Can We Get A Little Creative With The Auto Industry?

One day and the GM plan is already taking shots from one of the major stakeholders. The bondholders are questioning whether the plan adequately addresses the challenges facing the company.

The recovery plan GM presented to the federal government Tuesday evening calls for cutting 47,000 jobs around the world, closing five additional plants in North America and eliminating four of the auto maker’s eight brands. “The question is, did they go far enough, or are they just layering debt onto debt?” the person said. “They need the company to drive hard so it is competitive soon, not in 2012.”

Yeah, i’d agree with that, 2012 is a lifetime away given the times we live in. Given that nobody has an acceptable view of where we will be six months from now or how the world actually shakes out from all of this, a plan that projects results three years out is beyond worthless. If the business is that hard to turn towards viability within a much shorter time frame then it needs much more harsh medicine than the participants seem able to agree upon.

One of the problems with this entire episode is that there are so many pockets of assistance that it is becoming difficult to measure just how much this is really going to cost. For instance, the tax breaks included in the recent fiscal stimulus plan-loss carry-backs and abatement of taxes on repurchased debt-amount to substantial amounts of aid but are rarely cited in the overall cost. In addition, GM suggests that other industry participants that includes suppliers and its financing arm need further help.

The GM plan — by far the largest of the two — relies on assumptions that, if unmet, could make the proposed federal assistance far more costly than the $16.6 billion the company says it needs. GM is already banking, for instance, on $7.7 billion in loans from the Energy Department to develop more fuel-efficient technology, but those loans remain up in the air.

Another uncertainty: the stability of GM’s myriad suppliers, including Delphi Corp., the parts division spun off by GM a decade ago that’s now in Chapter 11 bankruptcy protection. GM’s plan proposes that the government create, by next month, a $4.5 billion credit-insurance program to guarantee payments to the country’s hard-hit parts makers. It also suggests that the government may have to provide significant aid to Delphi so it can emerge from Chapter 11.

In addition, GM said in the plan that its troubled financing arm, GMAC Financial Services, may need more federal assistance unless creditors begin to look more favorably on the unit. The Treasury Department put $5 billion into GMAC in December.

The alternative of some sort of Chapter 11 proceeding continues to be bandied about. The scare number that opponents are circulating is on the order of $100 billion. Maybe that’s right, I have no idea and neither do those putting forth the number. Whatever it might be, DIP financing is usually fairly secure as to repayment and at least a bankruptcy proceeding would afford the opportunity to hash this mess out without deadlines.

Time is a pretty precious commodity when you’re trying to work through difficult problems. It would seem to be a good buy right now in order to sift through the alternatives to the auto industry. The fact is that this country has a vibrant vehicle manufacturing sector and a couple participants are in dire straits. The problem is complicated by national pride when it need not be. If ever there was a time for the political class to put aside their empty platitudes and figure out a way for all to restructure the sector now would seem to be it.

The Armageddon type warnings of mass unemployment in the auto industry need to be put aside and a global solution pursued. It will require some give and take on both sides but there is no reason whatsoever that GM and Chrysler couldn’t end up as pieces of a stronger Toyota and Fiat with employment and supply chain companies marginally impacted. That’s going to take a much stronger and creative approach than is normally associated with the political class. If our new President wants to demonstrate some real change then he will start pursuing more creative solutions than we have seen to date.

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