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'Detroit Three' seem likely to get bulk of auto-bailout loans
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Sen. Carl Levin, D-Mich., said that automakers need the loans within six months.
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Published: September 30, 2008
DETROIT
If credit remains locked up and auto sales continue to slump, the federal government's $25 billion loan package for the auto industry could be a vital help in keeping Detroit's downtrodden automakers afloat, according to legislators and industry analysts.
Chrysler LLC, Ford Motor Co. and General Motors Corp., which likely will get the bulk of the loans, are losing billions and facing giant debts already as they try to remake their lineups from predominantly trucks and sport-utility vehicles to smaller, more fuel-efficient vehicles.
The loan legislation, approved by Congress on Saturday, was passed to help the battered industry retool factories and develop technology to meet new government fuel-efficiency standards of at least 35 miles a gallon by 2020, a 40 percent increase.
With the bulk of the money apparently going to the Detroit Three, it could come in the nick of time for cash-strapped automakers who might otherwise have trouble borrowing more to cover their bills.
Government red tape, namely regulations written by the Energy Department, could delay the loans by up to 18 months. Congress specified that the agency produce preliminary rules within 60 days, and legislators who support the industry say they hope that the financing arrives by spring.
"The longer it takes, the less valuable and useful it is," said Sen. Carl Levin, D-Mich. "It may vary from company to company, depending on their individual circumstances."
Levin says that it's important to get the money to automakers within six months, because that's the time they're retooling factories for a big rollout of fuel efficient 2010 models. General Motors and Ford each have announced new small cars for 2010, and GM and Chrysler have committed to rechargeable electric cars in the same year.
No one knows for sure how long it will take to get the money, but analysts and politicians are figuring on mid- to late-2009. That might be just in time for the Detroit Three if sales continue to drop, credit remains too tight for them to further tap conventional markets, and they start to run low on cash.
"I think the timing is fortuitous," said David Healy, an analyst with Burnham Securities who says that Ford, and particularly GM, might have trouble paying bills late next year without the loans, if conditions don't improve.
Auto executives have said that the government loans will speed up bringing new technology to market, but they have pledged to make more fuel-efficient models regardless of whether the loans arrive. The loans, however, could help them avoid making the choice between pursuing multiple fuel-efficiency technologies or further cuts, including more job losses, Chrysler CEO Bob Nardelli said last week.
Money is supposed to be available to the entire industry, but a clause in the legislation gives priority to "those facilities that are oldest or have been in existence for at least 20 years."
Chrysler, Ford and GM, all of which have factories far older than that, look like they have the inside track to get the bulk of the loans.
Rep. Joe Knollenberg, R-Mich., said that he expected the Detroit automakers to "get a large share" of the funding, but it was not clear how the money will be divided among car companies and parts suppliers.
It's unlikely that Japanese automakers, the Detroit Three's main competitors, will seek any money, said David Cole, the chairman of the Center for Automotive Research in Ann Arbor.
Toyota Motor Corp., Honda Motor Co., Nissan Motor Co. and other foreign-based automakers did not lobby for the loans.
The prospect of giving federal loans to foreign-owned companies raises political concerns, even though several Japanese automakers have factories that would qualify, Cole said.
"There's no way, for example, that a Toyota or a Honda is going to put in for this kind of money," Cole said. "I think politically it wouldn't be a good thing, and they don't need it."
The Detroit automakers, however, are in dire need. Ford already has $25 billion in long-term debt, and GM has about $32 billion. Both are losing billions, with no short-term prospect for profits. Chrysler, now a private company that does not have to report its debts, has seen the steepest U.S. sales drop of any automaker, down 24 percent through August.
In addition to covering losses and paying restructuring costs, all three are burning cash to retool plants, develop new gas engines and engineer new electric cars.
"You're swimming a river that's getting deeper and faster and wider," said Cole, who says that the market will eventually recover and automakers will again make money. "The pot of gold on the other side is getting bigger."
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