And you know who will pay for all of this.
Aug. 22 (Bloomberg) — General Motors Corp., Ford Motor Co., Chrysler LLC and U.S. auto-parts makers are seeking $50 billion in government-backed loans, double their initial request, to develop and build more fuel-efficient vehicles.
The U.S. automakers and the suppliers want Congress to appropriate $3.75 billion needed to back $25 billion in U.S. loans approved in last year’s energy bill and add $25 billion in new loans over subsequent years, according to people familiar with the strategy. The industry is also seeking fewer restrictions on how the funding is used, the people said today.
GM and Ford lost $24.1 billion in the second quarter as consumers, battered by record gasoline prices, abandoned the trucks that provide most of U.S. companies’ profit and embraced cars that benefit overseas competitors such as Honda Motor Co. U.S. auto sales may drop to a 15-year low this year and fall even more in 2009, analysts have said.
“Next year is going to be a make-or-break year in terms of survival,” said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which oversees $22 billion in assets, including GM and Ford bonds. “Any help like these government loans would be a huge boost.”
Standard & Poor’s said Aug. 19 that U.S. light-vehicle sales will fall to 14.2 million units this year from 16.1 million in 2007 and drop again to 14.1 million next year. The ratings company said there is a 20 percent chance that this year’s sales will be as low as 13.6 million and 11.7 million next, presenting an “overwhelming challenge” for U.S.-based companies.
Plans at Risk
“Our plans, which require significant investments, are at risk because of limited access to capital,” said Greg Martin, a spokesman for Detroit-based GM. He declined to comment on whether GM is seeking more than the original $25 billion. “This program will open capital that is necessary to make sure our transformational plans continue at full speed and give us the best chance to succeed.”
Mike Moran, a spokesman for Deaborn, Michigan-based Ford, said the automaker had no comment on any funding beyond the $25 billion already approved.
“The priority is to get the appropriation that has already been approved,” said Linda Becker, a spokeswoman for privately held Chrysler, based in Auburn Hills, Michigan. “Conversations as to why or how we should expand that amount are ongoing.”
Congress needs to appropriate about $3.75 billion to cover the upfront cost of the government loans, according to a July 25 estimate in a letter to House and Senate leaders. The letter was sent by 71 members of Congress urging support on the issue.
Presidential candidate and presumptive Republican nominee Sen. John McCain today gave his support to the proposal.
“Our auto companies are rising to the challenge building the next generation of American cars, but are doing so in times when credit conditions cripple the funding for the facilities and technologies to take the steps to the future,” he said in an e- mailed statement.
“We should fund it and take action that will assist Detroit and its suppliers in making it through this difficult time of transition,” he said in the statement.
Others disagreed with the proposal to put taxpayer funds at stake
“This is a horrible idea, another transfer of funds to failed ventures,” said David Littmann, senior economist for the Mackinac Center for Public Policy in Midland, Michigan, which describes itself as a supporter of free-market ideals. “If this were a good idea, the market would price the debt accordingly and give them the money.”
Cost of Upgrading
Auto-industry lobbyists want Congress to set rules that will allow the initial $25 billion to pay the full cost of upgrading assembly plants, parts production or engineering to improve fuel efficiency, said the people, who didn’t want to be identified because the plans are still being developed. The current rules limit loans to 30 percent of the cost.
The industry is also seeking a broader interpretation of what projects are eligible. That might allow the funds to cover the conversion of truck plants into car plants, for example, in addition to paying for vehicles with the highest mileage, such as hybrid-electric cars or fuel-cell models, the people said.
The loans were authorized in last year’s Energy Independence and Security Act. Rules to free up the funding are supposed to be written within a year of its December passage, Representative John Dingell said in an Aug. 4 letter to U.S. Department of Energy Secretary Samuel Bodman.
The auto industry wants funding for the loans approved before the current legislative session ends next month. Dingell and other lawmakers have said Congress needs to consider the impact the companies have on the U.S. economy.
GM, Ford and Chrysler employ 240,000 people in the U.S. and account for 7 out 10 U.S. auto workers, according to a report released this year by the Automotive Trade Policy Council in Washington, which represents trade interests of U.S. automakers. The companies support another 5 million jobs at auto dealerships, suppliers and service providers.
The automakers purchased $156 billion in auto parts last year and have invested $225 billion in U.S. plants and equipment since 1980, including $10 billion last year, according to the report.
“We’ve seen these kinds of bailouts for the financial companies, why not the automakers?” said Aaron Bragman, a Troy, Michigan-based auto analyst for Global Insight Inc. “The big problem is that a lot of people in Washington don’t see a value in the U.S. auto industry because they have a foreign plant in their district that is doing just fine.”
Last Updated: August 22, 2008 20:04 EDT
By Jeff Green