U.S. Auto Bailout: Bridge to Bankruptcy or Road to Salvation
R.Sagitha, Research Analyst
Economic Research and Analytics
Automotive & Transportation
March 25, 2009

Focus Points
U.S. Automotive Industry
Economic Importance
Current State of the Market
Key Global Trends
How We Got Here
Factors contributed to the Crisis
Possible Way Ahead for Detroit Three
Bailout Plan
Restructure Plans
Road Ahead
How can they become more viable?
2

U.S. Automotive Industry – Economic Importance
Employment in the U.S. Automotive Industry, 2000 – 2008 Vehicle Production and Sales, 1980 – 2007
20
Employment (Thousands)
1400 18
16
1200
14
Million Units
1000
12
800 10
8
600
6
400 Vehicle Sales Vehicle Production
4
200 2
0
0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
2000 2001 2002 2003 2004 2005 2006 2007 2008
Economic Contribution of the U.S. Auto Industry
• GDP Contribution by the U.S. Auto Industry has been nearly 4
Components of GDP (U.S.), 2007
percent every year
The auto industry accounts for about half of
7%
• At the end of 2008, the U.S. auto industry employed 850,000 18% durable goods, or almost 4 percent of GDP.
workers in manufacturing, and 1.8 million workers in auto dealerships
20%
• 775,000 retirees depend on automakers pensions and benefits Durable goods
• Auto exports is one of the major exports amounting to $ 87.1 billion Nondurable goods Personal
consumption
15% Services
• Imports accounts for nearly 25 percent of the domestic units sales
Gross private domestic investment
• Investment: $200 billion since 1990
Government
• Annual Research and Development Investment is estimated $20 US GDP totaled $13.8 trillion in 2007.
billion 40%
• U.S. Manufacturers face stiff competition from Non-American
Companies (Japan, Germany, and Korea) and imports
3

U.S. Automotive Industry – Current State of the Market
Automotive Industry Outlook: U.S Light Vehicle
Automotive Industry Outlook: U.S Light Vehicle
Sales – by Segment (North America), 2008
Sales – by VMs (North America), 2008
100%
6.0% 6.1% Sports, Van & Others
General Motors
2%2% 3% Pickup / Truck
Toyota, Scion, Lexus
2% 14.1%
15.1%
2% 23%
5% SUV
Ford Group
75%
Chrysler MPV
7% 25.0%
26.9%
Honda Super Luxury
Nissan, Infiniti High Luxury
4.2%
50% 4.5%
Hyundai Group Low Luxury
6.9%
6.5%
3.4%
Volkswagen, Audi 3.2%
11% Large
17%
15.8%
BMW 14.8% High Medium
25%
Mazda 4.7%
11% Low Medium
4.5%
15%
Mercedes Small
14.8%
13.9%
Others Basic
4.0% 4.3%
0%
2010 Source: Frost & Sullivan
2008
• Freezing of credit markets and loss of consumer confidence resulted in a decline in sales
• About 46% of sales in the U.S. constituted SUVs and Pickups in 2007, expected to fall below 39% by 2010
• Small cars are gaining more market share with an increase from 12% in 2007 to about 15% in 2010
• The Detroit Three VMs are expected to lose market share with falling sales
• VMs with a strong presence in basic and small vehicle segments such as Hyundai, Nissan and Honda are expected to
witness market share growth
4

Genesis: From Financial Sector to Real Sector
Lack of Trust in
Financial Institutions
Sub-Prime Financial Institutions
Mortgage Losses
Defaults Suspension of
Interbank Lending
Tightening Credit Markets
$
Lack of Capital
Banks Slow Down Lending
$
for Companies
$
Lack of Lending for
Small Business
Slower Growth Lack of Retail
Consumer Sentiment Collapses,
$ Credit
Spending Declines
$
Job Economy Slows Down/Contracts
Losses
5

Key Trends in the Global Automotive Market
• Auto sector turnover contributes between 3 – 4% of the
Automotive Industry Outlook: GDP Growth Rates (World), 2008
total GDP of U.S.; more than 6% of EU-15 GDP
12%
• China, India, Russia and Indonesia are expected to have
GDP growth rates of more than 6 percent through 2008 Growth Drivers:
– 2010 Developing Markets
9%
• Automotive Industry deeply impacted by the credit
crunch – Two-thirds of Europe’s cars are sold on credit
Growth Rate
and all players use debt financing for their working
capital 6%
• Production overcapacity affecting the global automotive
market – Global sales in 2007- 63 million units; USA to begin recovery
production capacity in 2007 - 80 million units in 2009 while Euro
3% Area continues to fall
• Slowdown in Auto Sales has systematically affected all
global VMs
0%
• Many VMs and suppliers affected financially
2006 2007 E 2008 F 2009 F 2010 F
Japan USA Euro Area Brazil
• Industry profitability hit by falling sales in 2008 –huge
losses for major OEMs; Brazil, Russia India and China hit Russia Turkey China Indonesia
by the global slowdown, with India expected to lead the Thailand India
Source: World Bank, Frost & Sullivan
way in the recovery
Analysis
6

Automotive stimulus packages of governments approaches $40–50 billion
Russia:
- Increase import duties on
Germany: foreign-made cars and used
- €1.5bn aside for the boost for the car car imports, to increase
market, loan guarantees for Opel local production and
France: stimulate growth
- Renault and PSA offered initial credit
guarantees of €6 bn China:
- Auto suppliers offered €600 million loans
USA: - RMB 10bn over a 3 year
- $13.4 billion to General period to help
Motors and $4 billion to automakers upgrade and
Chrysler develop alternative
energy vehicles
India:
- PSU banks to provide a line of
credit to NBFCs for buying
commercial vehicles
Brazil:
- Increase credit availability
by making available 8 billion
reais ($3.2 Billion) in credit
for automakers
7

Possible Way Ahead For Detroit Three - Bailout Plan
History of Bailout in U.S. Auto industry The difference between history and present bailout
Chrysler was provided with bail out in 1979 Too many companies too be provided with
bailout by the U.S. government unlike the
U.S. Government provided a loan of $1.5
history of bailout for Chrysler
billion to rescue Chrysler
Important industries like banking and financial
Other non-automotive bailout loans were
institutions are involved in the global
provided to Penn central Railroad, Lockheed,
economic crisis
Franklin National Bank amongst the few
Bailout Demand from Automakers Restructuring plans by automakers
A loan of $17.4 billion provided to GM and $17.4 billion loan sanctioned up for review of
Chrysler restructuring plans by automakers on 17th
February
An additional amount of $9.1 billion has been
requested by GM and Chrysler Restructuring plans included laying off
workers, wage cuts, and investment in Hybrids
$7.5 billion bailout was provided to GMAC and
amongst the few
Chrysler Financial
8

Possible Way Ahead For Detroit Three– Features of Restructuring Plans
Highlights of Restructuring Plans by GM
Competitive Product Mix & Cost Structure
Competitive Product Mix & Cost Structure
Models and Channels – GM to focus on brands like Chevrolet, Cadillac, Buick and GMC
Nameplates – GM to reduce vehicle nameplates by 25%
Dealers – Re-shaping of GM dealer network in main markets
Labor Cost – Tentative agreements between GM and UAW for job and pay cuts
Adherence to emission norms & fuel economy
Adherence to emission norms & fuel economy
• Alternative Fuels – Sale of GM’s alternative fuel models will be increased to 65%
• Hybrid & Plug-in vehicle – Cars and Trucks to be manufactured in 2009
Rationalization of costs, finances, competence
Rationalization of costs, finances, competence
• North American Business – Significant plant closing in North America
• Breakeven Volume – GM has reduced its breakeven to 11.5-12.0 million units
9

Possible Way Ahead For Detroit Three– Features of Restructuring Plans
Highlights of Restructuring Plans by Chrysler
Competitive Product Mix & Cost Structure
Competitive Product Mix & Cost Structure
Potential Partnerships – Chrysler has analyzed potential partnership with GM or Nissan or Fiat
Nameplates – Chrysler to reduce vehicle nameplates by 25%
Dealers – Chrysler’s Genesis program to trim models and consolidate dealers
UAW/VEBA – Tentative agreement with UAW for wage cuts according to U.S. transplants
50 percent reduction in Chrysler’s VEBA
Adherence to emission norms & fuel economy
Adherence to emission norms & fuel economy
• Powertrain Technologies – Chrysler's alliance with Fiat to leverage power train technologies
Rationalization of costs, finances, competence
Rationalization of costs, finances, competence
• Fixed Cost – Reduction of Fixed Costs by 27%
• Unit Capacity – Reduced Unit Capacity by 35 percent
• Suppliers – A request of 3 percent price reduction from suppliers
10

Bailout Plan - Impact Assessment
If Detroit Three does not Survive If Detroit Survives
• A loss of 3 million jobs throughout the U.S. - 973,969 • Massive stimulus package to revive the economy
workers employed in the suppliers industry and 108,000
• Employment levels expected to be positive in the long
jobs at stake in North American auto retailing industry
term but job loss is inevitable in the short run
• Termination of Detroit Three operation will reduce U.S.
• Social Security to lower the burden of the government
personal income by more than $150 billion
• Implementation of emission norms in compliance with
• Two million people rely on auto industry’s healthcare
U.S. standards. U.S. auto industry is expected to be a
benefits - U.S. Government will be liable for 65% tax credit
leader in green automotive technology
for health care costs
• Industrial production is expected to increase with the
• 775,000 retirees collect auto industry pensions
investment of Detroit Three
• Insolvency of auto industry will cause additional burden
• Budget deficit as of percent of GDP would be 12.6
on the Pension Benefit Guarantee Corporation (PBGC)
percent
• Loss of other dependant industries like steel, aluminum,
• By 2013 (End of Obama’s first term) budget deficit is
computer chips
expected to be 3 percent of the GDP as a goal under the
Obama administration
In either of the cases the us auto industry is expected to be dissolved, and the job losses will exist, whether sustained
overnight or over a longer period. The impact is expected to be prolonged over a longer period in a structured
bankruptcy.
11

Possible Way Ahead For Detroit Three - Economic Impact Assessment
Variable Dissolution Survive
3 million jobs lost. 1 million in Detroit Three, Job losses would be much lower, and will have a
Employment
100,000 in ancillary industries in a phased less catastrophic impact on the economy
manner with organized dissolution.
Marginal impact on deficit since the sums already
No Impact
Fiscal Deficit allocated/to be allocated are substantial, and this
entire aid is small in comparison
This is expected to discourage European and This is expected to lead to European
Asian Governments from supporting their governments providing support to their domestic
Impact Overseas
domestic automotive industry industries to even out the competitive landscape
Revitalize American manufacturing since auto
A collapse of the American automobile
Manufacturing manufacturers will have to restructure and
manufacturers will lead to revenue loss and cope
reposition themselves and consequently their
with the loss of key clients
suppliers too
Will have a cascading impact as job losses rise and Will help revitalize the American economy as
employment drops. Consumption is expected to automobile industry acts as a catalyst to restructure
Overall Economy
drop and recession prolonged American manufacturing. Economy will recover
faster and emerge stronger
Any form of dissolution, whether organized or chaotic of the American Automobile industry is expected to
prolong recession and have a catastrophic impact on employment and consumption.
12

Possible Way Ahead For Detroit Three – Road Ahead
U.S. auto Industry to witness restructuring of strategic operations between 2009-2011
Overall Auto Market Conditions Conditions Specific to Detroit Three
• Being one of the largest employers, it is almost • The Detroit 3 players will have to undergo
certain the Obama administration would give fundamental transformation to meet the changing
some form of assistance to the auto industry consumer preferences. This may lead to
rationalization of the brand portfolio currently
• Better inventory management, discontinuous on
marketed by American automotive companies
unprofitable businesses to result in restructuring
of overall market operations. • Renegotiation with UAW regarding upgrading
plants, and lower social security contribution
• Federal assistance (TARP) 0f $5 billion has been
provided to auto suppliers. As restructuring plans, • Phase out specific brands and manage distribution
suppliers and dealers would lose business channels better
• A U.S. bill has been introduced to provide • GM alone plans to eliminate 1,800 of its
vouchers to consumers through 2011 if they turn dealerships from 2008 to 2012
in aging vehicles in favor of more energy-efficient
• Bond holders need not be repaid fully. Total debt
transportation options
burden of Detroit Three is almost $80 billion.
• Fluctuating fuel prices continue to impact the sale
• Bankruptcy might lead to consumers not
of gas guzzlers and big cars
purchasing cars
• Workforce reduction, declining personal
disposable income will impact on automobile
sales
13

Possible Way Ahead For Detroit Three – How Can They Become Viable?
Factors Focus Areas
• Rationalize/ consolidate dealerships
• Restructuring and retooling of all operations to become lean, sustain, and competitive at lower sales
volumes
Restructuring • Sale or discontinuation of unprofitable and non-core businesses to generate cash for operations
• Consolidation of brands to strengthen market image and to cut costs
• Better inventory management on the input and output sides
• Develop flexible-architecture global platforms – for lower development costs, higher
economies of scale, and easier mid-cycle upgrades
• Rationalize/ consolidate platforms, brands, and nameplates -Parts sharing across platforms and models
• Longer product cycles to reduce development cost and capital investments without sacrificing
Products
product freshness, through flexible platforms
• Strategic platform co-development with competitors to spread development and engineering costs
• Parts sharing across platforms and models to reduce per-unit costs
• Focus on value-segment products and slow down development of vehicles in other segments
• Rapid technology evolution – critical investments must be maintained for next-generation technologies
Technology • Develop customer-value and fuel-efficiency technologies
• Strategic technology co-development with suppliers and competitors to spread costs
14

U.S. Automotive Industry – Bridge to Bankruptcy or Road to Salvation?
Best Case Scenario Worst Case Scenario
• •
Little loss of market share Substantial loss of market share
because of low oil prices making
• Undergo a Chapter 11 filing to
SUVs competitive
negotiate with bondholders and
• Avoid a Chapter 11 bankruptcy UAW
and successfully negotiate with
• After a few rough years, American
bondholders
Auto manufacturers emerge
• Recover quickly from the current stronger via investments in
crisis and support economic and research and development and
industry growth new product launches.
All industries undergo period of trouble, and emerge stronger, healthier and
more vibrant from it. American Automobile industry, especially the big 3
players are expected to emerge stronger from this current crisis, and become
global leaders
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