -- GM's fell 49%; Chrysler's declined 55%. The sales reports caused alarm in Washington, where officials in President Obama's administration are awaiting "viability" reports from GM and Chrysler by Feb. 1.

"I think there definitely is a growing sense of urgency" in Congress, said an aide to a Democratic auto-industry ally. "With so much focus on the [economic] stimulus and all of these other issues, there hasn't been as much focus on [the car industry] as there was perhaps last year. But the news from yesterday, headlines today, is starting to refocus people," the aide said.

A spokesman for Ms. Pelosi declined to comment.

The suppliers are seeking $7 billion in federal funds to create a "quick pay program" to funnel money to auto makers so they can pay suppliers within 10 days of receiving parts, instead of the 45 days or more they typically take to pay.

The group also seeks $10.5 billion to guarantee receivables of suppliers whose customers have taken federal loans, which means GM and Chrysler. The guarantee would provide a backstop to commercial-lending losses on loans to suppliers.

Lastly, the suppliers want $8 billion in direct access to federal loans.

Ann Wilson, spokeswoman for the car-parts association, had no comment.

A failure of a parts supplier could cause trouble at car-assembly plants across the country since many parts arrive just hours before they are needed on the assembly line.

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Chrysler and General Motors Offer Employees Buyouts

GM, Chrysler Offer New Buyouts
'Attrition Program' Incentives Will Include Cash
and Vehicle Vouchers.

Article by Wall Street Journal

General Motors Corp. and Chrysler LLC, under pressure to comply with viability requirements set by the Treasury Department, plan to unveil attrition programs at U.S. plants as early as this week in order to trim labor costs further, according to people familiar with the matter.

United Auto Workers officials at GM have received details of the plans, which include worker buyouts, but the auto maker hasn't yet disclosed specifics publicly. A GM spokesman said he couldn't comment on the matter.

GM and Chrysler, recipients of federal loans to help them survive a severe slump in auto sales, must submit plans to the government by Feb. 17, 2009 on how they intend to get back on track. Cutting hourly labor costs represents a substantial portion of what is expected to be included in those plans.

A UAW spokesman couldn't be reached for comment. GM union officials have been told that the program is intended to "address the number of surplus employees and create the potential for hiring entry-level employees when the business environment improves," according to these officials.

All hourly employees will be able to retire either on a normal or a voluntary basis, depending on their tenure, and receive a $25,000 vehicle voucher and $20,000 cash. The vehicle voucher will be valid for 18 months.

GM told union officials that there are certain restrictions being placed on the company's plan by the Treasury Department, including restriction of the use of pension funds to pay for attrition packages.

For Chrysler, retirement-eligible workers who leave will get a $50,000 incentive plus a $25,000 Chrysler vehicle voucher, according to a union official who reviewed a notice from the company. Workers who take a buyout and leave with no retiree health-care benefits get $75,000 and a $25,000 car voucher, the person said. Last year, retirement-eligible workers received $70,000, while those who took buyouts got $100,000.

"Given the difficult economic and market conditions in the U.S., Chrysler LLC determined in December 2008 that it would offer another phase of special [attrition] programs," Chrysler spokeswoman Shawn Morgan said without confirming actual details of the offer.

The majority of unionized hourly workers will have until Feb. 25 to decide, she said.
She said the original plan was to offer the program in December and January, but "due to the fact that many of the company's facilities had suspended production for extended periods in December and January, the program offerings are being rolled out now."

A Ford Motor Co. spokeswoman had no comment on whether the auto maker will offer a similar program. Ford hasn't asked for a federal bailout.

Chrysler Financial Gets Loan

As posted by: Wall Street Journal

The U.S. Treasury Department extended $1.5 billion in emergency loans to Chrysler LLC's lending arm and has begun discussions with Ford Motor Co.'s lending unit about its own financing needs, a government official said.

The five-year loans to Chrysler Financial LLC will be extended as part of Treasury's $700 billion Troubled Asset Relief Program. Chrysler was to get the first $100 million loan installment on Friday, with another installment this week, a government official said. The government will receive notes equal to 5% of the loan package.

The Chrysler deal, capping weeks of talks, was structured to ensure the cash infusion will be used to finance new consumer auto loans, the official said. It comes less than a month after Treasury extended $6 billion to General Motors Corp.'s GMAC lending arm. Chrysler has contended that the money to GMAC put Chrysler at a disadvantage.

Ford, meanwhile, has also been in talks with the Treasury, a government official said on Friday. The talks began shortly after Congress failed late last year to pass an auto-aid package. The official declined to say whether Ford's lending arm, Ford Motor Credit, is seeking aid.

Friday's agreement cleared the way for Chrysler Financial to expand credit to a wider base of customers and spur the company's U.S. car sales, which account for about 80% of the auto maker's overall sales. Customers, including those with credit scores in the 620 range, will be able to apply for loans. Dealers have said about 25% of their customers haven't been able to access loans because of tighter restrictions. The company is now offering 0% financing for as long as 60 months when financing a Chrysler, Jeep or Dodge vehicle.

"This funding will provide us with increased capacity to help Chrysler LLC and our dealers make new loans available to qualified consumers and sell more cars and trucks," said Thomas F. Gilman, vice chairman and chief executive of Chrysler Financial.

The deal was structured so the loans will be extended to a "special-purpose entity" created by Chrysler Financial. Under that arrangement, "we would not be in line with other creditors" who would be affected by a bankruptcy filing by Chrysler Financial, the government official said.

The special-purpose entity created by Chrysler Financial will issue warrants to the Treasury in the form of additional notes in an amount equal to 5% of the total size of the loan. The additional notes will vest 20% on the closing date and 20% on each anniversary of the closing date and will have other terms similar to the loan.

Chrysler's new car and truck sales fell 53% in December from the same month a year earlier. For the year, sales fell 30% in the U.S., with Chrysler selling 1.45 million cars and trucks.

Ford Hopes Self-Parking Vehicles Boost Curb Appeal

As posted by: Wall Street Journal

DETROIT -- Ford Motor Co. plans to offer two Lincoln models next year that can park themselves, the latest move in a strategy aimed at improving the public's image of the auto maker.

The automatic parallel-parking system will be shown next month at the North American International Auto Show in Detroit, and will be offered as an option on the Lincoln MKS sedan and MKT crossover-utility vehicle. (See a video of the system in action on YouTube.)
The Lincoln MKS sedan will be one of the models that Ford will offer with the ability to park itself

Similar technology is already available from Toyota Motor Corp.'s Lexus division, but Ford's push reflects a wider effort championed by Chief Executive Alan Mulally to cast the company in a more favorable light. At the Detroit show, Ford also will show a hybrid version of the Ford Fusion sedan rated at 41 miles a gallon in city driving -- eight more than Toyota's Camry hybrid.

On Monday, billionaire investor Kirk Kerkorian confirmed through a spokeswoman that he had sold his remaining shares in the auto maker in a widely expected move. Mr. Kerkorian earlier had pledged his support and confidence in Ford and Mr. Mulally.

Mr. Kerkorian's investment company, Tracinda Corp., had accumulated a 6.5% stake in Ford earlier this year. The auto maker's stock subsequently plunged, and in October Tracinda began selling its holding, saying Mr. Kerkorian wanted to concentrate his investments in oil, gas, gambling and lodging. The casino-and-hotel mogul suffered a huge loss on his Ford investment.

Ford, General Motors Corp. and Chrysler LLC still have strong reputations among truck buyers, but for years have suffered poor images among many consumers favoring cars. Recent studies have found about half of people shopping for cars won't even consider one from the three companies.

In an interview Monday, Mark Fields, Ford's president of the Americas, said the company is counting on technological innovations and fuel-efficient vehicles to help separate Ford from competitors and draw more people into its showrooms.

In 2007, the company began offering an in-car entertainment system developed with Microsoft Corp., called Sync, which drivers can use to control their phone, stereo and iPod through voice commands. Ford is hoping such innovations will "make us cool in the customers' minds," Mr. Fields said.

John Casesa, managing partner at the New York consulting firm Casesa Shapiro Group LLC, said it is unclear how many customers will want the new Active Park Assist feature. "In terms of technology, the automatic parking wasn't very successful at Lexus," Mr. Casesa said. "I think the better example is Sync because it worked as promised and it's priced right."

Ford didn't say how much the option will cost. A Lexus spokesman said its Advanced Parking Guidance System costs $700.

Ford's system requires less driver input and reduces the risk of selecting a too-small spot, said Ali Jammoul, Ford's chief engineer for steering systems.