GAO 

United States Government Accountability Office

Report to Congressional Committees

AUTO INDUSTRY

Summary of 

Government Efforts 

and Automakers’ 

Restructuring to Date 

April 2009 

GAO-09-553 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 2009

AUTO INDUSTRY

Summary of Government Efforts and Automakers’ 

Restructuring to Date 

Highlights of GAO-09-553, a report to 

congressional committees 

The turmoil in financial markets 

and the economic downturn has 

brought significant financial stress 

to the auto manufacturing industry. 

The economic reach of the auto 

industry in the United States is 

broad, affecting autoworkers, auto 

suppliers, stock and bondholders, 

dealers, and certain states. To help 

stabilize the U.S. auto industry and 

avoid disruptions that could pose 

systemic risk to the nation’s 

economy, in December 2008 the 

Department of the Treasury 

established the Automotive 

Industry Financing Program (AIFP) 

under the Troubled Asset Relief 

Program (TARP). From December 

2008 through March 2009, Treasury 

has allocated about $36 billion to 

this program, including loans to 

Chrysler Holding LLC (Chrysler) 

and General Motors (GM). 

GAO has previously identified three 

principles to guide federal 

assistance to large firms: define the 

problem, determine the national 

interests and set goals and 

objectives, and protect the 

government’s interests. As part of 

GAO’s statutorily mandated 

responsibilities to provide timely 

oversight of TARP activities, this 

report discusses the (1) nature and 

purpose of assistance to the auto 

industry, (2) how the assistance 

addresses the three principles, and 

(3) important factors for Chrysler 

and GM to address in achieving 

long-term viability and the 

challenges that they face to 

become viable. 

(continued on next page) 

From December 2008 through March 2009, the Treasury Department 

established a series of programs to help bring relief to the U.S. auto industry 

and prevent the economic disruptions that a sudden collapse of Chrysler and 

GM could create. In December 2008, Treasury provided bridge loans of $4 

billion to Chrysler and $13.4 billion to GM and required both automakers to 

submit restructuring plans in February 2009. In March, Treasury determined 

that the automakers’ restructuring plans were not sufficient to achieve longterm viability and required that they take more aggressive action as a 

condition of receiving additional federal assistance. At the same time, 

Treasury also established programs to ensure payments to suppliers of parts 

and components needed to manufacture cars and to guarantee warranties of 

cars Chrysler and GM sell during the restructuring period. In addition to these 

programs, the President announced a new White House initiative to help 

communities and workers affected by the downturn in the industry. In the 

coming weeks, Treasury will determine whether the additional steps Chrysler 

and GM have taken or plan to take are sufficient to warrant further assistance. 

If the companies are successful in implementing the additional steps toward 

restructuring, then Treasury may provide additional assistance. 

Components and Funding Levels under Treasury’s AIFP 

Component 

Funding level (in 

billions)

Loans to automakers $22.9

Assistance related to auto finance companies 7.4

Supplier Support Program 5.0

Warranty Commitment Program 1.1

Total $36.4

Source: GAO analysis of Treasury information. 

In providing assistance to the auto industry, Treasury identified goals and 

objectives and took steps to protect the government’s interest. Provisions to 

protect the government’s interest include requiring automakers to submit 

periodic financial reports and to gain concessions from stakeholders such as the 

UAW, creditors, and bondholders. To date, however, Chrysler and GM have not 

reached agreements with these stakeholders. In addition, Treasury included 

provisions to secure collateral from the automakers. However, because many of 

Chrysler’s and GM’s assets were already encumbered by other creditors, the 

amount of assets on which Treasury could secure senior liens was limited. An 

additional area of risk is the financial health of the automakers’ pension plans. In 

the event that Chrysler or GM cannot continue to maintain its pension plans—

such as in the case of liquidation—the Pension Benefit Guaranty Corporation, a 

government corporation, may be required to take responsibility for paying the 

benefits for the plans, which are not fully funded. 

(continued on next page) 

View GAO-09-553 or key components. 

For more information, contact Katherine A. 

Siggerud or Susan Fleming at (202) 512-

2834. 
Highlights of GAO-09-553 (continued)

United States Government Accountability Office

GAO’s panel of individuals with auto industry expertise identified a number of 

factors for achieving viability, including reducing the number of brands, 

reassessing the scope and size of dealership networks, reducing production 

capacity and costs, and obtaining labor concessions. However, Chrysler’s and 

GM’s restructuring plans submitted in February do not fully address these 

factors, according to GAO’s panelists. In its assessment of the plans, Treasury 

identified concerns similar to those identified by the panelists, and concluded 

that Chrysler and GM need to establish a new strategy for long-term viability in 

order to justify a substantial additional investment of federal funds. Achieving 

viability is made more difficult because of many additional challenges facing 

the automakers, some of which are outside their control—such as the weak 

economy and the limited availability of credit. The condition of the U.S. 

economy will likely continue to affect the financial health of Chrysler and GM, 

as historically automobile sales almost always decrease during periods of 

economic recession. Given these challenges, Treasury, Chrysler, and GM are 

considering a range options available for the automakers to achieve viability, 

including restructuring under the bankruptcy code. 

To address these objectives, GAO 

reviewed Chrysler’s and GM’s 

restructuring plans and financial 

statements, as well as Treasury 

documents related to AIFP. GAO 

also reviewed the terms and 

conditions of the federal loans to 

identify risks to the government 

and compared these loan 

provisions to GAO’s principles for 

providing federal financial 

assistance to large firms. In 

addition, GAO interviewed 

representatives of Chrysler, GM, 

Ford Motor Company (Ford) and 

the International Union, United 

Automobile, Aerospace and 

Agricultural Implement Workers 

of America (UAW), and officials 

from the Departments of the 

Treasury, Transportation, and 

Energy. GAO also conducted 

semistructured interviews with a 

panel of individuals identified by 

the National Academy of Sciences 

for their expertise in the fields of 

auto industry trends and data, 

labor relations, vehicle 

manufacturing, and corporate 

restructuring. 

GAO provided a draft of this 

report to the Departments of the 

Treasury, Transportation, and 

Energy for their review and 

comment. These agencies 

provided technical clarifications, 

which GAO incorporated as 

appropriate. GAO also made a 

draft of this report available to 

Chrysler and GM officials for their 

review and comment. Chrysler 

and GM officials provided 

technical corrections and 

clarifications, which GAO 

incorporated as appropriate. 

GAO is not making 

recommendations in this report. 
Page i GAO-09-553 

Contents 

Letter 1

Scope and Methodology 3 

Background 5 

Treasury Has Established Programs to Help Stabilize the Auto 

Industry 11 

In Providing Assistance to the Auto Industry, Treasury Identified 

Goals and Objectives for the Assistance and Took Steps to 

Protect the Government’s Interest 16 

Automakers Have Addressed Some of the Factors Important for 

Achieving Viability, and Many Challenges Remain 22 

Agency Comments and Our Evaluation 37 

Appendix I Members of GAO’s Auto Industry Panel 41 

Appendix II GAO Contacts and Staff Acknowledgments 42 

Tables 

Table 1: GAO’s Principles for Government Assistance as Applied to 

the Auto Industry Financing Program 10 

Table 2: Components and Funding Levels under the Automotive 

Industry Financing Program 15 

Table 3: Loan Terms and Conditions Designed to Manage Risk and 

Protect the Government’s Interest 17 

Table 4: Individuals with Auto Industry Expertise Identified by NAS 

Who Were Interviewed 41 

Figures 

Figure 1: Key Financial Relationships in the Auto Industry 9 

Figure 2: Monthly Light Vehicle Sales, 1976 to 2009 (Seasonally 

Adjusted Annual Rate) 32 

 Auto Industry 
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Page ii GAO-09-553 Auto Industry
Page 1 GAO-09-553 

 

United States Government Accountability Office

Washington, DC 20548 

 

April 23, 2009 

Congressional Committees: 

The United States is experiencing stress in financial markets and a severe 

economic downturn, affecting many sectors of the economy, including the 

automotive industry. The economy has been in a recession since 

December 2007, and several economic indicators, including economic 

growth and the employment rate, worsened at the end of 2008. Economic 

growth is expected to continue to decline in 2009. Automakers selling cars 

in the United States, including the three major domestic automakers—

Chrysler LLC, Ford Motor Company, and General Motors Corporation (the 

Detroit 3)—as well as Japanese automakers with production facilities in 

the United States—Honda, Nissan, and Toyota (transplant automakers) 

and others, have seen dramatic decreases in sales and idling of factories. 

Sales have been trending downward since 2006, but the decrease has 

become markedly sharper in the past year. Although most automakers 

experienced declining sales in 2008 and early 2009, recent economic 

conditions have particularly hurt sales of the Detroit 3, resulting in 

significant financial losses and necessitating the use of billions of dollars 

of borrowed money or cash reserves to keep operating. The drop in sales 

has a cascading economic effect as autoworkers are laid off, the revenues 

of dealerships and automotive parts suppliers decline, and shareholders in 

the companies lose the value of their investment. 

To help stabilize the U.S. automotive industry and avoid disruptions that 

would pose systemic risk to the nation’s economy, in December 2008 the 

Treasury Department established the Automotive Industry Financing 

Program (AIFP) under the Troubled Asset Relief Program (TARP).1

Through AIFP, Treasury in December extended loans of $4 billion and 

$13.4 billion, respectively, to Chrysler Holding LLC (Chrysler)—for use by 

its automotive manufacturing subsidiary, Chrysler LLC—and General 

Motors Corporation (GM) and may provide substantially more financial 

1

The Emergency Economic Stabilization Act of 2008 (EESA) authorized the Troubled Asset 

Relief Program (TARP), Pub. L. No. 110-343, 122 Stat. 3765 (2008), 12 U.S.C.§ 5201. Under 

TARP, Treasury has the authority to purchase or guarantee up to $700 billion in troubled 

assets through its Office of Financial Stability. As of March 27, 2009, Treasury had publicly 

announced funding programs under TARP totaling $667.4 billion, most of which was used 

to purchase or guarantee troubled assets from financial institutions, and about $422.4 

billion had been apportioned. 

 Auto Industry 
 

assistance.2 As required by the loan agreements, Chrysler and GM 

submitted restructuring plans to Treasury on February 17, 2009. These 

plans were to identify how the companies plan to repay government 

assistance, meet fuel economy standards, become competitive, and 

achieve and sustain long-term financial viability. On March 30, 2009, the 

President announced that the restructuring plans Chrysler and GM 

submitted did not establish a credible path to viability and do not justify 

substantial new investment of taxpayer dollars. The President outlined a 

series of actions that each company must undertake within a specified 

time frame—30 days for Chrysler and 60 days for GM—and Treasury 

agreed to provide working capital to fund the companies’ operations 

during this time. After these time periods expire and depending on the 

adequacy of the actions taken by Chrysler and GM, additional federal 

assistance may be provided. 

As part of our statutorily mandated responsibilities for providing timely 

oversight of TARP, we have been monitoring Treasury’s assistance to 

automakers, including reporting on conditions under which assistance 

should be provided.3

 In December 2008, for instance, we testified on the 

principles that guided previous federal assistance to large firms and 

municipalities and their applicability to assistance to automakers.4

 These 

principles include identifying and defining the problem, determining the 

national interests and setting clear goals and objectives that address the 

problem, and protecting the government’s interests. In this report, we 

describe the (1) nature and purpose of federal assistance to the auto 

industry, (2) how the federal assistance to the auto industry addresses 

these three principles, and (3) important factors for Chrysler and GM to 

 

2

Specifically, Treasury purchased debt obligations of GM and of Chrysler LLC’s parent 

company, Chrysler Holding LLC. Debt obligations constitute TARP “troubled assets” under 

section 3(9) of the Act, 12 U.S.C. § 5202(9). Under the terms of the Treasury-Chrysler 

Holding LLC Loan and Security Agreement, Chrysler Holding then provided the loan 

proceeds to Chrysler LLC, and Chrysler LLC has carried out the requirements of the loan 

agreement. 

3

EESA requires GAO to report at least every 60 days on findings resulting from, among 

other things, oversight of TARP’s performance in meeting the purposes of the act; the 

financial condition and internal controls of TARP; the characteristics of both asset 

purchases and the disposition of assets acquired; TARP’s efficiency in using the funds 

appropriated for the program’s operation; and TARP’s compliance with applicable laws and 

regulations. 

4

GAO, Auto Industry: A Framework for Considering Federal Financial Assistance, 

GAO-09-242T (Washington, D.C.: Dec. 4, 2008) and Auto Industry: A Framework for 

Considering Federal Financial Assistance, GAO-09-247T (Washington, D.C.: Dec. 5, 2008). 

Page 2 GAO-09-553 Auto Industry
 

address in achieving long-term viability and the challenges that they face 

to become viable. 

To describe the nature and purpose of the federal assistance provided to 

the auto industry, we reviewed Department of the Treasury documents 

related to AIFP—including white papers on the Supplier Support Program 

and the Warranty Commitment Program, terms and conditions of the loans 

provided to Chrysler and GM, and disbursement reports on the amount of 

funding allocated and disbursed under the AIFP. We also interviewed 

Treasury officials to obtain further information and clarification on these 

programs. 

Scope and 

Methodology 

To identify how the federal assistance to the auto industry addresses our 

three principles for government assistance, we obtained and reviewed 

program information and loan documentation from Treasury to identify 

the goals and objectives of the assistance and the problems the assistance 

was intended to address. We reviewed the terms and conditions of the 

loan agreements to determine mechanisms in place to protect taxpayers 

from excessive or unnecessary risks and compared these mechanisms to 

the principles we have previously identified for providing financial 

assistance to large firms. We also obtained and reviewed financial 

information of the automakers to ascertain the automakers’ financial 

position. We reviewed the reports that GM and Chrysler periodically 

submitted to Treasury, as required by the loan terms, and interviewed 

Treasury officials about their reviews of these reports. We conducted 

interviews with Treasury about the loan program and agreements to 

identify the procedures established to oversee, monitor, and enforce the 

terms and conditions of the loan agreements. We also conducted 

interviews with officials from the Departments of Energy and 

Transportation to obtain information on their coordination with Treasury 

in providing and overseeing assistance to automakers; representatives 

from Chrysler, GM, Chrysler Financial Services Americas LLC (Chrysler 

Financial) and GMAC LLC (GMAC) to obtain information on how they 

determined the level of funding needed and their plans for using the 

funding; and representatives from Ford Motor Company and Ford Motor 

Credit Company to determine why they have not sought federal 

assistance.5

 

5

Ford Motor Credit Company, GMAC, and Chrysler Financial are companies that provide 

financing for consumer automotive and dealer purchases. 

Page 3 GAO-09-553 Auto Industry
 

To identify important factors for Chrysler and GM to address to achieve 

long-term viability and the challenges they face to become viable, we 

contracted with the National Academy of Sciences (NAS) to identify a 

diverse group of individuals with expertise about the past and current 

financial condition and operations of the domestic automakers, the 

restructuring of distressed companies, labor relations issues, financial 

management and analysis of distressed or restructuring companies, 

factors influencing competitiveness in the auto industry, and engine and 

vehicle technologies that may affect the auto manufacturing industry 

today as well as in the near future. We selected a panel of 17 individuals 

from among those NAS identified based on achieving a variety of expertise 

and avoiding any potential conflicts of interest. We conducted individual 

semi-structured interviews with the panelists to identify factors 

influencing the current condition of the auto industry; factors affecting 

future viability; obstacles to achieving long-term viability; and elements 

that, according to members of our panel, if contained in the plans, would 

positively or negatively influence the potential for successful restructuring 

and future viability. (Appendix I lists the panel of individuals whom we 

interviewed.) We used a content analysis to systematically analyze 

transcripts of these interviews to identify principal themes that emerged 

from the interviews. We also reviewed comments on the content of the 

restructuring plans that panelists provided to us once the plans had been 

submitted. We compared the content of the automakers’ restructuring 

plans to the criteria identified by our panel and the requirements in the 

loan agreements. To further identify challenges to achieving long-term 

viability, we reviewed Treasury’s assessment of the restructuring plans 

Chrysler and GM submitted in February. 

The views expressed by the members of our panel should be interpreted in 

the context of the following qualifications. Although we were able to 

secure the participation of a balanced, highly qualified group of 

individuals, other individuals with expertise in relevant fields could not be 

included because of the need to limit the number of interviews conducted. 

Although many points of view were represented, the panel was not 

representative of all potential views. Nevertheless, the members of our 

panel provided rich information on the current state and future of the auto 

industry and insightful comments. 

To provide additional information and context on all issues examined in 

this report, we conducted interviews with other stakeholders, including a 

representative of the International Union, United Automobile, Aerospace 

and Agricultural Implement Workers of America (UAW), representatives 

of the Association of International Automobile Manufacturers, and other 

Page 4 GAO-09-553 Auto Industry
 

knowledgeable individuals including financial analysts specializing in the 

auto sector, a lawyer knowledgeable about state franchise laws, and an 

economist specializing in labor issues. 

To ensure the accuracy and completeness of the information contained in 

the report, we asked representatives of Chrysler, Ford, GM, the UAW, and 

the Pension Benefit Guaranty Corporation (PBGC), and two members of 

our panel to review portions of a draft of this report. We also provided 

Chrysler and GM with the opportunity to review the complete draft and 

discuss their comments with us. They offered some technical corrections 

and clarifications, which we incorporated as appropriate. 

We conducted this performance audit from January 2009 to April 2009 in 

accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings, based 

on our audit objectives. We believe that the evidence obtained provides a 

reasonable basis for our findings based on our audit objectives. 

GM, a publicly traded company, was incorporated in 1916 and employs 

about 240,000 people worldwide. It has manufacturing facilities in 34 

countries and sells more than a dozen brands of vehicles in about 140 

countries.6

 Chrysler is a privately held company that was established 9 

years later, in 1925, and employs about 54,000 people worldwide, including 

at manufacturing facilities in 4 countries and vehicles assembled under 

contract in 4 others.7

 Chrysler and GM reported losses in 2008 totaling $8 

billion8

 and $31 billion,9 respectively, and there are significant concerns 

about the future of both companies. For instance, in GM’s 2008 audit 

report, its independent registered public accountant raised “substantial 

doubt” about GM’s ability to continue as a going concern due to “recurring 

Background 

 

6

GM’s core U.S. brands are Buick, Cadillac, Chevrolet, and GMC; other brands include 

Daewoo, Holden, HUMMER, Opel, Pontiac, Saab, Saturn, Vauxhall and Wuling. 

7

Chrysler’s brands include Dodge, Chrysler, and Jeep. 

8

Chrysler noted that its losses are preliminary and include non-recurring impairment and 

restructuring charges totaling $4.2 billion. Because Chrysler is privately owned, data on its 

financial condition are not currently available to the public. However, Chrysler reported 

the unaudited $8 billion loss for 2008 in its restructuring plan submitted to Treasury on 

February 17, 2009. 

9

GM’s loss was reported in its audited financial statements for 2008. 

Page 5 GAO-09-553 Auto Industry
 

losses from operations, stockholders’ deficit, and inability to generate 

sufficient cash flow to meet its obligations.” In addition, Chrysler stated in 

its restructuring plan that additional federal funds will be needed this 

spring to prevent the company from having to file for bankruptcy. 

The automakers themselves are not alone in suffering the effects of 

declining automotive sales and revenues. The economic reach of the auto 

industry in the United States is broad, with many groups affected by its 

downturn and the financial condition of the automakers. Some key groups 

include the following. 

• Autoworkers: At the end of 2007, Chrysler, Ford, and GM employed 

about 240,000 hourly and salaried workers in the United States. Thousands 

of workers have been laid off, retired, or taken buyouts in the past months 

as the automakers seek to cut their costs and excess production capacity. 

Most hourly workers are represented by the UAW, which is in discussions 

with Chrysler and GM to modify existing labor agreements to achieve cost 

reductions.10

• Suppliers: More than 500,000 workers are employed by companies in the 

United States that manufacture parts and components used by 

automakers—both domestic automakers and transplants. According to the 

Motor and Equipment Manufacturers Association, many suppliers are in 

severe financial distress, with a number having filed for bankruptcy in 

2008. Some members of our panel said that because many of these 

suppliers have relatively high costs and depend on the business of the 

Detroit 3, some of them may not have enough revenue to survive if one of 

the automakers were to cease production. This, in turn, could affect the 

automakers’ ability to obtain parts needed to manufacture vehicles. This 

dynamic has the potential to affect all automakers with production 

facilities in the United States, regardless of home country. 

• States and localities in auto manufacturing regions: The automotive 

manufacturing industry, including the Detroit 3, transplant automakers, 

and suppliers, is concentrated in certain states in the Midwest and South. 

For instance, in Michigan, 28 percent of manufacturing jobs are in the 

automotive sector, as of March 2008. Other states with a high proportion 

of jobs in this sector include Kentucky (19 percent), Indiana (14 percent), 

Ohio (13 percent), Alabama (10 percent), and Tennessee (9 percent). A 

December 2008 Brookings Institution report identified 50 metropolitan 

 

10In March, the UAW ratified changes to its 2007 labor agreement with Ford. 

Page 6 GAO-09-553 Auto Industry
 

areas, clustered primarily in the Midwest and South, that rely heavily on 

Detroit 3-related jobs.11 Although any loss of output due to the difficulties 

of the auto industry could be felt nationwide, the geographic 

concentration of the industry means certain regions will be harder hit than 

others as residents in these regions lose their jobs and the tax base 

shrinks. 

• Automaker retirees: About 600,000 individuals currently receive pension 

payments from Chrysler and GM.12 Due to the retirement benefits—

including pensions and healthcare—provided to autoworkers, established 

and enhanced through several decades of collective bargaining, the Detroit 

3 are facing a significant financial commitment. In an effort to reduce 

costs and become more competitive with the transplants, the Detroit 3 in 

2007 reached an agreement with UAW to transfer responsibility for 

administering the health plans to the union. Under this agreement, 

voluntary employee beneficiary associations (VEBAs) were created to 

manage retiree health plans starting January 1, 2010, and the automakers 

agreed to make several cash contributions of specific amounts (totaling 

about $10.3 billion for Chrysler and up to $26 billion for GM) on specific 

dates to fund the VEBAs. Chrysler and GM are currently negotiating with 

the union to provide a portion of their monetary contribution as equity in 

the companies rather than cash. 

• Dealerships: The Detroit 3 have about 14,000 U.S. dealerships, most of 

which are independently owned and operated. Many are struggling 

financially due to low sales and lack of credit to purchase inventory from 

the automakers. In addition, in comparison to transplants, the Detroit 3 

automakers generally have more dealers and sell fewer vehicles per 

dealer. According to Automotive News, more than 900 dealers have closed 

during the last year, due in part to the current economic conditions. 

Employment at dealers—with more than 1 million jobs—has also fallen. 

• Bondholders and other creditors: Individual and institutional investors 

hold about $27.2 billion of unsecured GM bonds, and GM is currently 

engaged in negotiations with its bondholders to reduce this debt by at 

least two-thirds through an exchange of the bonds into company equity, or 

other appropriate means. Chrysler, which does not have significant 

 

11Detroit 3-related jobs account for 1 percent or more of the workforce in these 50 

metropolitan areas. Howard Wial, “How a Metro Nation Would Feel the Loss of the Detroit 

Three Automakers,” Metropolitan Policy Program at Brooking (Dec.12, 2008). 

12Data on pension recipients are from March 2009 for Chrysler and December 2008 for GM. 

Page 7 GAO-09-553 Auto Industry
 

unsecured public debt,13 has proposed debt restructuring to three creditor 

groups, which would convert $5 billion of debt to equity. 

• Shareholders: GM, as a publicly traded company, has experienced a 

significant decline in the price per share of its common stock. In October 

2007, GM’s equity traded at levels over $40 per share; in March 2009 the 

equity traded for a low of $1.45 per share. Chrysler, which is privately 

owned, currently has two shareholders.14 Chrysler reported in its 

restructuring plan that these shareholders have expressed willingness to 

relinquish their current equity and to convert their debt to equity. To the 

extent that restructuring efforts result in additional equity, the interest of 

GM’s and Chrysler’s current shareholders’ will be diluted, which would 

affect the voting of shares and any future dividends. 

The sharp downturn in the U.S. auto industry has been influenced by a 

convergence of factors, including both those within and outside the 

control of the automakers. According to reports on the auto industry and 

individuals with expertise in the industry, the following factors 

contributed to this downturn. 

• Economic factors contributing to the downturn include the weak 

economy and competition from transplants, which have led to decreased 

sales and market share. The U.S. economy has been in recession since 

December 2007, with increasing unemployment and declining personal 

wealth. During this time period, light vehicle sales in the United States—

including domestic and foreign brands—have dropped by about half, with 

the decrease disproportionately affecting the Detroit 3.15 For example, 

Detroit 3 sales in the United States dropped by 49 percent from February 

2008 through February 2009, whereas U.S. sales for Honda, Nissan, and 

Toyota dropped 39 percent during this period. Additionally, the Detroit 3 

have been losing U.S. market share to foreign automakers for several 

years. For instance, GM’s U.S. market share for total light vehicle retail 

sales fell from 27.2 percent in 2004 to 22.1 percent in 2008, while during 

 

13According to Chrysler, $20 million of unsecured public debt remains outstanding 

following a tender offer made by Chrysler in 2007 for the purpose of eliminating all such 

debt. 

14An affiliate of Cerberus Capital Management owns 80.1 percent of Chrysler Holding LLC, 

and Daimler AG indirectly owns the remaining 19.9 percent. Chrysler Holding LLC, in turn, 

indirectly owns 100% of Chrysler LLC. 

15Light vehicle refers to passenger cars, multipurpose passenger vehicles, trucks, and buses 

with a gross vehicle weight rating of up to 10,000 pounds. 

Page 8 GAO-09-553 Auto Industry
 

the same period, the market share of Japanese auto manufacturers grew 

from 29.8 percent to 38.9 percent. In addition, the recession has made 

credit less available, which may have limited the ability of auto 

manufacturers and suppliers to finance their businesses, consumers to 

purchase cars, and dealers to obtain loans to sustain their inventories. 

Figure 1 illustrates the financial relationships among suppliers, 

automakers, dealers, consumers, and financing companies. 

Figure 1: Key Financial Relationships in the Auto Industry 

Suppliers Automakers Dealers Consumers

Financing

companies

Suppliers are paid 

by automakers

45-60 days after 

receipt of parts

Automakers are 

paid when 

dealers purchase 

vehicles

Dealers are paid 

when consumers

purchase 

vehicles

Financing companies (such as GMAC and 

Chrysler Financial) provide financing to 

help dealers pay for their inventories and 

consumers purchase vehicles

Source: GAO.

• Management decisions that, according to members of our panel, have 

contributed to the automakers’ financial condition include labor 

agreements that resulted in wages and retiree benefit costs higher than 

those of transplants and a heavy reliance on sales of light trucks and sport 

utility vehicles (SUV), which are more profitable than cars.16 Additionally, 

offering consumer incentives and discounts over the past few years 

stimulated demand but contributed to an erosion of the value of the 

 

16A UAW representative, in commenting on this statement, disagreed, saying that the 

difficulties facing the Detroit 3 are more a result of the sharp drop in vehicle sales. 

Page 9 GAO-09-553 Auto Industry
 

brands and to average purchase prices that are lower than comparable 

foreign cars. As a result of the lower purchase prices, Chrysler and GM 

have to sell more cars in order to cover costs. 

In December 2008, the chief executive officers (CEOs) of Chrysler, Ford, 

and GM testified before Congress to request financial assistance from the 

federal government.17 In their testimonies, the CEOs from Chrysler and 

GM stated that without federal assistance, their companies would likely 

run out of the cash needed to continue operating. The Chrysler and GM 

CEOs further testified that they believed it would be difficult or impossib

to return to financial solvency while operating under bankruptcy becaus

consumers would be reluctant to make a long-term purchase such as an 

automobile from a company whose future was in question. 

le 

e 

We have previously identified three fundamental principles that can serve 

as a framework for considering federal government financial assistance to 

large firms. According to these principles, the federal government should 

(1) identify and define the problem, (2) determine the national interests 

and set clear goals and objectives that address the problem, and (3) 

protect the government’s interests.18 Table 1 provides a description of 

these principles as they apply to the assistance provided to the auto 

industry. 

Table 1: GAO’s Principles for Government Assistance as Applied to the Auto 

Industry Financing Program 

Principle Applicability to AIFP 

Identify and define the problem Clearly identify and define the problems 

confronting the industry, separating out 

those that require an immediate response 

from structural challenges that will take 

longer to resolve. 

Determine the national interests, and set 

clear goals and objectives that address the 

problem 

State the objectives and goals of the 

program to help determine which financial 

tools are best, provide criteria for program 

decisions, and serve as a basis for 

monitoring progress. 

 

17Ford subsequently determined that it would not request loans from Treasury at this time. 

18GAO-09-242T. 

Page 10 GAO-09-553 Auto Industry
 

Principle Applicability to AIFP 

Protect the government’s interest • Achieve concessions from 

management, labor, suppliers, dealers, 

and creditors. 

• Institute controls over management. 

The government must have the 

authority to approve an aid recipient’s 

financial and operating plans and new 

major contracts. 

• To the extent feasible, the government 

should require that the recipient 

provide adequate collateral and that 

the government be in a first lien 

position. 

• The government should receive 

compensation through fees or equity 

participation for risk. 

• Accountability should be built in so that 

Congress and the public can have 

confidence that the assistance is used 

in a manner consistent with the 

identified objectives. 

Source: GAO. 

In an attempt to help stabilize the U.S. automotive industry and avoid 

disruptions that would pose systemic risk to the nation’s economy, in 

December 2008 Treasury established AIFP and agreed to provide Chrysler 

and GM with loans of $4 billion and $13.4 billion, respectively.19 These loans 

were intended to allow the automakers to continue operating through the first 

quarter of 2009 while working out details of their plans to achieve and sustain 

long-term viability, recognizing that after that point, additional loans or other 

steps would be needed. According to Chrysler and GM officials, the 

companies have been using the loans to cover routine operating costs. 

Treasury Has 

Established Programs 

to Help Stabilize the 

Auto Industry 

As a condition of the December loan agreements, Chrysler and GM were 

required to submit restructuring plans to Treasury in February that describe 

actions the automakers would take to achieve and sustain long-term viability. 

These plans were required to show how the automakers would repay the 

loans, comply with federal fuel economy requirements, develop a product mix 

and cost structure that are competitive in the U.S. marketplace, and become 

 

19Ford requested a $9 billion line of credit to protect against further industry downturns, 

but company officials have said that they do not intend to use this line of credit. 

Page 11 GAO-09-553 Auto Industry
 

financially viable. Chrysler and GM submitted these plans on February 17, 

2009, and requested up to an additional $5 billion and $16.6 billion in federal 

financial assistance, respectively, because of the continued sluggish economy 

and lower than expected revenues.20

To oversee the federal financial assistance—including evaluating the 

restructuring plans—and to make decisions about future assistance to the 

automakers, the loan agreements provided for a presidential designee. 

Rather than appoint a presidential designee, President Obama on February 

20, 2009, announced that he was establishing the Presidential Task Force 

on the Auto Industry to advise him and the Secretary of the Treasury on 

issues impacting the financial health of the industry.21 Under the terms of 

the loan agreements, since no presidential designee was appointed, the 

Secretary of the Treasury will make decisions on all matters involving 

financial assistance to the automakers, including future decisions about 

providing additional assistance to Chrysler or GM. 

On March 30, 2009, the President announced that the restructuring plans 

submitted by Chrysler and GM did not establish a credible path to viability 

and do not justify substantial new investment of taxpayer dollars. The 

President outlined a series of actions that each company must undertake 

to receive additional federal assistance. The President’s announcement 

further said that Treasury officials will work closely with Chrysler and GM 

as the companies take steps to achieve the following. 

Treasury’s Key Findings on the 

Viability of Chrysler and GM

Treasury determined that Chrysler’s and 

GM’s restructuring plans did not establish a

credible path to viability.

For Chrysler, Treasury identified the 

following challenges:

• A limited global presence that leads to 

greater vulnerability to local economic 

fluctuations and the inability to leverage 

economies of scale.

• Quality scores that lag behind those of 

competitors.

• A product mix that does not cover 

smaller-car segments.

• Lack of investment in manufacturing 

practices that are critical to long-term 

profitability.

For GM, Treasury identified the following 

challenges:

• Over reliance on trucks and SUVs for a

large share of profits.

• Substantial costs associated with retiree 

benefits, which will continue to grow 

through the restructuring period.

• Closing underperforming dealers at too 

slow a rate.

Chrysler: According to the Task Force, Chrysler is not viable as a stand-alone 

company and must find a partner to achieve long-term viability. Chrysler and 

the European automaker Fiat are in discussions about such a partnership, but 

additional work must be completed to result in a binding agreement and gain 

 

20These amounts are in addition to the loans Chrysler and GM are seeking through the 

Department of Energy for advanced technology vehicles. These loan applications are 

discussed later in this report. 

21The Task Force is a cabinet-level group that includes the secretaries of Transportation, 

Commerce, Labor, and Energy. It also includes the Chair of the President’s Council of 

Economic Advisers, the Director of the Office of Management and Budget, the 

Administrator of the Environmental Protection Agency, and the Director of the White 

House Office of Energy and Climate Change. The President has directed the Secretary of 

the Treasury and the Director of the National Economic Council to lead the Task Force. 

Also, Treasury has retained two additional individuals to assist the Task Force—a senior 

adviser to the Task Force who has experience in labor-management relations and a 

counselor to the Secretary who will advise on issues related to the auto industry. According 

to Treasury officials, the Task Force is advisory and has no decision-making authority. 

Page 12 GAO-09-553 Auto Industry
 

the necessary support of stakeholders. Treasury agreed to provide Chrysler 

with up to $500 million in loans under TARP to fund its operations for 30 days 

while the company takes additional steps toward restructuring. If Chrysler is 

successful in completing the additional steps, Treasury said it will consider 

investing up to an additional $6 billion in Chrysler. If not, Treasury will not 

provide further federal assistance, which, according to Treasury officials, 

would likely result in a liquidation bankruptcy. 

GM: The Task Force concluded that GM can be a viable company if it 

develops a more aggressive restructuring plan and implementation 

strategy. Treasury agreed to provide GM up to $5 billion in loans under 

TARP to fund its operations for 60 days while it undertakes the additional 

work. Treasury also announced this restructuring effort would entail 

leadership changes at GM and increased involvement by Treasury and its 

outside advisers. If GM submits a satisfactory restructuring plan and 

implementation strategy by the end of the 60 days, Treasury will invest an 

unspecified amount of additional federal funds to help with GM’s 

restructuring efforts. If, however, GM fails to meet these conditions, 

according to Treasury, it will not invest additional federal funds, creating 

the possibility that GM will file for a reorganization bankruptcy. GM’s CEO 

stated that the Treasury’s determination makes a bankruptcy filing for GM 

more “probable” than prior to the announcement. 

Several new initiatives to help stabilize the auto industry and bring relief 

to those affected by the industry were announced in March 2009. The first 

two initiatives will be administered through AIFP and will be funded under 

TARP. The third initiative will seek to leverage federal funding available 

through other programs. 

• Supplier Support Program: Under this program, Chrysler and GM will 

receive funding for the purpose of ensuring payment to suppliers. The 

program is designed to ensure that automakers receive the parts and 

components they need to manufacture vehicles and that suppliers have 

access to credit from lenders. The automakers will designate certain 

suppliers who are most critical to their operations to receive guaranteed 

payment for delivered supplies. After agreeing to participate in the 

program, the supplier sells eligible receivables to a special purpose entity 

established by the automaker to fund the program. Prior to the sale of the 

receivable, the automaker owes the supplier a payment for the receivable 

at a due date. If the supplier sells a receivable to the program, it receives 

payment from the special purpose entity, which becomes the owner of the 

receivable. If the supplier chooses to receive cash up front, a service fee of 

3 percent is deducted from the payment; if the supplier chooses to receive 

payment on the receivable’s due date—typically 45 to 60 days after 

delivery—the service fee is 2 percent. On the due date, the automaker is 

Page 13 GAO-09-553 Auto Industry
 

responsible for paying the program servicer the amount due for the 

delivery. Treasury has made up to $5 billion available through this 

program.22

• Warranty Commitment Program: This program is intended to mitigate 

potential consumer reluctance to buy a vehicle from a financially 

distressed company by providing funding to guarantee the warranties on 

new vehicles purchased from participating auto manufacturers during the 

restructuring period.23 Under this program, participating automakers 

(currently Chrysler and GM) and Treasury will contribute cash to a 

separate special purpose company. The total amount of cash to be 

contributed will equal 125 percent of the expected cost of paying for 

warranty service on each covered vehicle, with the automakers 

contributing 15 percent of the projected costs and Treasury providing a 

loan to contribute 110 percent of the projected cost. Should a 

participating automaker go out of business, a program administrator will 

be appointed to identify a qualified service provider to supply warranty 

services for vehicles sold during the restructuring period in exchange for 

the assets of the special purpose company. Treasury officials estimate the 

cost of this program to be about $1.1 billion. According to several 

members of our panel, addressing consumers’ concerns about warranties 

is important because, unlike buying a plane ticket from a bankrupt airline, 

purchasing a vehicle is a significant and long-term investment. Thus, 

consumers may avoid purchasing vehicles from an automaker facing the 

possibility of bankruptcy because they are concerned their warranties may 

not be honored, further depressing vehicle sales. 

• Initiative to Support and Revitalize Auto Industry Workers and 

Communities: This initiative is intended to coordinate government efforts in 

providing assistance to communities and workers affected by the loss of auto 

manufacturing jobs. The director responsible for the initiative is tasked with 

working with all parties to ensure that communities and workers take 

advantage of all available government resources and to work with 

government and elected officials in helping retool and revitalize the 

economies of affected communities. In carrying out his duties, the director is 

charged with exploring all possible strategies, including seeking to maximize 

the use of funds from the American Recovery and Reinvestment Act of 2009 

 

22If Chrysler or GM file for bankruptcy, Treasury has the right to cease accepting 

receivables into the program. 

23In April, the government of Canada announced a similar program to guarantee warranties 

on Chrysler and GM vehicles sold in Canada. The program is valued at about $150 million. 

Page 14 GAO-09-553 Auto Industry
 

(Recovery Act), deploying rapid response units to communities facing plant 

closings, attracting new industries to the region, and working with 

stakeholders on legislative efforts to direct emergency support to the affected 

communities.24

The programs that Treasury has announced for the auto industry— 

including the automakers, auto financing companies, and other 

stakeholders—as of April 2009, are summarized in table 2. 

Table 2: Components and Funding Levels under the Automotive Industry Financing 

Program 

Component Description Funding level

Automaker loans Loans to Chrysler and GM to 

fund their operations while 

they take steps to restructure 

their companies 

$22.9 billiona

Assistance related to auto finance 

companies 

Funding to assist Chrysler 

Financial and GMAC 

$7.4 billionb

Supplier Support Program The program will provide 

funding to guarantee suppliers 

are paid for the products 

they ship to participating 

automakers. 

$5.0 billionc

Warranty Commitment Program The program will set aside 

funds to guarantee warranties 

for vehicles Chrysler and GM 

sell during restructuring. 

$1.1 billionc

Total $36.4 billion

Source: GAO analysis of Treasury information. 

a

This includes the $17.4 billion in loans agreed to in December 2008, which have been fully 

disbursed, and the up to $500 million and up to $5 billion that Treasury is providing to Chrysler and 

GM during their additional 30- and 60-day restructuring periods. Treasury may provide more 

assistance based on the outcome of the restructuring efforts. 

b

This amount includes an $884 million loan to GM to allow the company to participate in GMAC’s new 

rights offering related to its reorganization as a bank holding company; a $5 billion purchase of 

preferred stock investment plus warrants from GMAC; and a loan of $1.5 billion to a special purpose 

entity created by Chrysler Financial to finance the extension of new consumer automotive loans. A 

separate subsidiary of the Chrysler Holdings, Chrysler Financial Company provides financing to 

automotive dealers and consumers. Chrysler and Chrysler Financial operate independently from each 

other under separate managements. In April 2009, Treasury offered additional financial assistance to 

Chrysler Financial, but the company declined the assistance. 

c

These amounts are Treasury’s estimated costs of the programs. 

 

24Pub. L. No. 111-5, 123 Stat. 115 (2009). 

Page 15 GAO-09-553 Auto Industry
 

Treasury identified as a problem of national interest the financial 

condition of the U.S. automakers and its potential to affect financial 

market stability and the economy at large. In determining what actions to 

take to address this problem, Treasury concluded that Chrysler and GM’s 

lack of liquidity needed immediate attention and, in order to prevent a 

significant disruption of the automotive industry, provided short-term 

bridge loans to the automakers. To address the industry’s structural 

challenges, which will take more time to resolve, Treasury required 

Chrysler and GM to prepare restructuring plans that describe the changes 

the automakers intend to make in order to achieve long-term financial 

viability. 

In Providing 

Assistance to the Auto 

Industry, Treasury 

Identified Goals and 

Objectives for the 

Assistance and Took 

Steps to Protect the 

Government’s Interest 

Treasury established goals and objectives for the federal financial 

assistance in the loan agreements and other program documentation. For 

example, the loan agreements state that funding should be used to enable 

the automakers to develop a viable and competitive business and develop 

the capacity to produce energy-efficient advanced technology vehicles, 

among other things. Although Treasury identified goals for the assistance, 

it will need to determine how to assess goals that rely on concepts that are 

not clearly defined and to evaluate the relevant trade-offs associated with 

the goals that appear to conflict. For example, the goals stated in the loan 

agreements include concepts that were not defined, such as rationalized 

manufacturing capacity and competitive product mix. 

If additional assistance is provided to the automakers, it will be important 

for Treasury to clearly articulate what it intends to achieve with this 

assistance. We have previously reported that it is important for 

policymakers to identify objectives and goals for federal assistance that 

are clear, concise, and consistent. Such objectives and goals can help 

program administrators and Congress determine which financial tools are 

needed and most appropriate for the industry and for company-specific 

circumstances; provide criteria for program decisions; and serve as a basis 

for monitoring progress. In addition to lacking clear definitions, some of 

Treasury’s goals may work at cross purposes, at least in the short-term, 

and thus will require an assessment of the relevant trade-offs among the 

goals. For example, according to members of our panel, producing 

advanced technology vehicles has the potential to conflict with the goal of 

developing a viable business in the near term because the costs of 

designing, developing, and producing these types of vehicles are greater 

than the revenue generated in the initial years of sales. We have previously 

Page 16 GAO-09-553 Auto Industry
 

reported that it is important that policymakers choose clearly among 

potentially conflicting goals of providing federal financial assistance.25

Without knowing the primary goal, it is difficult to decide what steps are 

appropriate and to judge whether a program has succeeded. 

In developing the terms and conditions of the loans to Chrysler and GM, 

Treasury included provisions to manage risk and protect the government’s 

interest. Table 3 describes these provisions. Treasury also established an 

internal working group—referred to as the auto team—to oversee the 

AIFP and provide analysis in support of the Task Force and the Secretary. 

Table 3: Loan Terms and Conditions Designed to Manage Risk and Protect the 

Government’s Interest 

Concessions from stakeholders 

• Executive compensation limitations: Restrictions on compensation for senior 

executive officers include recovery of any bonus or incentive payments based upon 

materially inaccurate statements of earnings, limiting tax deductions on executive 

compensation over $500,000 per executive, and prohibiting golden parachute 

payments.a

• Agreements with debt holders: The automakers must use their “best efforts” to 

convert at least two-thirds of their unsecured public debt through a bond exchange 

or other appropriate means. 

• Labor concessions: The automakers must use their “best efforts” to reduce the 

compensation of their workers to be comparable to workers at transplant facilities, 

align their work rulesb

 more closely with those of transplants, and close the Jobs 

Bank programs.c

• Retiree concessions: The automakers must use their “best efforts” to reach 

agreement with the union to provide at least one-half of the automakers’ future 

payments or contributions for retiree health plans (VEBAs) in the form of company 

stock. 

 

25GAO, Guidelines for Rescuing Large Failing Firms and Municipalities, 

GAO/GGD-84-34 (Washington, D.C.: Mar. 29, 1984). 

Page 17 GAO-09-553 Auto Industry
 

Controls over management 

• Approval of material transactions: Treasury must approve any fundamental changes 

to the automakers’ companies and certain transactions for more than $100 million in 

value and outside the ordinary course of business. 

• Restrictions on expenses: The automakers must maintain and implement an 

expense policy with limitations on, among other things, sponsoring conferences and 

events, travel costs, office renovations, and entertainment. In addition, the 

automakers must provide for oversight and mechanisms to ensure compliance with 

the expense policy. 

• Restructuring plans: The automakers are required to prepare restructuring plans 

outlining the actions they will take to meet the requirements set forth in the loan 

agreements, including concessions from various stakeholders. Treasury must 

approve these plans and the actions the automakers have taken toward 

implementing the plans before additional assistance is provided.d

• Periodic reporting requirements: The automakers must submit periodic financial 

reports including weekly rolling cash forecastse

 and biweekly liquidity status reports,f

as well as monthly certifications of expense policy conformance and quarterly 

certification of compliance with executive compensation provisions. 

Collateral 

• Liens: In negotiations prior to signing the loan agreements, Treasury attempted to 

obtain senior liens on all unencumbered assets at both GM and Chrysler.g

Compensation for risk 

• Compensation: The automakers agreed to provide Treasury with compensation in 

the form of warrants and notes in the case of GM and additional notes in lieu of 

warrants in the case of Chrysler. Both automakers are required to repay the loans 

with interest. 

Source: GAO analysis of Treasury information. 

a

A golden parachute is defined as any payment in the nature of compensation to a senior executive 

officer made on account of involuntary termination or in connection with any bankruptcy filing, 

receivership, or insolvency of the institution to the extent that the present value of the payment equals 

or exceeds three times the executive’s average annual compensation over the preceding 5 years. 

b

Work rules generally refer to those sections of a contract that define issues such as hours to be 

worked and what work is done by what employees. 

c

Under their Jobs Bank programs, the Detroit 3 continue to provide wages and benefits to workers 

that have been laid off. 

d

As discussed above, Chrysler and GM submitted these plans on February 17, and Treasury 

announced on March 30 that additional steps must be taken before further assistance is provided. 

e

This forecast outlines for each of the thirteen weeks both operating and non-operating cash receipts 

and disbursements which result in a net cash flow for the week that increases or decreases the 

previous week’s ending cash balance and results in the current cash balance. 

f

This report details the company’s current liquidity profile; expected liquidity needs; any material 

changes in the company’s business since the date of the last status report; any transfer, sale, pledge 

or other disposition of any material asset since the date of the last status report; and any changes to 

the company’s capital structure. 

g

A lien is a legal right that a creditor has in another’s assets, usually lasting until a debt is repaid. 

Senior liens have priority over other liens on the same asset. 

Page 18 GAO-09-553 Auto Industry
 

While the loan agreements include a number of terms and conditions to 

help protect the government’s interests, some potential risks, as described 

below, remain. 

Concessions from stakeholders. The loan agreements called for 

stakeholder concessions, including agreements from creditors to reduce 

overall debt, from labor for more competitive wage structures, and from 

retirees for modifications to VEBA contributions, as well as limits on 

executive compensation. 

Agreements with debtholders: According to Chrysler officials, the 

company does not have substantial public debt, but it said in its 

restructuring plan that it would work with three groups of creditors, 

including Treasury, senior lien bank lenders, and the UAW VEBA, to 

reduce debt by $5 billion. GM stated in its restructuring plan that it was 

negotiating a potential debt-for-equity exchange with an unofficial 

committee of GM bondholders.26 As of April 22, although the automakers 

have begun negotiations with their bondholders (in the case of GM) and 

creditors (in the case of Chrysler) agreement has not been reached. 

Labor and retiree concessions: Chrysler’s and GM’s negotiations with the 

UAW continue, and tentative agreements have been reached on 

modifications to labor costs and work rules. For instance, General Motors 

and the UAW reached a tentative agreement modifying wages, benefits and 

work rules to become more cost competitive with transplants. The net 

effect of these changes is a reduction in the company’s annual hourlyrelated cost by approximately $1.0 billion to $1.1 billion, and potentially 

more, according to GM. As of April 22, agreements on restructuring 

Chrysler and GM’s monetary contributions to fund retirees’ health care 

plans have not been reached. 

Executive compensation: According to Treasury officials, they are waiting 

for the Office of Management and Budget to approve additional 

regulations that Treasury has drafted on executive compensation as 

required by the Recovery Act before establishing a process to monitor 

compliance with the executive compensation requirements. Establishing 

procedures to oversee compliance with such requirements is important to 

 

26According to a GM official, as of March 2009, GM had identified about 182,000 

bondholders. However, they are certain that not all bondholders have been identified. 

Therefore, the total number of bondholders is expected to be higher. 

Page 19 GAO-09-553 Auto Industry
 

help ensure that the automakers adhere to conditions set forth in the loan 

agreements. 

Collateral. Treasury’s goal in its negotiations with Chrysler and GM prior 

to signing the loan agreements was to obtain senior liens whenever 

possible and, for assets already encumbered, to obtain junior liens. For 

Chrysler, because most assets were already encumbered with senior liens, 

Treasury was only able to obtain a senior lien on a portion of the 

company’s parts inventory, known as Mopar.27 For GM, Treasury obtained 

a senior lien on cash, inventory, real property, equity in domestic and 

foreign subsidiaries, and intellectual property. Treasury also received 

junior liens on additional assets from both companies. According to 

Treasury officials, Treasury cannot put an estimated dollar value on either 

company’s pledged collateral because the value of certain items, such as 

cash and inventory, is constantly changing. Treasury officials said that the 

limited amount of assets on which the government has senior liens could 

become an issue if the companies enter bankruptcy or otherwise liquidate 

their assets, although the situation differs somewhat for the two 

companies. 28 According to Treasury, in the case of Chrysler, the sale of the 

assets would result in cash equal to only a small percentage of the value of 

the loans. Moreover, because Treasury placed liens on all unencumbered 

assets to secure the December loans, it will be difficult or impossible for 

the government to obtain additional collateral for any new loans that may 

be provided. In its restructuring plan, GM proposed that additional federal 

assistance could be in the form of a preferred equity investment in the 

company, a revolving facility,29 and a loan secured by the collateral already 

used to support the current $13.4 billion loan. Chrysler did not propose 

collateral options for any additional federal assistance in its restructuring 

plan. 

In considering whether the federal government should provide additional 

assistance to Chrysler and GM, it is important to assess the government’s 

 

27Chrysler reported in its restructuring plan that the Mopar inventory has a recovery value 

between $149 million and $261 million. 

28In commenting on a draft of this report, a GM official stated that in a normally functioning 

credit market, the assets GM provided as collateral would likely have supported similar 

loans from commercial lenders, although GM did not have formal valuation data to support 

this statement. 

29A revolving facility is a type of loan allowing a borrower to draw down and repay amounts 

(up to a limit) for short periods throughout the life of the loan. Amounts repaid can be reborrowed, thereby providing some flexibility to the borrower. 

Page 20 GAO-09-553 Auto Industry
 

overall financial exposure should one or both of the automakers fail to 

achieve long-term viability. A potential area of significant financial 

exposure is the government’s liability for terminated pension plans. 

Specifically, the Pension Benefit Guaranty Corporation (PBGC)—a selffunded government corporation—insures private-sector defined benefit 

plans.30 When PBGC takes over a terminated pension plan, it assumes 

responsibility for future benefit payments to the plan’s participants, up to 

the limits set in law.31 An underfunded pension plan that is insured by 

PBGC may be terminated only if certain statutory criteria are met. In 

general, an employer is permitted to terminate an underfunded plan only if 

it can demonstrate that it is in serious financial distress and cannot 

continue in business or reorganize (if in bankruptcy) unless the pension 

plan is terminated. 

The pension plans of Chrysler and GM pose considerable financial 

uncertainty to PBGC. In the event that Chrysler or GM cannot continue to 

maintain their pension plans—such as in the case of liquidation or an asset 

sale—PBGC may be required to take responsibility for paying the benefits 

for the plans, which are currently underfunded by a total of about $29 

billion.32 Although it is impossible to know what the exact claims to PBGC 

would be if it took over Chrysler’s and GM’s pension plans, doing so would 

likely strain PBGC’s resources, because the automakers plans’ represent a 

 

30PBGC was established by the Employee Retirement Income Security Act of 1974. Pub. L. 

No. 93-406, 88 Stat. 829 (29 U.S.C.§§ 1001- 1461). 

31PBGC’s single-employer insurance program guarantees participant benefits up to $4,500 

per month for age-65 retirees of plans terminating in 2009, with lower guarantees for those 

who retire before age 65. Additionally, benefit increases arising from plan amendments in 

the 5 years immediately preceding plan termination are not fully guaranteed, although 

PBGC will pay a portion of these increases. A similar 5-year phase-in limit applies to 

benefits payable upon the permanent closing of a plant or similar event. PBGC is also 

restricted from paying certain supplemental benefits, such as temporary benefits payable 

from early retirement to the date a retiree becomes eligible for Social Security benefits. 

These temporary supplemental benefits are generally not guaranteed. 

32Estimates of pension funding levels vary based on the methods and assumptions used. 

According to PBGC, GM’s plans were underfunded by $20 billion and Chrysler’s by $9.3 

billion on a termination basis as of November 30, 2008, for GM and January 1, 2009, for 

Chrysler. Termination liability reflects the cost to a company of paying an insurer to meet 

its pension obligations should the plan terminate. This is calculated by using actuarial 

assumptions PBGC makes including interest and mortality. Termination liability is often 

higher than liability calculated for other purposes. According to GM’s financial statements, 

its U.S. pension plans were underfunded by $13.6 billion as of December 31, 2008; 

according to information provided by Chrysler, its U.S. pension plans were underfunded by 

$3.6 billion as of December 31, 2008.

Page 21 GAO-09-553 Auto Industry
 

significant portion of the benefits it insures. Further, from an 

administrative standpoint, PBGC would be presented with an 

unprecedented number of assets to manage as well as benefit liabilities to 

administer.33 To the extent these additional claims markedly increase 

PBGC’s accumulated deficit and decrease its long-run liquidity, there 

could be pressure for the federal government to provide PBGC financial 

assistance to avoid reductions in guaranteed payments to retirees or 

unsustainable increases in the premium burden on sponsors of ongoing 

plans.34

In general, we found that Chrysler’s and GM’s February restructuring plans 

contain some of the key factors our panel of individuals with auto industry 

expertise identified as important for achieving viability, such as reducing 

the number of models and brands and rationalizing dealerships. However, 

the plans do not fully address all of the considerations that members of the 

panel identified, which are discussed below. Treasury identified similar 

concerns and concluded that Chrysler and GM need to establish a new 

strategy for long-term viability in order to justify substantial additional 

investment of federal funds. Achieving viability may be difficult because of 

a number of challenges facing the automakers, including some outside of 

their control. 

Automakers Have 

Addressed Some of 

the Factors Important 

for Achieving 

Viability, and Many 

Challenges Remain 

Chrysler’s and GM’s 

February Restructuring 

Plans Do Not Fully 

Address Factors Needed to 

Achieve Viability 

Reducing the number of brands and models 

About half of the members of our panel said that reducing the number of 

brands and models would be a key factor in achieving financial viability. 

Some of the cited advantages of eliminating brands and models include 

reducing intracompany competition for sales of similar models, 

eliminating associated costs such as factory tooling and product 

development, and focusing remaining resources on fewer models for 

 

33For example, we estimate that GM’s and Chrysler’s plans include roughly 900,000 

participants, both those receiving benefits now and those who have earned benefits 

payable in the future, which would increase the total number of PBGC’s current or future 

beneficiaries by nearly 80 percent. Additionally, PBGC would pay all the plans’ benefit 

promises, up to certain limits set by Congress. These limits mean that some individuals, 

typically younger retirees, would see reduced benefits. 

34PBGC has available a $100 million line of credit from the U.S. Treasury for liquidity 

purposes if its self-generated funds are insufficient to meet operating cash needs in any 

period. 

Page 22 GAO-09-553 Auto Industry
 

greater improvements in quality, brand image, and performance. One 

panelist further noted that eliminating brands and models also eliminates 

dealers, another cost savings, although as discussed below, there are costs 

associated with closing dealers that can be difficult to estimate. 

According to its February plan, Chrysler has reduced its number of vehicle 

models by seven. However, some members of our panel criticized 

Chrysler’s product mix; for example, one panelist noted that most of 

Chrysler’s product line contains older models and that to be competitive 

the company needs to introduce more new products in 2009. Another 

noted that Chrysler has plans for only one midsize model and no luxury 

models to compete with models from other companies. GM’s February 

plan proposes to reduce its brands to the four core brands that account for 

more than 90 percent of the company’s U.S. aggregate contribution margin 

(revenue less variable cost) by selling or phasing out three brands.35 One 

panelist noted that GM’s focus on the remaining four brands is a good 

long-term strategy, although another noted that this may cause difficulties 

in short-term sales because consumers may be unlikely to buy cars from a 

brand that is being discontinued. GM’s plan also includes a total reduction 

in the number of models by 25 percent, including the reduction of models 

from brands that GM is planning to sell or phase out. Within the planned 

overall reduction in the number of models, GM is planning to introduce 

five new hybrid and plug-in models by 2012, bringing the total of such 

models to 14. These new models would include at least one extended 

range electric vehicle;36 however, members of our panel cautioned that this 

electric model may not sufficiently improve GM’s viability because the car 

is expected to be priced too high to result in substantial sales. 

Treasury identified similar challenges related to both Chrysler’s and GM’s 

product mixes. According to Treasury, given that Chrysler and GM rely on 

profits from trucks and SUVs, which typically have higher profit margins 

than smaller vehicles, both companies face challenges due to the 

 

35Additionally, one existing brand would become a niche brand. 

36An extended range electric vehicle has an electric motor that turns the vehicle’s wheels 

and is powered by a battery that is charged from an outlet. It also has a small internal 

combustion engine that is fueled with gasoline or other alternative fuel, but, in this case, 

the engine acts as a generator for the electric motor. 

Page 23 GAO-09-553 Auto Industry
 

vulnerability of demand for these vehicles based on fuel prices.37 Treasury 

also concluded GM is currently burdened with underperforming brands 

and models and that GM’s plan does not act aggressively enough to curb 

these problems. Treasury noted that although the decision to sell or phase 

out three brands is an important step, GM is late in taking this step. 

Additionally, Treasury determined that GM’s current plan retains too many 

unprofitable models that have negative effects on GM’s operations. 

Rationalizing dealership networks 

Half of the panelists considered decreasing the size of the domestic 

automakers’ dealership networks to be an important factor for future 

viability, with several noting that the networks are too large to be 

supported by the sales levels of recent years. Today, Detroit 3 

dealerships—many of which are independently owned and operated—are 

more numerous and, in general, sell half or fewer vehicles per dealership 

than transplant dealerships. As one panelist noted, higher sales per store 

allow for a greater return on the dealer’s fixed costs of running the 

business, allowing for more investment in facilities and advertising—

which ultimately benefits the automaker by improving the price for which 

its cars can be sold. 

Chrysler’s plan for reducing dealerships includes merging its three 

brands—Chrysler, Jeep, and Dodge—into combined dealerships rather 

than having separate dealerships for each brand. Although the plan 

indicates that Chrysler has reduced its number of dealerships by about 700 

since 2004, the plan does not indicate how many additional dealerships 

can be eliminated through combined dealerships. A Chrysler official also 

noted that because of unfavorable market conditions, many dealers are 

choosing to close or consolidate with other dealers. GM has already 

reduced the size of its dealership network and plans to further reduce it 

from its 2008 level of 6,246 to 4,100 in 2014. GM’s plan also indicates 

specifically which brands and locations (metropolitan or rural markets, for 

instance) will be targeted for reductions. Several members of our panel 

told us that eliminating dealerships against their will would be challenging 

due to state franchise laws that protect dealers, as discussed later in this 

report, and therefore the companies would need to negotiate with the 

 

37In commenting on a draft of this report, a GM official noted that for all automakers, SUVs 

and trucks generally have higher profit margins than cars. In addition, the official said that 

GM’s increased emphasis on smaller cars was evident by 2007 and that GM had promoted 

its ability to deliver fuel efficient cars as early as 2004. 

Page 24 GAO-09-553 Auto Industry
 

dealers. Chrysler’s plan does not discuss such negotiations and associated 

costs, such as buying back dealer inventory; however, GM’s plan 

acknowledges that each negotiation is unique depending on factors such 

as the individual state law, the dealer, possible union contracts, and 

associated finance and warranty business, and that the costs of 

terminating a dealership can vary greatly. 

Treasury concluded that although GM has been successfully pruning 

dealerships for several years, more aggressive restructuring is needed. 

According to Treasury, GM’s current pace for reducing the number of 

dealerships will burden the company with too many unprofitable or 

underperforming dealerships for a long period of time, which hurts brand 

equity and the prospects of stronger dealerships. 

Reducing production costs and capacity 

According to our panel, the companies have excess production capacity 

and their cost structures do not facilitate the companies’ profitable 

operation in a market in which sales volumes are significantly lower than 

they have been in past years. Panelists told us that the companies’ cost 

structures were established during a time when they dominated the U.S. 

market, and as foreign competition grew, their market shares decreased. 

Some of the panelists added that rather than adjust their cost structures, 

such as by reducing fixed costs, the companies pursued higher sales 

volumes to try to profitably operate under their existing cost structure. 

Given the forecast for continued decreased sales volumes, members of our 

panel said that they expected the restructuring plans to identify significant 

reductions in fixed costs. Additionally, these individuals said the 

automakers could benefit from incorporating efficiencies used by some of 

the foreign automakers into their production processes, such as 

manufacturing multiple types of vehicles at the same production facility or 

relying more on common vehicle architectures for the production of 

vehicles. Common vehicle architectures can allow automakers to plan, 

design, engineer and source vehicles for all global markets, whereas 

previously these efforts may have differed based on whether a car was to 

be sold in the United States or Europe, for example. 

According to Chrysler’s February plan, the company began restructuring 

in 2007 to reduce fixed costs, and, by the end of 2009, these costs will have 

been reduced by $3.8 billion (27 percent), which includes a reduction of its 

Page 25 GAO-09-553 Auto Industry
 

salaried workforce by 35,000.38 In addition, Chrysler is requesting a 3 

percent reduction in suppliers’ prices. However, some members of our 

panel said that reliance on supplier price cuts is a problematic assumption 

because the suppliers are struggling financially and cannot afford to 

reduce their prices. Chrysler’s plan does not address specific plans for 

production flexibilities. According to GM’s February plan, the company 

plans to reduce its North American fixed costs by about $6 billion from 

2008 to 2011 and keep those cost levels constant through 2014. These 

savings are largely the result of the initiatives outlined in the plan and 

include the reduction of U.S. employment levels (hourly and salaried) by 

about 20,000 from 2008 to 2011, acceleration of labor cost parity with 

transplants, idling of 14 additional manufacturing facility in the United 

States by 2012, and reduction of 12 models offered in the United States by 

2012. However, some members of our panel cautioned that the company 

may not be able to “cut its way to prosperity” and that GM needs to have a 

plan for how remaining salaried workers will carry out the restructuring 

efforts. GM’s plan also indicates that the company plans to increase 

production flexibility by increasing the number of plants that can produce 

multiple vehicle models and that by 2012, more than half of its U.S. 

passenger car sales will be derived from common architectures. 

Treasury concluded that although both Chrysler and GM have made 

progress related to manufacturing, Chrysler still faces challenges in this 

area. Treasury noted that Chrysler’s plan identified opportunities for 

reducing the company’s cost structure, including fixed-cost reductions; 

however, manufacturing is still a key challenge for Chrysler because it has 

not invested significantly in common architectures and manufacturing 

flexibility. In contrast, Treasury said that GM has made material progress 

in creating common architectures and has worked to create greater 

flexibility in its facilities. According to Treasury, GM’s actions in this area 

allow it to spread its product development and fixed costs over a large 

range of vehicles; in contrast, Treasury identified Chrysler’s scale as a 

challenge because the company must spread fixed costs over a smaller 

number of vehicles, which may limit funding for the research and 

development needed to maintain competitiveness. 

 

38Chrysler provided some examples of fixed-cost reductions including plant closures, 

improved asset utilization, program deferrals and cancellations, and healthcare actions 

related to active and retired employees. 

Page 26 GAO-09-553 Auto Industry
 

Obtaining labor concessions 

A number of panelists attributed the domestic automakers’ current 

financial condition in part to the labor agreements with the existing 

workforce, as well as health-care and pension costs associated with the 

companies’ retirees. Several of them noted that Chrysler’s and GM’s labor 

costs are higher than those of transplants primarily because of more 

generous healthcare benefits for workers. Others noted that work rules 

contained in the labor agreements can increase costs and limit production 

flexibility.39 According to the companies’ plans, the UAW, and our 

panelists, previous labor agreements reached between the UAW and the 

automakers are helping to restructure labor costs to be competitive with 

transplants, by, for instance, bringing in new hires in nonskilled trades at a 

substantially lower wage rate than current workers, but some members of 

our panel said that more needs to be done in this area.40 

Both Chrysler’s and GM’s February restructuring plans discuss proposed 

labor concessions, but no final agreements have been reached to date. 

According to Chrysler’s plan, it has a tentative agreement with the UAW to 

implement labor terms competitive with those of transplants. The tentative 

agreement includes adjustments to levels of compensation, work rules, 

and severance provisions such as elimination of the Jobs Bank program, 

which provided income and benefit protection in lieu of layoffs. Similarly, 

GM’s plan indicates that the company has reached agreement with the 

UAW to implement competitive work rules and to reduce labor costs. GM’s 

plan also discusses some labor concessions that are in the process of 

being implemented, namely reducing costs through buyouts. Neither 

company has reached an agreement with the UAW to reduce cash 

contributions to the VEBAs to fund retirees’ healthcare plans, also part of 

Chrysler’s and GM’s plans to achieve viability. According to the UAW, 

union members will not vote to ratify the labor modifications (e.g., 

 

39For instance, some of our panelists told us that transplants have fewer job classifications 

for hourly workers, which creates flexibility in reassigning workers to new or different 

tasks. In contrast, UAW contracts establish dozens of job classifications and narrowly 

define the roles that each classification can perform, limiting flexibility in managing 

staffing. 

40As previously discussed, the terms of the automakers’ loan agreements require the 

automakers to try to (1) achieve total compensation packages (wages and benefits) 

competitive with transplants, (2) apply work rules that are competitive with transplants, 

and (3) eliminate any compensation or benefits, other than customary severance pay, to 

employees that have been fired, laid off, furloughed or idled. 

Page 27 GAO-09-553 Auto Industry
 

compensation and work rules) until a tentative agreement has been 

reached on the modification to VEBA contributions.41

Treasury concluded that neither company has satisfied the terms of the 

loan agreements, in part, because neither reached approval on labor and 

VEBA modifications. Treasury also identified liabilities associated with 

pensions and health care for retirees as a challenge for GM, given that the 

company would need to sell 900,000 additional cars per year to cover its 

future cash payments for these costs. According to Treasury, these costs 

leave GM aiming to maximize sale volumes rather than focusing on return 

on investment. 

Relying on realistic estimates for sales volumes, market share, and other 

assumptions 

Members of our panel said that the success of the plans would depend on 

whether the underlying assumptions for sales, market share, and possible 

future financial assistance were realistic. They cautioned against basing 

estimates for viability on assumptions of an immediate increase in sales 

volumes or in the Detroit 3’s market share. Some of the panelists 

attributed the automakers’ financial struggles, in part, to the companies’ 

historical reliance on unrealistic expectations of sales volumes and market 

share that were not later met. As previously discussed, given their existing 

cost structure, the companies must have high sales volumes in order to 

achieve profitability. However, if the companies’ forecasts for sales 

volumes and market share are too optimistic compared to actual 

consumer demand, the restructuring plans may not result in financial 

viability without further modifications to the restructuring plans. 

Therefore, some panelists said that restructuring efforts need to rely on 

realistic or conservative assumptions about sales volumes and market 

share. 

Regarding sales assumptions, Chrysler’s baseline plan relies on 10.1 

million unit sales in the United States for cars and light trucks in 2009, and 

GM’s baseline plan relies on 10.5 million unit sales. Both plans include 

 

41Although Ford has not accepted federal assistance and is not bound by the terms of the 

loan agreements that Chrysler and GM signed, Ford and the UAW reached agreement in 

March 2009 on modifications to the 2007 labor contract and to plans for Ford’s 

contributions to the VEBA. This agreement is noteworthy because, according to the UAW, 

the agreement addresses all of the labor and VEBA modifications that Chrysler and GM 

must achieve under their loan agreements with Treasury. 

Page 28 GAO-09-553 Auto Industry
 

2009 downside scenario sales estimates that are 1 million unit sales lower 

than their 2009 baseline scenario sales estimates (9.1 million, for Chrysler; 

and 9.5 million, for GM). Some panelists told us that they thought the 

automakers’ baseline sales estimates were realistic. With respect to 

market share, they said the companies should provide analysis to support 

their market share assumptions, given that the companies have been 

losing market share for decades while continuing to project gains in 

market share. GM’s plan includes some key assumptions that drive its 

market share analysis; however the plan does not indicate to what extent 

each of these assumptions affects market share estimates. Chrysler’s plan 

does not identify the assumptions that contribute to its market share 

estimates. One panelist commended GM for acknowledging the potential 

for dropping from its 2008 U.S. market share of 22 percent to below 20 

percent market share, although another cautioned that GM may not be 

able to maintain more than 16 percent market share. A few of the panelists 

noted that sales projections may not be realized due to the effect of 

eliminating or discontinuing brands because buyers interested in those 

brands may turn to competitors’ products, rather than to other brands of 

GM and Chrysler. 

The February plans also assume assistance from other entities, including 

loans from the Department of Energy (DOE), an alliance with another 

automaker (in the case of Chrysler), and loans from foreign governments 

(in the case of GM).42 In addition to the AIFP funding the automakers 

requested in their February restructuring plans, Chrysler’s plan assumes $6 

billion in DOE loans and GM’s plan assumes $7.7 billion in DOE loans. 

However, DOE has not completed its review of either company’s 

application, in part, because DOE’s program rules require loan recipients 

to be financially viable. DOE officials told us that they cannot finish 

reviewing Chrysler’s and GM’s applications until Treasury makes a final 

determination on the companies’ viability, and that DOE will coordinate 

with Treasury in making that determination. Additionally, Chrysler’s plan 

indicates that to be viable on a long-term basis, the company must pursue 

strategic alliances and includes a scenario based on a proposed alliance 

between Chrysler and Fiat, a European car company. Chrysler states in its 

plan that this alliance would provide Fiat with an equity stake in Chrysler 

and will provide Chrysler access to Fiat’s smaller, fuel-efficient platforms 

 

42Chrysler and GM have both applied for loans from DOE’s Advanced Technology Vehicle 

Manufacturing Program, which will provide low-cost loans to auto manufacturers or 

component parts producers to retool or build plants to make cars or components that will 

substantially improve vehicle fuel economy. 

Page 29 GAO-09-553 Auto Industry
 

and technologies, as well as Fiat’s international dealer network. However, 

the alliance does not provide any financial resources, for example, through 

equity contributions to Chrysler. Chrysler also states in its plan that even 

with a Fiat alliance, the company would struggle if sales fall below its 

downside estimate. 

In its plan, GM assumes it will receive about $6 billion in financial 

assistance from foreign governments to be able to maintain adequate cash 

balances for its global operations through the beginning of economic 

recovery. The company’s restructuring plan details the progress of 

ongoing discussions with governments in Australia, Canada, Europe, and 

Asia in order to achieve viable operations in those regions. GM submitted 

a separate restructuring plan to the Canadian government on February 20, 

2009, which the Canadian government found to be insufficient. 

Treasury criticized several of the automakers’ assumptions as being too 

optimistic or too aggressive. Treasury noted that Chrysler assumes it will 

maintain its market share even though it has lost market share over the 

last decade and there are few signs it can reverse this trend. Similarly, 

Treasury determined that GM’s market share assumptions are too 

optimistic. GM has been losing 0.8 percent market share annually over the 

last 30 years and its plan assumes a slower rate—0.3 percent per year—of 

market share decline. With regard to pricing assumptions, Treasury stated 

that it will be challenging for Chrysler to maintain pricing as projected in 

its plan given what Treasury characterized as the perception of poorer 

product quality. With respect to GM, Treasury noted that its plan does not 

assume a decreased contribution margin despite a severely distressed 

market and the company’s plan focuses on passenger cars and crossovers, 

which traditionally have earned lower contribution margins than trucks 

and SUVs. Additionally, Treasury concluded that GM’s assumption of 

European assistance represents a risk to the viability of its plan because 

funds from European governments have not been allocated. 

Automakers Face Many 

Challenges to Successful 

Restructuring 

The automakers are confronting a number of challenging conditions in 

their efforts to restructure in a way that will achieve and sustain long-term 

viability, according to members of our panel and research we reviewed. 

Some of the challenges are the same ones that led to the automakers’ 

current condition, such as the weak economy and changing consumer 

preferences. Although Chrysler and GM acknowledged many of these 

challenges in their restructuring plans, many are beyond their control. 

Page 30 GAO-09-553 Auto Industry
 

Weak economic conditions 

The poor condition of the U.S. economy will likely continue to affect the 

financial health of Chrysler and GM. As figure 2 shows, over the past 30 

years, automobile sales almost always decreased during periods of 

economic recession. Chrysler and GM officials, as well as some panelists, 

noted that the current recession has had a similar effect on consumer 

confidence in general and automotive purchases in particular. Some 

panelists attributed this pattern to the discretionary nature of automobile 

purchases—that is, these purchases are easily postponed during periods of 

economic downturn. Reflecting the current economic conditions and 

projected slow recovery, both Chrysler and GM revised their sales 

projections downward, as noted above. However, if the economy recovers 

more slowly than the companies anticipate and sales revenues are lower 

than projected, the companies may not be able to achieve viability 

according to schedule and under the conditions laid out in their plans. For 

instance, both Chrysler and GM noted that their downside scenarios, 

which will occur if sales volumes are lower than expected, would result in 

the need for more federal funding than their baseline scenarios. However, 

although GM’s assumption about economic growth (measured by gross 

domestic product) for 2009 was characterized as more conservative than 

other estimates, this assumption now looks optimistic compared to 

Congressional Budget Office and IHS Global Insight estimates.43

 

43IHS Global Insight is a private sector firm that provides economic and financial forecasts 

and industry analysis. 

Page 31 GAO-09-553 Auto Industry
 

Figure 2: Monthly Light Vehicle Sales, 1976 to 2009 (Seasonally Adjusted Annual Rate) 

Vehicle sales (in millions)

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Year

0

2

4

6

8

10

12

14

16

18

20

22

200

2004

2005

2006

2007

2008

2009

3

199

1994

1995

1996

1997

1998

1999

2000

2001

2002

3

198

1984

1985

1986

1987

1988

1989

1990

1991

1992

3

1976

1977

1978

1979

1980

1981

1982

Recession period

Light vehicle sales

Note: According to members of our panel, the spike in sales during 2001, a recession period, is 

largely attributed to the financing incentives that the automakers offered consumers. 

Frozen credit markets 

The continuing lack of credit availability—on both a consumer and 

institutional level—is a major challenge for the automakers. A substantial 

amount of vehicle financing is obtained through asset-backed securities 

(ABS) transactions, which provide liquidity to the automotive financing 

companies, such as GMAC and Chrysler Financial, and enable dealer and 

consumer financing. However, due to conditions in the capital markets, 

considerably less of this type of financing is occurring. In turn, this has 

affected the ability of dealers to offer retail financing to consumers. 

Because almost all consumers rely on some level of financing to purchase 

automobiles, this lack of credit has negatively impacted sales. In addition, 

the lack of credit availability has affected dealers’ ability to finance their 

inventory (referred to as floorplan financing). Since dealers purchase 

vehicles from the automakers, the lack of floorplan financing also 

negatively impacts the automakers’ revenues. Given the role the 

automotive financing companies play in vehicle sales, Chrysler and GM 

Page 32 GAO-09-553 Auto Industry
 

indicated in their restructuring plans that the financial health of Chrysler 

Financial and GMAC is critical to their financial viability. As noted earlier, 

both GMAC and Chrysler Financial have received federal financial 

assistance through AIFP.44

To increase the availability of credit for consumers, Treasury and the 

Federal Reserve have announced the Term Asset-Backed Securities Loan 

Facility (TALF) program, which will provide financing to investors for 

purchases of ABS and could generate up to $1 trillion in lending for 

individuals and businesses.45 Eligible ABS includes newly issued AAArated tranches of securitizations backed by auto loans. However, officials 

from the automakers and auto financing companies we interviewed 

expressed concern about the AAA-rating requirement, noting that und

such a requirement certain of the auto financing companies’ securities 

would not be

er 

 eligible. 

 

Solvency of suppliers 

Officials from Ford, GM, and Chrysler, as well as members of our panel, 

stated that the tenuous financial condition of auto suppliers is a major 

concern because the solvency of the supply chain is critical to the 

automakers’ viability. As Ford’s CEO noted in his December 2008 

congressional testimony, the domestic auto manufacturing industry is 

interdependent, especially in the area of suppliers, with an estimated 80 

percent overlap in supplier networks. Thus, according to the automakers 

and some panelists, the collapse of one or more of the domestic 

automakers would affect the remaining automakers because, among other 

things, such a collapse could impact the ability of shared suppliers to 

continue operations. Ford also noted that a supplier financing safety net—

such as guarantees on payment from the federal government—would help 

prevent this situation. Moreover, large production cuts due to sluggish 

sales, especially in the first quarter of 2009, have affected the cash flow 

and liquidity of many automotive suppliers. According to the Motor & 

Equipment Manufacturers Association (MEMA), more than 40 major 

44To date, Ford Motor Credit Company (Ford Credit) has not received financial assistance 

under AIFP; however, it is a participant in the Commercial Paper Funding Facility and the 

Term Asset-Backed Securities Loan Facility programs. Like Chrysler Financial, Ford Credit 

has applied to FDIC to establish an industrial loan company. An industrial loan company is 

a financial institution that lends money and may be owned by nonfinancial institutions. To 

date, FDIC has not made a decision on Chrysler Financial or Ford Credit’s application. 

45Up to $100 billion in funding will come from TARP. 

Page 33 GAO-09-553 Auto Industry
 

suppliers filed for Chapter 11 restructuring in 2008, with industry surveys 

indicating approximately one-third of all suppliers are in imminent 

financial distress.46 As previously noted, Treasury announced in March it 

would provide up to $5 billion in assistance to help suppliers. 

Cost of developing advanced technology vehicles 

Several panelists noted that not only is developing advanced technology 

vehicles expensive, but also the return on the investment in those vehicles 

can be low because the initial demand for new technologies can be slow to 

develop. For example, the Toyota Prius was on the market for 10 years before 

reaching 1 million units sold. According to our panel, given the high 

development costs and low initial demand, especially if gasoline prices 

remain relatively low, these new vehicles are not likely to generate a profit for 

several years. Thus, changing the companies’ product mix to include more 

advanced technology vehicles may not be the best way to improve the 

financial bottom line in the short term. Furthermore, at least one panelist 

questioned whether the necessary energy infrastructure, such as electrical 

outlets to charge batteries, will be available to support these new 

technologies. Without adequate infrastructure, consumers will be reluctant to 

purchase these new advanced technology vehicles. GM officials 

acknowledged these challenges but indicated that the company decided to 

continue investing in advanced technologies even during the current financial 

crisis because they need this technology in their fleet to help meet federal fuel 

economy standards in the future. In addition, GM officials said they are 

planning for higher oil prices than current futures market expectations, in 

order to make GM’s plan more robust against oil price volatility. 

Reducing the number of dealerships to align with sales volumes 

Many panelists said that it will be difficult for Chrysler and GM to resize their 

dealership networks. The large number of dealers increases intra-brand 

competition and thus reduces the pricing power of individual dealers. One 

GM official noted that the biggest competition for a GM dealer is often the 

other GM dealer down the street. As previously mentioned, Detroit 3 

dealerships sell substantially fewer vehicles per dealership than transplant 

dealerships sell. Given these and other concerns, Chrysler, Ford, and GM are 

 

46MEMA represents motor vehicle parts suppliers. MEMA supports its members through its 

three affiliate associations: Automotive Aftermarket Suppliers Association, Heavy Duty 

Manufacturers Association, and Original Equipment Suppliers Association. 

Page 34 GAO-09-553 Auto Industry
 

working to “right size” their dealer networks to better align with automakers’ 

current and projected sales volumes and market shares. However, panelists 

told us state franchise laws make eliminating dealerships difficult because 

these laws generally provide strong protections for auto dealer franchisees. 

For example, Michigan’s law on auto dealer franchises states that 

manufacturers must provide adequate notice, act in good faith, and have good 

cause in order to terminate an agreement with a dealer.47 Any action to 

consolidate or eliminate a dealer—outside of a bankruptcy court—must be 

negotiated with the affected dealers. According to members of our panel, 

under the best-case scenarios, the automakers can expect to incur significant 

costs and delays in rationalizing their dealership networks. Given the current 

depressed level of automobile sales, automakers and panelists also told us 

that some dealers are looking either to go out of business voluntarily or to 

merge their business with other dealerships. 

Uncertainty over future fuel economy standards 

The current uncertainty of future fuel economy standards could complicate 

the auto manufacturers’ ability to plan for future market conditions. The 

National Highway Traffic Safety Administration (NHTSA), within the 

Department of Transportation, issues fuel economy standards for vehicles 

sold in the United States. Currently, fuel economy standards are set through 

model year 2011. NHTSA officials told us they plan to propose standards for 

model years 2012 through 2016 this summer and issue final standards by 

March 31, 2010. Further, according to NHTSA, it must coordinate the rule 

making with the Environmental Protection Agency (EPA). EPA will be 

responsible for setting standards regarding the level of greenhouse gases 

passenger vehicles can emit if it adopts its proposed finding that greenhouse 

gases in the atmosphere endanger the public health and welfare.48 In addition, 

NHTSA officials said they were monitoring events relating to California’s and 

other states’ attempts to set and enforce individual greenhouse gas emission 

standards for passenger vehicles. Chrysler and GM officials told us they 

would prefer one national standard to individual state standards. If NHTSA 

raised the fuel economy standards above what the automakers have planned 

for their near-term product line, or if states are allowed to set individual 

standards, it could complicate the viability plans of the auto manufacturers by 

forcing them to make faster, more costly technological investments in their 

vehicles than they otherwise had planned. NHTSA officials told us that when 

 

47Mich. Comp. Laws § 445.1567(1)(a)-(c). 

48Greenhouse gas emissions in vehicles are directly related to a vehicle’s fuel economy. 

Page 35 GAO-09-553 Auto Industry
 

setting future fuel economy standards, they would take into account the 

ability of the auto industry to make the necessary technological investments 

in its products to increase fuel economy. 

Reducing debt 

Restructuring the automakers’ balance sheets by reducing debt and related 

leverage are critical elements to any plan for long-term viability.49 As of 

December 31, 2008, GM had total liabilities of $176.4 billion compared to 

negative stockholders’ equity of $86.2 billion. GM’s liabilities of $176.4 

billion included current liabilities (payable in 2009) of $73.9 billion and 

noncurrent liabilities of $54.1 billion for pensions and postretirement 

benefits and $29.6 billion of long-term debt.50 The loan agreement calls for 

GM’s “best efforts” to reduce its unsecured public debt by at least twothirds. As of December 31, 2008, GM had about $27.2 billion of unsecured 

public debt (consisting of amounts included in GM’s debt payable in 2009 

and long-term debt). In its restructuring plan, GM reported that 

negotiations were under way with its bondholders to convert the 

unsecured debt to equity. This debt restructuring would reduce interest 

expense and immediately improve cash flow to GM. Chrysler, which does 

not have significant unsecured public debt, proposed working with 

creditors, including Treasury, senior lien bank lenders, and the UAW 

VEBA, to reduce its debt by $5 billion.51

According to members of our panel and financial analysts we interviewed, 

reaching agreements with bondholders could be difficult because the value of 

company stock is less than the value of the bonds. Bondholders will be 

trading a known rate of return that is subject to bankruptcy risk for a 

completely unknown rate of return that is also subject to bankruptcy risk. As 

a Treasury official noted, however, by not agreeing to the exchange, the 

bondholders are subject to the risk that the companies could file for 

bankruptcy, potentially rendering their bonds worthless. According to 

financial analysts we spoke with, many bondholders are willing to take their 

chances waiting for more government assistance. Recognizing these 

 

49Leverage represents the amount of debt in relation to equity plus reserves and is a critical 

measure in determining an entity’s financial flexibility and solvency. 

50The remaining $18.8 billion of liabilities are comprised of liabilities for financing and 

insurance operations, other liabilities, and deferred income taxes. 

51We reviewed Chrysler’s financial statements but because it is not a public company, 

information on its liabilities cannot be disclosed in this report. 

Page 36 GAO-09-553 Auto Industry
 

challenges, officials from both Chrysler and GM told us they will likely need 

the assistance of the Presidential Task Force or Treasury to reach agreement 

with their bondholders or creditors. 

Given Challenges, Treasury 

and Automakers Are 

Considering Options for 

Restructuring 

Given the substantial amount of debt that both Chrysler and GM have, and the 

uncertainty that revenues from car sales will increase in the near term or that 

the automakers’ stakeholders will reach an agreement needed for successful 

restructuring, Treasury and the automakers have acknowledged the very real 

possibility that restructuring might be accomplished through a reorganization 

under the bankruptcy code. Under that scenario, according to Treasury, the 

most likely approach would be a court-supervised asset sale, in which the 

company’s good assets would be sold to a new entity,52 and substantial 

amounts of the company’s debt would remain in possession of the old part of 

the entity to be dealt with in bankruptcy court. Treasury said this approach 

would help accelerate the turnaround of the companies by allowing them to 

quickly exit bankruptcy. According to Treasury, another possibility for 

restructuring for GM would be a “prepackaged” bankruptcy, in which the 

company’s creditors approve a reorganization plan before the company files 

for bankruptcy; however, according to Treasury, it appears unlikely that such 

an agreement could be reached in the limited amount of time available. 

Treasury has said it would consider providing bankruptcy financing to 

Chrysler and GM if the companies meet the conditions Treasury set in its 

March 30 announcement and if Treasury and the companies determine that a 

reorganization bankruptcy is the best course of action.53

We provided a draft of this report to the Departments of the Treasury, 

Transportation, and Energy for review and comment. These agencies 

provided technical clarifications, which we incorporated as appropriate. 

Agency Comments 

and Our Evaluation 

We also made a draft of this report available to Chrysler and GM officials for 

their review and comment. Chrysler and GM officials provided technical 

corrections and clarifications, which we incorporated as appropriate. 

 

52The sale would be conducted under 11 U.S.C. § 363, and the shareholders of the new entity 

would include the federal government and the current stakeholders of Chrysler or GM. 

53Section 364 of the bankruptcy code governs debtor-in-possession financing and 

authorizes various kinds of credit after a bankruptcy petition is filed. If the federal 

government were to extend credit to the automakers in a Chapter 11 reorganization 

bankruptcy, the federal government could receive priority regarding the payment of such 

loans under 11 U.S.C.§ 364. 

Page 37 GAO-09-553 Auto Industry
 

We are sending copies of this report to other interested congressional 

committees and members, the Departments of the Treasury, 

Transportation, and Energy, and others. The report also is available at no 

charge on the GAO Web site at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact 

Katherine Siggerud at (202) 512-2834 or siggerudk@gao.gov or Susan 

Fleming at (202) 512-2834 or flemings@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on the 

last page of this report. GAO staff who made major contributions to this 

Gene L. Dodaro 

report are listed in appendix II. 

Acting Comptroller General 

 of the United States 

Page 38 GAO-09-553 Auto Industry
 

List of Committees 

The Honorable Daniel K. Inouye 

Chairman 

The Honorable Thad Cochran 

Vice Chairman 

Committee on Appropriations 

United States Senate 

The Honorable Christopher J. Dodd 

Chairman 

The Honorable Richard C. Shelby 

Ranking Member 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

The Honorable Kent Conrad 

Chairman 

The Honorable Judd Gregg 

Ranking Member 

Committee on the Budget 

United States Senate 

The Honorable Max Baucus 

Chairman 

The Honorable Charles E. Grassley 

Ranking Member 

Committee on Finance 

United States Senate 

The Honorable David R. Obey 

Chairman 

The Honorable Jerry Lewis 

Ranking Member 

Committee on Appropriations 

House of Representatives 

The Honorable John M. Spratt Jr. 

Chairman 

The Honorable Paul Ryan 

Ranking Member 

Committee on the Budget 

House of Representatives 

Page 39 GAO-09-553 Auto Industry
 

The Honorable Barney Frank 

Chairman 

The Honorable Spencer Bachus 

Ranking Member 

Committee on Financial Services 

House of Representatives 

The Honorable Charles B. Rangel 

Chairman 

The Honorable Dave Camp 

Ranking Member 

Committee on Ways and Means 

House of Representatives 

Page 40 GAO-09-553 Auto Industry
Appendix I: Members of GAO’s Auto Industry 

Panel 

Page 41 GAO-09-553 

Appendix I: Members of GAO’s Auto Industry 

Panel 

We contracted with the National Academy of Sciences (NAS) to identify a 

balanced, diverse group of individuals with expertise about the past and 

current financial condition and operations of the domestic automakers, 

the restructuring of distressed companies, labor relations issues, financial 

management and analysis of distressed or restructuring companies, 

factors influencing competitiveness in the auto industry, and engine and 

vehicle technologies that may affect the auto manufacturing industry 

today as well as in the near future. We selected 17 individuals for 

interviews from among those NAS identified based on achieving a variety 

of expertise and avoiding any potential conflicts of interest (see table 4). 

Table 4: Individuals with Auto Industry Expertise Identified by NAS Who Were Interviewed

Name Company or Institution 

Bruce M. Belzowski University of Michigan, Transportation Research Institute 

Richard N. Block Michigan State University, School of Labor and Industrial Relations 

John Casesa Casesa Shapiro Group 

K.G. Duleep Energy & Environmental Analysis Inc. 

George Eads CRA International 

Susan Helper Case Western Reserve University 

Rod Lache Deutsche Bank 

Tim Lieuwen Georgia Institute of Technology 

John Paul MacDuffiea University of Pennsylvania, Wharton School of Business 

Walter S. McManus University of Michigan, Transportation Research Institute 

Glenn MerceraThe International Motor Vehicle Program at the Massachusetts Institute of Technology 

Henry S. Miller Miller Buckfire & Company 

Justin Mirro Moelis & Company, Transportation Investment Banking Group 

Nabil Nasr Rochester Institute of Technology 

William A. Niskanen Cato Institute 

Douglas M. Steenland Formerly of Northwest Airlines Corporation 

Marina Whitman University of Michigan, Ross School of Business 

Source: GAO. 

a

These individuals also reviewed a portion of a draft of this report to ensure the accuracy and 

completeness of the information. 

 Auto Industry 
Appendix II: GAO Contacts and Staff Appendix II: GAO Contacts and Staff Acknowledgments 

Acknowledgments 

Katherine A. Siggerud, (202) 512-2834 or siggerudk@gao.gov

Susan Fleming, (202) 512-2834 or flemings@gao.gov

In addition to the contact names above, the following individuals made 

important contributions to this report Marcia Carlsen, Nikki Clowers, and 

Raymond Sendejas, Assistant Directors; Alana Finley; Chuck Ford; Cole 

Haase; Heather Halliwell; Jennifer Henderson; Joah Iannotta; Matthew 

LaTour; Susan Michal-Smith; and Susan Sawtelle. 

Page 42 GAO-09-553 Auto Industry

GAO Contacts 

Staff 

Acknowledgments 

(541052) 
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