The effort by General Motors Corp. to secure a federal bailout faces an overlooked hurdle: skeptical politicians, policy makers and industry analysts who don't think the world's largest auto maker is capable of turning itself around.
"Detroit has had a lot of time to understand what it takes to compete. They wouldn't stand up to the labor-union bosses, and now they're facing the consequences," said Rep. Jeb Hensarling, a three-term Texas congressman and chairman of a group of fiscally conservative Republicans. "We can't be in the business of picking winner and losers. What's next, the airlines? What about Starbucks or all of the other struggling small businesses out there?
Another Republican, Rep. Scott Garrett of New Jersey, said that "the real problem with this is that [a bailout] is not going to change the company, but simply to perpetuate the same business practices that created the problem in the first place."
"You will be asking the average middle-class taxpayer that doesn't have as rich of a benefit package to subsidize buyouts," Rep. Garrett added. "There are a lot of jobs on the line, but a bailout does not permanently solve the situation. Who's to say we won't be facing the same crisis in 2009?"
Though some kind of financial assistance has broad support among Democrats, others said they would reserve final judgment until they see the conditions attached to more aid for the auto makers. James Cooper, a fiscally conservative Democrat representing Tennessee, raised questions about the future of the auto makers' management teams. He said Congress must take a "tough love" approach and criticized "management and boards of companies that have shown arrogance since the 1950s that they never needed to change in a fundamental way."
GM maintains the company just needs financing to get to 2010, when UAW cost cuts kick in. GM Chief Executive Rick Wagoner says he won't resign despite questions about his management and continues to rule out bankruptcy as an untenable option. GM is burdened by high labor costs, but skepticism about its management stems from the many blunders it has made in recent years. "The current management team at GM must be replaced, even if GM selects the lowest funding-level option off the menu we prescribe," wrote automotive consultant Kenneth A. Elias, with Maryann Keller & Associates LLC, in a recent letter to President-elect Barack Obama.
Other voices are chiming in that a managed bankruptcy would be the best approach.
"It has been hamstrung for years because it has too much debt and it has contracts that are uneconomic," Bill Ackman, manager of the Pershing Square Capital Management LP hedge fund in New York, said on the Charlie Rose television show that aired Tuesday night. "What should happen is they should do a prepackage bankruptcy. The equity holders have been largely wiped out already."
GM, Ford Motor Co. and Chrysler LLC, owned by Cerberus Capital Management LP, may be moving closer to gaining federal aid, but substantial obstacles remain. U.S. House Speaker Nancy Pelosi, Democrat of California, said Tuesday her party will craft legislation that would give the industry "limited" assistance under the recently enacted Troubled Asset Relief Program.
Illinois Democratic Rep. Rahm Emanuel, chief of staff to President-elect Barack Obama, said in a television interview Sunday that the U.S. auto industry is "essential" to the economy.
Still, the White House has signaled its opposition, saying aid to the industry wasn't discussed during the debate on the banking bailout. Congress may take up auto-maker assistance when it returns next week. David Cole, chairman of the Center for Automotive Research, says he is ideologically opposed to rescue packages like the one the auto industry is desperate for right now but that he strongly supports it in this case, and immediately, seeing no alternative.
"It's the difference between life and death," says Mr. Cole, whose center receives funding from the auto industry. "Philosophically, it's not something that I like, but when you look at it from a practical standpoint...the cost of keeping them in the game is substantially less than the cost impact in the short term on the economy."
"Everything is so intertwined, and the supply base is fairly weak, so what that does, if you take a big guy out, that really cascades through the industry quickly," he said.
Others said that while the auto industry has been hurt by its own past mistakes, the recent financial crisis has exacerbated its problems. Mike Jackson, chief executive of AutoNation Inc., blamed Wall Street for the bankruptcy threat at auto makers. He argued in an interview on CNBC Tuesday that the auto companies had done much to repair themselves -- improved quality, cut labor costs, rationalized production, improved fuel economy -- and would have been in good shape if not for the credit crisis. "These companies have had structural challenges, they made dramatic fundamental changes, and now they're in danger of being swept away because of irresponsible behavior on Wall Street," Mr. Jackson said. A bankrupt auto maker, he added, won't be able to sell cars.
Auto makers aren't restricting their bailout efforts to the U.S. Australia's government is to inject an extra $2.3 billion into the ailing car industry to offset tariff cuts and a global economic slowdown, Prime Minister Kevin Rudd said on Monday. A €40 billion ($51 billion) government bailout package is under serious discussion in Europe. Analysts generally peg job cutting in the U.S. auto industry as costing at least $1.5 billion in incentives per 10,000 manufacturing jobs that are cut. That doesn't include other costs related to facility closures and white-collar buyouts.
Mr. Wagoner said Friday that the U.S. auto makers can't find funding to complete the essential restructuring efforts demanded of them. They are also finding it hard to predict just how much of the North American domestic auto industry needs to go away.
In addition to watching the market soften, GM, Ford and Chrysler must cope with the additional strain of having an increasingly slimmer piece of the shrinking U.S auto market. Through October, the three companies had lost four percentage points of market share, compared with the same period in 2007, giving domestic brands a 46% share, according to Autodata Corp.
Much of Detroit's restructuring efforts in recent years has been focused on reducing the ranks of blue-collar workers in order to deal with lower sales. But now, as cash dries up, the auto makers are eager to cut salaried costs.
GM's problems clearly demonstrate this need. On Friday, the auto maker said it will cut its 2009 capital-spending budget to $4.8 billion from $7.2 billion, meaning it will have far less need for thousands of engineers currently on the payroll. GM estimates 30% of its salaried budget in North America needs to be eliminated.
"We're cutting to the bone," GM Chief Operating Officer Fritz Henderson said.
GM isn't alone. Chrysler and Ford, along with thousands of U.S. auto suppliers and dealers, will need to downsize rapidly. And in Detroit, where job cuts have become a way of life, people are preparing for the worst.
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