By on May 11, 2011

Some taxpayer-funded turnarounds just have a little more turnaround than others, according to the GAO’s recent report on the auto bailout [PDF here], which tracks the progress of the Detroit patients and considers their futures. Sure, GM received quite a bit more government money than Chrysler, but the improvements in GM’s financial performance compared to Chrysler’s are clear. But the GAO still has a number of concerns about the “more than $34 billion” of taxpayer value that’s still floating around, unrecouped, in the rescued automakers. Feel free to peruse the GAO’s full 59-page report, or you can hit the jump for the highlights.

A recent survey of industry executives showed that insiders on both the OEM and supplier sides believe the Chrysler bailout to have been far less beneficial for the industry than the GM rescue, with 42% calling it “negative” for the industry. The GAO’s assesment finds that Chrysler’s bailout, though less expensive, was by far the less effective of the two rescues, further drawing distinctions between the often-lumped-together GM and Chrysler bailouts. Not only did Chrysler show only modest reductions in workforce, a growth in brands and a ballooning of debt, but the report also points out that the bailout only moved Chrysler’s breakeven point minimally

As noted in its November 4, 2009, business plan, Chrysler, at that time, had to ship roughly 1.65 million vehicles worldwide annually to break even on its  operating income. Chrysler’s reported worldwide shipments reached 1.6 million vehicles in 2010. According to Chrysler, the company has since reduced its operating breakeven to roughly 1.5 million vehicles worldwide (assuming a U.S. vehicle sales market level between 10 million to 11 million vehicles) due to operating efficiencies and other cost reduction actions.

But if Chrysler’s “operating break-even” is at 1.5m annual units, wouldn’t 1.6 million units delivered in 2010 drive a better operating performance than the $763m it reported? Except that Chrysler didn’t sell 1.6m units last year, but 1.516m units. Strangely though, that improves Chrysler’s profitability outlook (and Chrysler probably would have showed a profit for 2010 were it not for its high interest costs on government loans) by implying that Chrysler squeezed $763m in “modified operating profit” out of 160k units . So, did Chrysler really make $4,768 in profit on each car over its 1.5 “breakeven point” or are the government’s numbers a bit off? We’d lean towards assuming the latter.

GM, on the other hand shows some serious improvement in its break-even, as demonstrated in this chart. But, the report notes,

Since, according to Chrysler officials, 2007 data are not meaningful because of the change in ownership, we are not able to provide a similar historical trend and comparison for Chrysler.

Pity. Meanwhile, the numbers behind GM’s much-improved performance don’t lie… and they provide quite the contrast to Chrysler’s “turnaround.”

Here, the only metric that GM has clearly failed to achieve is dealer size reduction, which incidentally is the only metric that Chrysler had major success with (albeit without fixed targets for determining success). But given the SIGTARP’s harsh take on the (possibly criminal) GM/Chrysler bailout-era dealer cull, that’s not much of a black mark for The General. Meanwhile, models, brands, employees and debt have all been drastically reduced… although this graph’s non-inclusion of “pension or other postretirement benefit liabilities” in the “debt line item is a bit troubling.

Speaking of which, this is a major question facing GM’s long-term viability. After all, the GAO warned just a short year ago that unfunded pension obligations could re-sink the bailed-out automakers. Now, however, the issue of pension obligations is receiving only muted attention… and not because it’s all been taken care of either.

As of December 31, 2010, GM reported that its U.S. pension plans were underfunded (i.e., the value of plan assets was less than the value plan liabilities) by $12.4 billion, down from $17.1 billion at the end of 2009. This reduction is to some extent the result of GM’s voluntary contribution of $4 billion in cash to its defined benefit pension plans in December 20 Additionally, in January 2011, GM contributed approximately $2 billion in common stock to the plans, and GM’s former chief financial offic publicly stated that the contribution was part of GM’s goal to fully fund pension plans and minimize debt. We previously reported that GM has large “credit balances” based on contributions made in prior years that may be used to offset contributions that may otherwise be required. While projections of funding requirements are inherently sensitive to underlying assumptions, GM currently projects that required contributions will amount to no more than $3.5 billion through 2016. Thus, while the company’s recent, voluntary contributions may help reduce a portion of the underfunding among its plans, the plans may continue to be underfunded for several years or more unless, among other things, GM makes additional voluntary contributions or the plans’ asset performance improves.

The key phrase here, I believe, is “while projections of funding requirements are inherently sensitive to underlying assumptions.” The GAO’s previous report predicted GM’s pension funding obligations amounted to $5.9b in 2013, and $6.4b in 2014… paying $6b now and estimating only $3.5b more in pension costs through 2016 seems quite optimistic, especially given that $2b of GM’s recent contributions were in the form of stock that has yet to appreciate measurably since the IPO. It appears that some rosy assumptions about pension costs are going unchecked by the government’s “accountability” watchdog.

But pensions are just one of a grip of challenges that the GAO identifies as standing in the way of complete recovery for the bailed-out automakers and a complete payback of taxpayers’ “investment.” The report warns of possible rising labor costs coming out of this year’s UAW negotiations, a weak economic recover’s muted impact on the overall car market, GM and Chrysler’s unique vulnerability to fuel price volatility as well as their unique challenges in wining over consumers. The report even hops on TTAC’s old “retail sales” hobbyhorse, noting that

In order for GM and Chrysler to be successful, it will be important for them to sell cars that retail consumers want to purchase so that the companies do not have to rely as heavily on selling large numbers of fleet vehicles at discounted prices.

Oh, and that Opel mess? It should cost GM a good $4.2b. That’s nothing to sneeze at either.

After noting that the Treasury demanded that unsavory investors be kept away from GM’s IPO, a move that may have affected its value, the GAO sums up the prospects for the governments exit from GM.

After taking into account Treasury’s proceeds from the IPO, we estimate that Treasury will need an average share price of about $54 across all offerings for its remaining GM shares. As figure 2 shows, as of April 26, 2011, GM’s share price has traded well below that range—from about $30 to $39. Although Wall Street analysts are predicting positive trends, the share price target estimates that these analysts made after the company’s fourth quarter 2010 earnings announcement—showing a $37 to $50 share price target over roughly a 6- to 18-month period—are well below the price that Treasury would need to fully recoup its investment. Additionally, for each share sold below $54, the threshold for the remaining investment increases, thus suggesting that Treasury will have difficulty fully recouping its investment if it plans to exit its remaining interest in GM within the next year.

Additionally, Chrysler’s equity will have to grow appreciably in order to reach the value at which Treasury would recover the entire equity investment in the company. We estimated that Chrysler would need a market capitalization of about $41 billion for Treasury to earn enough on the sale of its equity to fully recoup its investment in Chrysler. As a point of reference for these values, in 1997, the last year Chrysler was a publicly traded company, its market capitalization value ranged between $23.1 billion and $31.7 billion, and in 1998, when it merged with Daimler, its estimated value was $37 billion. Also, as the Congressional Oversight Panel reported, for Treasury to recover all of the funds that it has invested in both old and new Chrysler, all of Chrysler’s loans would have to be
repaid and Treasury’s equity stake would have to yield at least $3.5 bill to make up for the losses to date.ion

Meanwhile, the report notes that the Department of Labor’s Auto Recovery Office has not been able to prove that it’s done anything. Which means the government’s corporate restructurings and equity “investments” were actually more effective than the effort to directly help auto-dependent communities. It’s all relative, isn’t it?


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2 Comments on “GAO: $34b Left On Bailout Bill...”

  • avatar

    2 points:

    GM had much more to cut in plants, dealers, capacity, etc. than did Chrysler because Chrysler started much earlier, probably back when Daimler owned them (and not all the cutting was done because of the economy or company performance, but because that’s the way Daimler wanted it). Measured from the beginning of Daimler ownership till the beginning of 2007 Chrysler shed thousands of workers, closed plants, close a brand (Plymouth), and started consolidating remaining brands under one roof… Gm has shown more improvement sine the BR because it had more to do – but it also had larger losses as a percentage of it’s business then Chrysler did because it not done those cuts before the BR.

    US Treasury holdings in Chrysler are much smaller percentage than GM. Therefore Chrysler shares would have to increase more to cover the investment (less % of shares to recoup costs), whereas Treasury ownership of GM is much larger %.

  • avatar
    Robert Schwartz

    A couple of years ago, I did an analysis of Honda, which has the capacity to manufacture 1.6 million vehicles in North America, from 12 Plants employing 25,000 workers, which cost almost $11 billion.

    Chrysler still has too many brands, too many plants, and too many employees.

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