Auto Industry: Summary of Government Efforts and Automakers' Restructuring to Date
Published: 2009-04-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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. 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.
section_title: What GAO Found
paragraphs: 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 long-term 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. 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. 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 of options available for the automakers to achieve viability, including restructuring under the bankruptcy code.

section_title: Letter
paragraphs: 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).  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  assistance. 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. 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. 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  address in achieving long-term viability and the challenges that they face  to become viable.
subsections: section_title: Scope and Methodology
paragraphs: 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.
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.
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  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.
section_title: Background
paragraphs: 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. 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. Chrysler and GM reported losses in 2008 totaling $8  billion and $31 billion, 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  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.
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  areas, clustered primarily in the Midwest and South, that rely heavily on  Detroit 3-related jobs. 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. 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  unsecured public debt, 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. 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. 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  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.
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. Additionally,  offering consumer incentives and discounts over the past few years  stimulated demand but contributed to an erosion of the value of the  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. 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.
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. Table 1 provides a description of  these principles as they apply to the assistance provided to the auto  industry.
section_title: Treasury Has Established Programs to Help Stabilize the Auto Industry
paragraphs: 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. 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.
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  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.
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. 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.
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  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  responsible for paying the program servicer the amount due for the  delivery. Treasury has made up to $5 billion available through this  program.
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. 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  (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.
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.
section_title: In Providing Assistance to the Auto Industry, Treasury Identified Goals and Objectives for the Assistance and Took Steps to Protect the Government’s Interest
paragraphs: 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.
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  reported that it is important that policymakers choose clearly among  potentially conflicting goals of providing federal financial assistance.  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.
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. 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 hourly- related 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  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. 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. 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, 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  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 self- funded government corporation—insures private-sector defined benefit  plans. 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. 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. 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  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. 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.
section_title: Automakers Have Addressed Some of the Factors Important for Achieving Viability, and Many Challenges Remain
paragraphs: 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.
subsections: section_title: Chrysler’s and GM’s February Restructuring Plans Do Not Fully Address Factors Needed to Achieve Viability
paragraphs: 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  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. 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; 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  vulnerability of demand for these vehicles based on fuel prices. 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.
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  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  salaried workforce by 35,000. 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.
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. 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.
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.,  compensation and work rules) until a tentative agreement has been  reached on the modification to VEBA contributions.
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  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). 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  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.
section_title: Automakers Face Many Challenges to Successful Restructuring
paragraphs: 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.
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.
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  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.
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. Eligible ABS includes newly issued AAA- rated 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 under  such a requirement certain of the auto financing companies’ securities  would not be eligible.
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  suppliers filed for Chapter 11 restructuring in 2008, with industry surveys  indicating approximately one-third of all suppliers are in imminent  financial distress. 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  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. 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. 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  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.
Restructuring the automakers’ balance sheets by reducing debt and related  leverage are critical elements to any plan for long-term viability. 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. The loan agreement calls for  GM’s “best efforts” to reduce its unsecured public debt by at least two- thirds. 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.
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  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.
section_title: Given Challenges, Treasury and Automakers Are Considering Options for Restructuring
paragraphs: 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, 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
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.
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  report are listed in appendix II.
section_title: Appendix I: Members of GAO’s Auto Industry Panel
paragraphs: 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).
section_title: Appendix II: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: 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.