Analysis of the Big 3 Automakers Business Plans
Companies / US Auto's Dec 08, 2008 - 08:10 AM GMTBy: David_Urban
Last week the Big 3 automakers returned to Detroit in hybrid vehicles armed with business plans ready to appeal for billions in federal aid aimed at helping them through the ongoing recession and credit crunch.
A summary of the three plans follows with some comments.
Ford
Ford’s plan was the most informative in terms of telling the story of why they needed to restructure, where they are in their restructuring, and how long it will take for them to finish. After reading the plan I had a sense that they understood the task ahead of them and they were well on the way to addressing the problems. On the first page, it mentions that they did not wait for the current crisis to begin restructuring and that they believe they are already on the path to long-term viability.
Ford began to refocus earlier this decade and is moving to reduce costs to the point where they can operate profitably in the current demand environment.
To date, Ford has worked to consolidate and streamline their operations in each of their four global companies realizing design and operational synergies.
Ford admitted that in acquiring brands such as Aston Martin, Mazda, Jaguar, Land Rover, and Volvo the original Ford brand was neglected and its value fell in the eyes of the consumer. To that end, almost all non-core brands and ownership stakes have been sold with the exception of a part of Mazda and Volvo. Ford has refocused efforts to build the brand name.
$5 billion has been requested through an application through the Department of Energy-136 (DOE136). The DOE136 program was a part of the Energy Independence and Security Act of 2007 which offers loans and grants to support the development of advanced technology vehicles and components in the US.
The restructuring process has been difficult for Ford. In North America the plan is to convert nearly all assembly plants and half of the engine and transmission plants to flexible body shops by 2012. Vehicle platforms are in the process of being reduced from 25 in 2005 to 9 in 2012 and Ford has continued to move along by closing 17 plants over the past 5 years and reducing headcount by 57,000 employees in the past 3 years.
Production suppliers have been halved from 3,300 in 2004 to 1,600 currently with a further reduction planned to 750.
In 2005 Ford took back 17 plants from their parts supplier Visteon and has worked with the UAW to either sell or close the facilities. By year end, only four plants will remain to be either sold or closed.
Ford Credit has also refocused efforts exiting several Asian markets and restructuring US operations. Ford applied to the FDIC to establish an Industrial Loan Company for Ford Motor Credit Company as well.
The dealer network is being restructured with the total number of dealers shrinking from 4,396 dealers in 2004 to 3,790 dealers by years end.
Ford plans on transferring long-term responsibility for retiree health care to the UAW through the Voluntary Employee Beneficiary Association (VEBA) and make full payments and transfer of assets by year end 2009.
Currently, Ford provides retirement benefits to 207,000 UAW retirees and 128,000 retirees. Recent stock market declines mean that if the markets do not improve, Ford will be required to make $3-4 billion in contributions starting in 2010.
Ford is in the process of boosting fuel economy by an estimated 26% by 2012 across the entire vehicle line and doubling production of flexible fuel vehicles by 2010.
In December of 2006, Ford raised $23.5 billion dollars to fund the restructuring and is currently eligible and participating in funding programs from the European Central Bank and the Federal Reserve’s Commercial Paper Funding Facility.
As of September 30, Ford had $30 billion in liquidity available. They mention that although they do not need to access the loans they believe it is important that a line of credit be available to them in case the recession drags on. The revolver, if approved, would be required to be paid back or refinanced, markets permitting, by 2011.
The business plan was based on 3 different sets of assumptions with respect to annual auto sales in the 2009-11 timeline. The first is total vehicle sales in the 12.5-14.5-15.5 space while the current scenario is based on 11-12.5-14, and finally a pessimistic scenario of 10.5-11-12.
The recommended terms would be a 10 year revolver at government borrowing rates and conditions consistent with TARP legislation.
General Motors
The plan from General Motors (GM) had a sense of panic with no contingency plan. Bankruptcy was not an option yet there was a sense that they were late to the party with respect to restructuring. They know where they have to go but there seems to be some apprehension to making the ‘deep cuts’ that Ford has done and are required. Over the last 15 years GM has spent $105 billion on legacy costs which has constrained investment and held the company back. This should tell the government how deep the problems are at GM.
GM competes in the US through 8 brands with Chevrolet, Cadillac, Buick, and GMC representing 83% of current sales. Efforts are being made to combine the Buick, Pontiac, and GMC brands into a single network. Pontiac will serve as a specialty brand complementing the Buick and GMC brands.
Hummer, Saab, Isuzu, Suzuki and Saturn are currently under review to explore strategic alternatives.
GM intends on dropping the number of nameplates from 63 in 2004 to 48 today and 40 in 2012. Truck nameplates have been reduced from 30 in 2004 to 17 today.
The plan by GM details a shift in the company’s business with 22 of 24 new vehicles being launched in the 2009-12 timeframe being crossovers/fuel efficient vehicles.
Global product development has been restructured putting it on an equal footing with Toyota and GM is currently tied with Ford for top honors in the JD Power Initial Quality Survey.
Currently, 60% of US assembly plants are able equipped with flexible platforms.
GM submitted to the DOE its first Section 136 application on November 17th for a total amount of $3.6 billion related to 8 high-efficiency projects. A second application is in progress and estimated at requesting an additional $4.7 billion.
GM’s interest in GMAC is a bit complicated as Cerberus owns 51% of the outstanding common stock and is in the process of restructuring. Financing of vehicle sales and leases has fallen and GMAC is in the process of exiting several international markets.
GMAC is attempting to become a bank holding company (BHC) by converting from an industrial loan company into a bank. In the event they are approved, additional capital will have to be raised to meet regulatory capital requirements. GM and Cerberus would have to restructure their ownership interests and revise their commercial agreements as well.
Dealer networks are being restructured with the number falling from 7,497 in 2004 to 6,450 in 2008, and 4,700 in 2012.
In terms of the defined benefit pension plan for salaried employees, GM suspended matching contributions effective November 1 with current and future benefits at risk if the plan is terminated or taken over by the government.
The net effect of GM’s operational and financial restructuring will be a company which is profitable on an EBIT basis with US industry auto sales between 12.3 and 13 million vehicles.
While liquidity now stands at $16 billion, it is above the $11-14 billion minimum required by GM to continue to implement their plan.
The business plan was based on 3 scenarios, a downside scenario with auto sales estimates of 10.5-11.5-12-12.8 million vehicles during the 2009-12 timeframe, a baseline scenario with auto sales estimated at 12-13.5-14.5-15 million vehicles, and an upside scenario with auto sales estimated at 12-14-15.5-16.2 million vehicles.
Senior executive compensation will be adjusted to be more ‘at risk’ in terms of aligning their interests with the company’s well being. The top 5 most senior officers do not have any employment or severance agreements.
The GM Plan calls for further reduction in the white collar ranks and negotiations with the UAW with respect to the company’s unions to lower GM’s overall cost structure and VEBA obligations. Negotiations will also begin with relevant stakeholders to discuss conversion and rescheduling of its indebtedness.
Even if GM is approved for the loan, they anticipate working with lenders, bond holders, and unions to make the necessary changes to their capital structure in order to be competitive and may ask for the federal oversight board to become involved.
GM has proposed a $4 billion dollar immediate loan, a second tranche of $4 billion to be available in January 2009, a third tranche of $2 billion to be drawn down in February or March with $2 billion additional funds available for draw and a $6 billion dollar line of credit to be used to ensure adequate liquidity under more severe conditions.
Chrysler
Chrysler’s proposal was by far the shortest at 17 pages and less detailed than Ford or GM’s. Chrysler is moving towards a different business model as well, one that relies less on research and development and more towards selling rebranded vehicles. After reading the proposal I did not get a good feel for the company and its needs but they do seem to be moving quickly to address the problems.
Chrysler’s plan was odd to review since they are majority owned by private equity firm Cerberus Capital. This means they do not need to make their financial statements public. They went private in a transaction where Cerberus purchased a majority stake from Daimler.
The loan request was more open covenant wise as a more detailed plan is in process and will be submitted for Congressional approval.
Since obtaining ownership, 4 unprofitable vehicle models have been discontinued and Chrysler has disposed of more than $700 million dollars in assets. Chrysler has also disposed of 30% of their capacity and reduced fixed costs by $2.4 billion. The workforce has shrunk by 32,000 workers and Chrysler is moving towards making their cost structure competitive with transplant manufacturing by 2010.
To this end, management realizes that there are still significant opportunities to trim capacity and make operations more efficient although no specific timelines are given.
During the first 60 days as a private company, Chrysler implemented over 400 design changes and invested $500 million dollars in product improvements.
Chrysler’s plan includes 24 product launches through 2012 and is currently the largest producer of all-electric vehicles in the US.
Chrysler was the first to apply for DOE136 funding, requesting $8.5 billion in funding, $6 billion of which is factored into the 2009-12 timeframe.
To that end, Chrysler is pursuing strategic alliances such as an agreement with Nissan to provide 100% of their full size truck manufacturing in North America and purchase a small, fuel efficient car for resale globally. Chrysler also became the sole supplier to Volkswagen for its Minivan production in North America.
Chrysler Financial provides 75% of the financing to dealers to assist in their operations.
Chrysler ended the first half of the year with approximately $9.4 billion of cash and estimates that they will end the year with $2.5 billion cash on hand.
Chrysler is requesting a $7 billion dollar secured bridge loan with a covenant that the loans will be immediately callable if Chrysler’s restructuring plan submitted on government by March 31, 2009 is not acceptable or other agreed upon benchmarks are not met.
Chrysler’s operating assumptions includes annual sales of 11.1-12.1-13.7-13.7 million vehicles over he 2009-12 timeframe. A more optimistic scenario calls for sales of 12.1-13.1-14.7-14.7 and a pessimistic scenario calls for 10.1-11.1-12.7-12.7. Chrysler also anticipates market share rising from 10.4% to 10.7% over the 4 year timeframe.
Summary: As someone who formerly worked in a loan administration capacity early in their work career I read the plan from the point of view of a lender and wondered about risk and weather I would offer money to each of these companies or decide if bankruptcy is the best option. The Capitalist in me says that they should be allowed to fail much like any business but the automakers are a unique case in some regards. First, their business is global making any bankruptcy difficult and problematic at best. For example, if North American operations were shuttered at one of the big three not only would there be warranty and parts questions for all current owners but globally as well since many cars are sold globally and use the same platforms and part suppliers. We have had global companies go into bankruptcy but none with the global reach and depth of a Ford, GM, or Chrysler.
If the loans are approved, any precondition by the government for senior status on debt could cause a lender or holder to allege a debt default. This makes the governments place in line difficult as pressure for subordination could cause a default clause to be triggered.
Ford made mention of this in their plan stating that a collapse of GM or Chrysler would hurt Ford as they have an 80% overlap in supply networks and 25% of Ford dealers own GM and Chrysler franchises. A collapse by GM or Chrysler would have ripple effects across the industry, seriously affecting Ford and other automakers. These are important facts for people to consider.
A comment by Ron Gettelfinger, UAW President must be mentioned. He noted last week that if his workers worked for free it would not help that much. In that sense, I believe he is correct, the current rank and file has made sacrifices towards bringing down healthcare and pension costs to allow the Big 3 the ability to compete cost wise with Toyota and Honda. The real problems lie in the healthcare and pension legacy costs of retired workers along with brand management by the Big 3.
The most unpalatable scenario may be the best scenario in this situation. A prepackaged bankruptcy where the government agrees to provide debtor-in-possession financing and leans on stakeholders in return for the automakers making deep cuts across the board and emerging from bankruptcy in a timeframe of no more than a couple of months.
Source: Ford Motor Company Business Plan submitted to the Senate Banking Committee, December 2, 2008
General Motors Corporation, ‘Restructuring Plan for Long-Term Viability’, December 2, 2008
Chrysler’s Plan for Short-Term and Long-Term Viability, December 2, 2008
By David Urban
http://blog.myspace.com/global112
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.
David Urban Archive |
© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.
