Frost & Sullivan Presentation: U.S. Auto Bailout: Bridge to Bankruptcy or Road to Salvation

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The automotive crisis of 2008 has impacted the U.S. automotive industry in a big way. Rising fuel prices and the global financial crisis are a few causes for this downturn. The “Detroit Three” automakers – General Motors (GM), Ford, and Chrysler have been primarily affected by this crisis.
The U.S. government has helped these auto companies with a bail out amount of $17.4 billion. In addition, the government has also provided bail out money to GMAC Financial services and Chrysler Financial, which are the financial arms of GM and Chrysler.

Under the presidency of Barack Obama, most assured plans are continued to be designed for the auto industry. He shows a strong commitment towards restructuring the automotive industry and helping out the Detroit Three fall. Obama has charged a “Presidential Task Force on Auto Industry”, which is a cabinet level group to evaluate the restructuring plans of GM and Chrysler. Based on the restructuring plans submitted, the administration is expected to take a decision on providing support including extending the loans to the auto companies.

Research Analyst, Sagitha R., will discusses the background of the crisis, details of support plans and its impact on the U.S. automotive industry.

Published in: Business, Automotive
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Frost & Sullivan Presentation: U.S. Auto Bailout: Bridge to Bankruptcy or Road to Salvation

  1. 1. U.S. Auto Bailout: Bridge to Bankruptcy or Road to Salvation R.Sagitha, Research Analyst Economic Research and Analytics Automotive & Transportation March 25, 2009
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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 15
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