Big 3 Change Tune But Still Fiddle

Top executives of Detroit’s Big Three automakers got the memo when they delivered a lemon to Congress last month asking for $25 billion to keep their cars running.

Ford Chief Executive Alan Mulally and Chrysler LLC CEO Robert Nardelli said they would work for $1 per year if Congress granted them the loans. General Motors Chief Rick Wagoner was expected to follow along.

Nor will they arrive on three corporate jets to appear before Congress Thursday and Friday as they did in last month’s dog and pony show.

Mulally is coming by car from Detroit. Wagoner will drive a Chevrolet Malibu hybrid sedan for the 520-mile trek. Nardelli won’t travel by corporate jet, but a spokeswoman declined to elaborate on his travel plans, citing security reasons.

Whoop de do da. That’s just fluff.

What substance will the three tycoons offer?

Skeptics analyzing the companies’ detailed reports to Congress suggest it may be more about public relations than economics. They describe the loans as a bridge to economic recovery.

It may be a bridge too far.

Analysts say the expected promises to renegotiate labor contracts, cut benefit costs or reduce product lines may placate some in Congress but will be hard to achieve.

GM has had its Hummer unit on the block since June, and it is now understood to be considering the sale of Saab or even Pontiac and Saturn.

Ford, meanwhile, sold Jaguar and Land Rover to Indian carmaker Tata Motors this year. Ford on Monday added another high-end line to the for-sale list: Volvo.

According to the Los Angeles Times:

Saying a brand is for sale and actually selling it are two different things. Robert Schulz, an auto industry analyst for Standard & Poor’s, said with lending for corporate acquisitions all but frozen, there may be few takers for even a prestige marque such as Volvo.

“There’s no obvious candidate to offload these assets to,” Schulz said.

Labor costs will almost certainly be on the line.

Yet labor specialists wonder how much more the United Auto Workers union can give. Last year, the UAW signed a landmark deal with the Big Three that will effectively allow the automakers to unload retiree healthcare costs starting in 2010.

Even if the UAW agreed to more cuts, the savings to the Detroit Three might be surprisingly small.

Only a few years ago, GM’s UAW payroll was well over 100,000. Today it’s barely 55,000. As a result, even an across-the-board 20% pay cut “would result in a savings of only $1.1 billion per year,” said Michigan State University professor Richard Block, a specialist in labor relations. “That’s enough to keep them going for what, two weeks?”

GM and Chrysler have both expressed concern that they could run out of cash by early next year, whereas Ford has insisted that it does not necessarily need government aid and would take it only if there weren’t too many strings attached.

Ford’s sales are off by nearly as much as GM’s this year, but its cash position is stronger thanks to $23 billion the company borrowed in late 2006, and the fact that Ford still has an untapped credit line worth more than $10 billion.

GM, on the other hand, has been unable to borrow cash and exhausted its last line of credit this summer.

One possible cost-cutting move — simply eliminating poor-selling brands like Buick, which is down nearly 24% this year — may be a nonstarter because of the costs involved. Franchise contracts with dealers require the automakers to buy them out should a brand fold; the last to do so, Oldsmobile, cost GM more than $1 billion in payouts to dealers.

Part of a turnaround plan has to focus on developing attractive products and revamping marketing to get consumers buying. But the current sales environment is dismal.

This year, U.S. vehicle sales are on pace to drop below 13 million units, compared with more than 16 million in 2007. Forecasters don’t expect sales to top 15 million before 2011 at the earliest.

Meanwhile, of the Big Three, Ford is in the best financial shape. It is asking Congress for a $9 billion “stand-by line of credit” to stabilize its business, but says it doesn’t expect to tap it.

Unless one of Detroit’s other Big Three auto companies goes bust, Ford expects to have enough money to make it through next year, it said in a plan that projected the firm will break even or turn a pretax profit in 2011.

Reports the Wall Street Journal:

Ford owes more than $26 billion, with $6.3 billion due to its UAW trust fund at the end of 2009. All three likely are negotiating with the UAW for delays in payments to the trusts.

GM will outline efforts to negotiate swapping some of the company’s debt for equity stakes in the automaker, either shares or warrants for them, said two people briefed on the company’s plan.

With eight separate brands, GM will also discuss efforts to shed brands but it would prefer to sell them instead of shutting down Pontiac, Saturn or Saab, said one of the people briefed on the plan. Killing off brands, like GM did with Oldsmobile in 2004, would require cash the company doesn’t have, the person said.

Chrysler is expected to outline changes that would include a swap of debt in the company for equity stakes and reductions in some vehicle models, according to a person who was briefed on the plan.

The companies are resisting calls for bankruptcy. The executives said last month that bankruptcy cannot be an option because no one would buy a car from an automaker that may not survive the life of the vehicle.

cross posted on The Remmers Report