[Senate Hearing 110-876]
[From the U.S. Government Publishing Office]
S. Hrg. 110-876
EXAMINING THE STATE OF THE DOMESTIC AUTOMOBILE INDUSTRY--PART I
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
ON
EXAMINING THE STATE OF THE U.S. DOMESTIC AUTOMOTIVE INDUSTRY AND ITS
OVERALL IMPACT ON THE NATION'S ECONOMY, THE AUTOMOTIVE WORKERS, AND THE
COMPANIES INVOLVED IN THE SUPPLY CHAIN AND THEIR EMPLOYEES
__________
NOVEMBER 18, 2008
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii MIKE CRAPO, Idaho
SHERROD BROWN, Ohio ELIZABETH DOLE, North Carolina
ROBERT P. CASEY, Pennsylvania MEL MARTINEZ, Florida
JON TESTER, Montana BOB CORKER, Tennessee
Shawn Maher, Staff Director
William D. Duhnke, Republican Staff Director and Counsel
Amy Friend, Chief Counsel
Mark Oesterle, Republican Chief Counsel
Dawn Ratliff, Chief Clerk
Devin Hartley, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
?
C O N T E N T S
----------
TUESDAY, NOVEMBER 18, 2008
Page
Opening statement of Chairman Dodd............................... 1
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 4
Senator Johnson.............................................. 5
Senator Enzi................................................. 6
Senator Schumer.............................................. 7
Senator Bunning.............................................. 8
Senator Carper............................................... 9
Senator Dole................................................. 10
Senator Menendez............................................. 11
Senator Corker............................................... 12
Senator Brown................................................ 13
Senator Allard............................................... 15
Senator Casey................................................ 15
Senator Bennett.............................................. 17
Senator Tester............................................... 18
Senator Martinez............................................. 19
Senator Bayh................................................. 20
Senator Crapo................................................ 22
WITNESSES
Debbie Stabenow, a U.S. Senator from the State of Michigan....... 24
Ron Gettelfinger, President, International Union, United
Automobile, Aerospace, and Agricultural Implement Workers of
America........................................................ 29
Prepared statement........................................... 78
Response to written questions of:
Senator Shelby........................................... 109
Alan R. Mulally, President and Chief Executive Officer, Ford
Motor Company.................................................. 31
Prepared statement........................................... 81
Response to written questions of:
Senator Shelby........................................... 110
Robert Nardelli, Chairman and Chief Executive Officer, Chrysler
LLC............................................................ 32
Prepared statement........................................... 87
Response to written questions of:
Senator Shelby........................................... 112
G. Richard Wagoner, Jr., Chairman and Chief Executive Officer,
General Motors................................................. 34
Prepared statement........................................... 90
Peter Morici, Professor, Robert H. Smith School of Business,
University of Maryland......................................... 37
Prepared statement........................................... 105
Response to written questions of:
Senator Shelby........................................... 113
Robert A. Ficano, Wayne County Executive, Detroit, Michigan
Prepared statement........................................... 106
(iii)
EXAMINING THE STATE OF THE DOMESTIC AUTOMOBILE INDUSTRY--PART I
----------
TUESDAY, NOVEMBER 18, 2008
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 3:02 p.m., in room SD-538, Dirksen
Senate Office Building, Senator Christopher J. Dodd (Chairman
of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. The Committee will come to order.
If I had known the interest, I would have held this at RFK.
Well, listen, thank you all for coming this afternoon, and
I appreciate the participation of our witnesses and our
colleagues as well. Momentarily, we will be asking our
colleague Senator Stabenow to share some opening comments.
I would point out that Carl Levin, the senior Senator from
Michigan, is unable to be with us this afternoon, but has
submitted testimony and obviously has a very strong interest in
this subject matter. And I have had numerous conversations with
him over the past number of days, and so we appreciate his
contribution to this afternoon's proceedings as well.
Let me just briefly say how we are going to proceed here. I
am going to make some opening comments. My friend and colleague
from Alabama will make some opening comments, and then I will
ask my colleagues here if they would please be brief, if you
could. I know everyone wants to be heard on this subject
matter, at least a couple of minutes. We will then turn to you,
Senator Stabenow, and then we will invite our witnesses up for
their testimony here this afternoon.
This afternoon's hearing is on ``Examining the State of the
Domestic Automobile Industry.'' This afternoon the Committee
examines the condition of this important domestic industry to
our country, and I want to thank Senator Shelby and our other
colleagues for accommodating their schedules to allow us to
have this hearing scheduled on such short notice. And although
we may have different views on the ailments of the auto
industry and the remedies for them, I think we can all agree
that its fate is a very important subject matter for this
Committee's consideration.
Our Banking Committee jurisdiction, I would point out to
those who may not be aware, extends to matters pertaining to
economic stabilization and financial aid to commerce and
industry. As such, today's hearing is very timely and
appropriate.
The automobile industry, of course, has made an urgent
request, as we are all aware, that Congress provide some
emergency assistance to their companies. Without that
assistance, we are told that one or more of the Big Three
automobile makers could become significantly impaired or
collapse altogether. Were that to happen, the repercussions, of
course, would be severe. Hundreds of thousands of people who
assemble these automobiles would lose their jobs. Many more who
supply auto parts would face layoffs. As well, automobile
dealers would be shuttered, and countless others who rely on
the auto industry for their livelihoods, from the people who
work in restaurants near these auto factories to those who, in
fact, clean the offices of these executives, could find
themselves without a job.
There are those who believe that the partial or total
collapse of the domestic automobile industry would have
repercussions far beyond those whose work is directly or
indirectly connected to that industry. They argue that if this
major industry goes down, it could take down huge sloughs of
the Nation's economy with it; and in so doing, it could create
new and profound risks to the stability of our entire economy,
which, as we all know, is already in a very precarious state.
None of us relishes being here today to consider these
prospects. That goes for our company and labor witnesses who
are going to be testifying later this afternoon. Their
discomfort in coming to the Congress with hat in hand is only
exceeded by the fact they are seeking treatment for wounds that
I believe to a large extent were self-inflicted. No one can say
that they did not see this coming. Their companies have been
struggling for years. They are hemorrhaging jobs; 450,000 have
been lost in the last 8 years alone. They are losing market
share. For the first time, the domestic auto share for Ford,
Chrysler, and GM has slipped below 50 percent, going from 66
percent in 2001 to just 47 percent today. Their boardrooms and
executive suites, in my view, have been famously devoid of
vision.
Certainly there have been exceptions. Ford was arguably
ahead of the market when in the early years of this decade,
they saw a big future in the fuel-efficient and alternative
energy vehicles. But for the most part, the top echelons, in my
view, of the Big Three turned a blind eye to such
opportunities. They have been content, in my view, to not only
satisfy but in too many respects drive the demand for
inefficient gas-powered vehicles that Americans have been going
broke to gas up. They derided hybrid vehicles as making ``no
economic sense.'' They have dismissed the threat of global
warming, the role played by their products in creating it, and
the strong desire of the American people to do something to
stop it. The prices of GM and Ford shares have declined
steadily and have now reached historic lows.
In short, the auto makers have failed to adapt to change,
in my view, and the shareholders are rendering judgment for
that fact. They have approached 21st century challenges with
decidedly a 20th century mind-set, and we are all paying the
price for it. This is not the first time that the leaders of
our automobile industry have presented Congress with a doomsday
scenario in connection with a cry for help. It happened in the
late 1970s as well. At that time this Committee, under
different leadership, and the Congress responded with the
Chrysler Loan Guarantee Act. The law provided $1.5 billion to
Chrysler in loan guarantees to help it avoid bankruptcy. But it
did so with several very tough conditions. It created a Federal
oversight board to review and approve funding decisions. It
required Chrysler to become energy efficient. It prohibited the
company from paying dividends on its common or preferred stock.
It required buyouts that resulted in the loss of thousands of
jobs, and the company was required to come up with a nearly
dollar-for-dollar match in private funds in order to qualify
for Federal guarantees.
Unlike 1979, however, today the tools already exist to
provide meaningful and appropriate assistance to the industry.
I am referring to the Emergency Economic Stabilization Act,
which was signed into law barely 6 weeks ago. This legislation
confers broad authority on the Secretary of the Treasury,
including, in my view, the authority to purchase ``any
financial instrument,'' such as stock from any institution, if
necessary, to promote financial market stability. The Secretary
of the Treasury has until now declined to use that authority,
and I regret that, focusing the resources of the act on
financial companies. It is hard to explain how you can provide
massive assistance to AIG, but manage to find no room at all
for assistance for our three major automobile manufacturers.
Similarly, the Federal Reserve has declined to use its
authority under Section 13-3 of the Federal Reserve Act to
assist the auto industry. That provision allows the Fed to lend
to any individual, partnership, or corporation if, due to
unusual or exigent circumstances, that person, partnership, or
company is unable to secure adequate credit.
I support efforts to assist this industry, not because
their leaders necessarily deserve taxpayer help--on the
contrary, deserve no more help than do the leaders of the
financial companies that created the subprime mortgage mess
that has exploded into the global financial crisis. Rather, I
support action as a way to minimize the possibility of such a
destabilizing event in our overall economy. At a time like
this, when our economic future is so tenuous, we must do all we
can to ensure stability. None of us wants to look back and ask
if we were penny-wise and pound-foolish at a moment of great
peril economically. That said, I am only one of 100 Members of
this body. It will take more than my support to pass meaningful
legislation this week or next week, and by ``meaningful,'' I
mean legislation that would provide not only necessary
financing to sustain operations; I also mean legislation that
imposes tough conditions on the companies to sustain our planet
and to maintain strict accountability to the taxpayers who are
once again being asked to make extraordinary sacrifices for
those whose actions are costing our Nation dearly.
My view is that this moment presents not only a challenge
but also an opportunity--an opportunity to reject the subsidy
for failed business practices, instead to generate meaningful,
lasting change that transforms a key piece of our manufacturing
base for success in the 21st century.
Whatever path we ultimately choose--and we will have
differences about what it is--that ought to be our shared goal.
So in a few minutes, I will be asking our friend and colleague
from Michigan to share her thoughts with us, but before I do
that, let me turn to my colleague from Alabama, Senator Shelby.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman.
Only 6 weeks ago, Congress hastily passed a bill that gave
the Secretary of the Treasury authority to spend $700 billion
to address the credit crisis. The key component of the Treasury
plan was the purchase of so-called troubled assets held by
financial institutions. At that time I expressed grave concerns
with the wisdom of the approach and questioned whether it would
be an appropriate use of taxpayer dollars.
Instead, at that time I called for a serious examination of
the origin and scope of the ongoing financial crisis so that we
might then craft a thoroughly considered and narrowly tailored
solution. Unfortunately, we, the Congress, skipped that step.
The Treasury Department has since abandoned the plan, as
you all know, to purchase troubled assets and is now using the
funds to purchase direct equity stakes in financial
institutions. We were told that this would be the best way to
stabilize faltering institutions and stimulate lending.
Although interbank lending has improved slightly in recent
weeks, the series of ad hoc Government measures intended to
relieve stress in the credit markets have actually increased
mortgage rates and placed additional strains on demand. This
has occurred despite intentions to the contrary.
Today, as we consider altering the Treasury bailout program
to provide cash assistance to the domestic auto manufacturers,
I am concerned that once again we are about to employ the
``ready, fire, aim'' approach to problem solving.
Before we take that step, I believe we need to determine a
number of things. First, we must examine whether diluting the
TARP program will fatally weaken an already flawed construct.
Second, I believe we must determine the current financial
condition of the domestic auto manufacturers and how they got
that way. Finally, Mr. Chairman, I believe we must determine
both the short- and long-term outlook for these firms. These
are all fact-based considerations, and we should look at the
facts. Therefore, we can and I think we must build a thorough
record so that we can make fact-based decisions here in the
Congress.
And while I recognize that the current economic situation
has exacerbated the problems of the Detroit auto makers, I
think we in the Congress must examine in greater detail the
causes of their longstanding problem.
For example, industry analysts contend that the firms trail
their major competitors in almost every category necessary to
compete and make a profit. In fact, even when the firms were
setting record sales records, they were barely making money.
I believe we need to understand why this has been the case.
We need to know what the firms are doing to enhance their
ability to compete in the future. How do they plan to deal with
current management, labor, cost and quality control, and
product development shortfalls, which they know they have? How
do they plan to address changes in the marketplace such as
long-term reductions in annual sales? How do they intend to
reverse the continued loss of market share to foreign car
companies? Yes, and how are they going to adapt to an
international market that demands greater efficiency and
flexibility?
I also, Mr. Chairman, have questions about the amount of
resources needed to address the current situation. Is $25
billion--a lot of money to me--is that enough? Is this the end
or just the beginning? Some reports state that the firms
appearing today may each need at least $20 billion, some $50
billion apiece. If that is true, we should be told that today.
Finally, how is the money going to be used? That is a good
question. Will it be used to improve their business model,
which has been a failure, and product lines? Or is this just
life support?
I understand that each firm may use their entire share to
pay preexisting claims to stay afloat. In other words, the
money would be used just to keep the lights on. If that is the
case, there would be nothing left to make changes that might
actually help turn the firms around. I believe this begs the
question: Are we here in the Senate being asked to facilitate a
stronger, more competitive auto manufacturing sector or to
perpetuate a market failure?
Today's witnesses need to assure this Committee and the
American people that they are able to do what they have failed
to do in the last 10 years. I look forward to their answers.
Chairman Dodd. Thank you very much, Senator.
Senator Johnson.
STATEMENT OF SENATOR TIM JOHNSON
Senator Johnson. Mr. Chairman, thank you for calling
today's hearing to examine the condition of the domestic auto
industry and the effects of interest rate turmoil on job
creation and economic growth. As you know, I did not support
the $700 billion bailout, in part because I did not believe
that the conditions set for bailout monies for Wall Street
firms were strong enough. I expect that if help is extended to
the auto industry, these companies and their executives will be
held to very high standards of accountability and that the
taxpayer protection remains a top priority.
Going forward, Congress must focus on how to secure the
hundreds of thousands of jobs connected to the auto industry
and also ensure that this industry makes dramatic improvements
to innovate and reflect consumers' changing tastes for fuel-
efficient vehicles, including flex-fuel vehicles and
alternative-fuel vehicles, cars, and trucks. The U.S. has the
ability to lead the world powering vehicles on renewable fuels.
What is lacking has been the domestic auto industry's embrace
of policies and misallocations of resources, resulting too
often in an inferior product.
I am keenly interested in learning from today's witnesses
as to how additional investment of taxpayer dollars to this
interest would not repeat these missteps.
Thank you, Chairman Dodd.
Chairman Dodd. Thanks very much.
Senator Enzi.
STATEMENT OF SENATOR MICHAEL B. ENZI
Senator Enzi. Thank you, Mr. Chairman. I am disappointed
that we are here today to consider another financial rescue
package. While I agree that this topic deserves the deliberate
consideration of the Senate Banking Committee, I have to note
that this Committee will not actually be approving any
legislative proposals related to the auto rescue package
through the regular order, through deliberation, which is the
only way that we get good legislation.
The Committee process is the method by which we consider
legislative proposals, weigh alternative ideas, and build
coalitions through the process of deliberation. Unfortunately,
that process has not been relied upon during the debate on the
Emergency Economic Stimulus Act, and it is not the process we
are using right now. I opposed passage of the Emergency
Economic Stabilization Act in October because, in Congress'
rush to pass an expensive solution to our financial crisis, we
did not carefully consider the impact such a proposal would
have on our markets and honestly weigh all available
alternatives. As evidenced by the financial markets since
October 3rd, the EESA has made little progress in bringing
prosperity and consumer confidence back into the markets. Even
though there is a lot more flexibility there than I think any
of us dreamed of, I have serious doubts that this rescue
package will be any different. The auto manufacturing industry
is telling us today they need a $25 billion rescue package as a
result of the financial crisis and the public's inability to
find credit to buy their products.
This is not the only reason why the domestic auto industry
is in trouble. Labor costs, enormous legacy liabilities, and
inefficient production have also contributed to the current
crisis in the auto industry. Isn't it prudent for us to
consider how the taxpayers' $25 billion will go to addressing
these issues before we authorize the spending? For example,
General Motors' direct labor cost is reportedly $71 an hour
while Toyota pays only $47 per hour. Indirect costs resulting
from union labor agreements only add to this cost differential.
Ford and GM both spend much more time to produce a vehicle than
either Toyota or Honda, and fixed costs keep domestic
manufacturers from competing with more nimble overseas
competitors.
Unfortunately, the auto package being considered by the
Senate this week is completely silent on these issues. When the
Senate votes on the bailout on Wednesday, the $25 billion
bailout will not be attached to any larger proposal to reform
contractually imposed costs incurred each year by domestic auto
makers. The bill will not include reforms to address the
industry's crippling legacy costs or enormous and costly
infrastructure. Instead, it will be another check issued by the
taxpayer to solve a long-term problem with a short-term
solution. I am pretty sure whatever the bill is, if you took it
to your banker and asked for $25,000, he would send you back
for more work.
Under the terms of the proposal, I would not be surprised
if we find ourselves and the domestic auto industry in the same
situation 6 months or a year from now. There is nothing in the
proposals that I have heard to prevent the same problems from
returning to the industry in the future. We have little
evidence that this $25 billion will do anything to promote the
long-term success and competitiveness of domestic auto
manufacturers. However, this body is under enormous pressure
from that industry to provide the money with no strings
attached.
Instead, I ask my colleagues to resist the illusions of
pending economic disaster and carefully consider the proposal.
This Committee should also examine ways to modify existing
proposals to make it more taxpayer friendly. We could secure
this $25 billion loan with unencumbered assets of the
participating auto companies. We could boost private sector
investment through a matching program similar to the one
proposed by Secretary Paulson. These ideas are worthy of
consideration and deliberation and should be a part of the
debate.
I thank the Chairman.
Chairman Dodd. Thank you.
Senator Schumer.
STATEMENT OF SENATOR CHARLES E. SCHUMER
Senator Schumer. Thank you, Mr. Chairman. I thank you and
Senator Shelby for holding this obviously very timely and
important hearing.
Survival of the auto companies is imperative for America's
ability to remain the global economic leader in innovation. At
a time when there are tremendous horizons of opportunity in the
auto sector, helping the industry meet its challenges is very
important. We should not drop out of the race before we have
had a chance to compete. And given the fragility of our economy
today, ignoring the plight of the auto industry would only
accelerate an economic downturn and make it more difficult for
our Nation to return to prosperity. Bankruptcy of one or more
major companies at this point in time in our economy would have
far more severe effects than during a time of relative
prosperity or stability.
The auto industry is a bedrock of our economy. Almost 4
percent of the Nation's GDP comes from autos. That is 10
percent of our industrial production by value. What is more,
the industry supports 3 million ancillary jobs--jobs we must
preserve when employment is decreasing by over 200,000 jobs a
month, and more massive layoffs are expected as a result of the
credit crisis. And thousands of these jobs, Mr. Chairman, are
in my State of New York, where the auto industry has been an
important part of the local economy for decades. Large portions
of the economies in western New York, the Rochester area,
Syracuse, and other places depend on the auto industry.
So, while I believe that the auto industry is too vital to
let fail, I do share many of my colleagues' concerns that what
we are being asked to do is not the end but the beginning, and
that you will be back before us in a matter of months. We must
be assured that whatever aid we give you is accompanied by a
real plan that shows you recognize the direction that this
industry must take in order to not to survive but to thrive. I
believe we must take action in the short term to save the
industry, but we also need to hear a plan from the auto
executives sitting here today. We need them to reassure us they
will not come back again in 6 months in the same sinking boat
asking for another $50 billion to plug more holes.
A business model based on a gas-guzzling past is
unacceptable. We need a business model based on cars of the
future, and we already know what that future is: the plug-in
hybrid electric car. We need to know that you will be committed
to building the cars that will make America a leader in
automotive innovation and are committing the appropriate
resources to get this done, even if it means sacrificing some
short-term income for your long-term investment in the future.
I am hopeful that our Republican colleagues will recognize
the urgency of this situation and join us in this critical
investment in our future.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you, Senator.
Senator Hagel, any comments?
Senator Hagel. No, Mr. Chairman.
Chairman Dodd. Senator Bunning.
STATEMENT OF SENATOR JIM BUNNING
Senator Bunning. Thank you, Mr. Chairman.
Before talking about any legislation, I want to say that I
am very concerned about the state of the auto industry in the
United States. I am not concerned out of a sense of American
pride or because of the great history of the American auto
industry. What concerns me are the workers, the men and women
who assemble our cars and trucks, who sell and service the
vehicles at dealerships, and those who work for suppliers that
keep the industry running.
Auto manufacturing is the largest manufacturing sector in
my State. I know Detroit's pain is felt in towns and cities all
across Kentucky. In many counties, jobs making seat belts and
radiator hoses are some of the best-paying jobs around. And
those jobs are in danger.
Just last week at least 600 steelworkers were laid off at a
plant in Ashland, Kentucky, that supplies steel for exhaust
pipes. I am concerned for those workers and their families.
The question facing Congress is what, if anything, to do
about the industry's current problems. The proposal coming
before the Senate tomorrow is not a serious one. Much like the
other bailouts we have passed, it is virtually a blank check
that does not require serious considerations or concessions. It
also does not address the current problem facing the industry,
which is a lack of funding for auto loans. More importantly, it
does not address the long-term viability of the domestic
manufacturing industry.
Everything I read says that these three companies before
this Committee cannot survive at the current size and cost
structure, even when the current economic climate passes. I
also hear that $25 billion is not enough to last past February
at the current rate of spending. To me, that says that major
changes are needed if Federal dollars are to be made available.
The bill coming before the Senate requires no such changes.
What I hear from our witnesses today is whether or not they are
serious about making the painful changes that are necessary for
these three companies to survive the long term.
One idea I read in the New York Times this morning is that
the companies could go in a prearranged Chapter 11
restructuring and the Government would provide financing for
these companies coming out of bankruptcy. That is a more
serious proposal than what is before the Senate, so I want to
know if the people sitting at the witness table--not my fellow
colleague--are willing to make those tough choices. Are the
companies ready to close down brands, factories, and shrink
their overall sizes? Is the union willing to go along with cost
and size reduction as the companies restructure? Are executives
willing to give up their jobs as a condition of getting these
funds? These are just a few of the questions that need to be
answered.
Finally, Mr. Chairman, I want to repeat my concern for the
workers up and down the auto supply chain and dealer networks.
Many of those families and communities are living in fear right
now. No matter what we do, some of those jobs are going to go
away, at least for the short term. We owe it to them to discuss
serious proposals that will lead to long-term stability in the
auto industry.
Thank you.
Chairman Dodd. Thank you, Senator.
Senator Carper.
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. Thanks, Mr. Chairman. Welcome to our
witnesses today. Thank you for joining us. It is an important
occasion.
Not surprisingly, there is a healthy skepticism when it
comes to an auto industry bailout. Many are quick to point out
the mistakes the auto industry has made in past decades. I have
been among those. Some prominent economists have gone so far as
to say that the bankruptcy court could actually force a
beneficial reorganization. If our economy were doing well and
if the credit markets were not frozen, you know, it might just
be possible that they are right. But as things stand today, I
do not believe that bankruptcy court is the answer.
General Motors does not have the money to reorganize, nor
is there credit available. That means we are not talking about
a Chapter 11 process but a Chapter 7--in other words,
liquidation. That means the loss of more than perhaps a million
jobs at the worst possible moment. Our economy is too
vulnerable. It simply cannot stand the kind of anti-stimulus
that a GM liquidation would bring.
The Big Three auto makers are taking steps we would want
them to take already. They have reached an agreement with the
UAW to bring labor costs down and to reduce the legacy costs by
moving health care benefits to private trusts managed by the
union. Further, as painful as it is, the Big Three have closed
plants to bring their production more in line with U.S. demand.
In addition, they are developing new, exciting vehicles like
the Chevrolet Volt, which will go 40 miles without using one
drop of gasoline.
But in the midst of all these positive steps, the auto
makers were hit by high gas prices, along with the rest of us,
followed quickly by the complete paralysis of credit and a
recession. The challenge now is to get our domestic auto
industry through the next year while they finish the
reorganization and modernization that everyone has agreed is
good for them and for the country, and, I might add, while they
bring through the pipeline the vehicles, the very promising
vehicles that are on the drawing board.
As policymakers, it is our goal to design an assistance
package that will lead to a successful outcome for the auto
industry while protecting taxpayers' investment. To do so, such
a package could include curbs on excessive executive
compensation and the inclusion of preferred stock and warrants
in each of the companies receiving bridge loans, not unlike
what we did in 1979 with Chrysler, a process which led to the
Federal Government actually realizing a return on investment of
$310 million.
Although saving the auto companies is important to the
overall health of our economy, in Delaware auto workers, much
like those around the country, are losing their jobs right now.
In fact, our Chrysler assembly plant in Newark, some 50, almost
60 years old, will close at the end of this year. So while we
talk of another industry bailout, I just hope we can take some
time to ensure assistance to those who will be left behind
whether or not the companies, their companies, are saved.
Of course, people who are losing their jobs today need to
know that they will have unemployment benefits tomorrow, as
well as job retraining, job placement help, and possible
relocation assistance. We also cannot forget the communities
who are facing the challenge of redeveloping closed auto plants
at a time when new investment is scarce. We must provide
assistance to ensure that auto sites do not become blighted,
but instead offer new opportunities and create new jobs.
I am pleased that our Chairman called this hearing, but I
am not pleased that it was necessary, nor do I suspect any of
our witnesses are. However, I am interested in hearing what you
have to say. I stand ready to work with my colleagues,
certainly Senator Stabenow and Senator Levin, to quickly
determine the best course of action for auto makers, for their
employees, for our taxpayers, and for our economy.
Thanks, Mr. Chairman.
Chairman Dodd. Thank you. Thank you, Senator.
I want to note the presence of Sandy Levin, our fellow
Congressman from Michigan, who is in the room. We thank you,
Congressman, for coming over to join us.
Senator Dole.
STATEMENT OF SENATOR ELIZABETH DOLE
Senator Dole. Thank you, Mr. Chairman.
As I have indicated before, I have very serious concerns
about the $700 billion rescue package that this legislation
unfairly holds taxpayers responsible for the costly and
reckless decisions of investment bankers on Wall Street and
policymakers in Washington. Like so many North Carolinians I
have heard from, I continue to be very skeptical that this
newly enacted law is turning out to be the blank check that so
many of us feared.
Incredibly, only last week Treasury Secretary Paulson said
that the Troubled Asset Relief Program would now not include
the purchase of illiquid mortgage securities. This proposal was
principally sold to Congress as the way to return our financial
institutions to health. In fact, this Committee and its staff
spent countless hours quizzing Treasury and Federal Reserve
officials about how this proposal would work in practice. I
know I was hardly the only Member who found their responses
either inconclusive or unsubstantiated.
Well, as someone who opposed this legislation from the
beginning, I am pleased that Secretary Paulson now recognizes
this type of mortgage purchase mechanism looks destined to
failure. I can only imagine the number of Members of Congress
who have had to come to grips with the fact that the TARP plan
was an ill-advised, hurried attempt to stymie fundamental
underlying problems in our housing and credit markets. And now
we are talking about extending this same legislation to the
automotive companies? This would ignore the original intent of
the law, which was to clear out the credit markets so banks
would lend money to one another and to businesses, thereby
spurring economic activity. Additionally, this would distract
from what I believe to be the root cause of our economic
problem: the collapse of our housing market.
So much of what is now happening with regard to the credit
crisis, the housing slump, and the bankruptcy and dissolving of
major financial institutions can be linked to the mismanagement
of Fannie Mae and Freddie Mac, which was made possible by weak
oversight and very little accountability. If anything, this
Committee should now be spending its precious time asking
regulators: What is going to happen with those GSEs in a post-
Government-conservatorship world? After the conservatorship,
what next? As I have previously stated, we need to end the
existing structure of an implied Government guarantee. We need
to end the practice of private rewards at public risk.
Another topic that would be more pertinent for this
Committee's attention right now, it seems to me, would be the
results of this past weekend's G-20 summit. One bright note
from those discussions was the recognition among the
participants for the need for stronger regulation of
derivatives, including credit default swaps. I have called for
more transparency in this area of the credit markets--called
for it for some months--which have grown exponentially from $1
trillion in 2000 to $55 trillion today in market exposure.
Finally, without fundamental changes in the automotive
industry, we would just be throwing taxpayers' dollars at firms
that will inevitably go under. For instance, the enormous costs
in union-required benefits is unsustainable. Renegotiating
these contracts would be essential if there were to be hope of
keeping these companies afloat.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator.
Senator Menendez.
STATEMENT OF SENATOR ROBERT MENENDEZ
Senator Menendez. Well, thank you, Mr. Chairman.
First, let me say that if I was a Michigander or this
industry, I would not have any greater advocates than Senator
Levin and Senator Stabenow. They are both passionate and
eloquent, and if I lived in Michigan, I would want them to be
my Senators.
You know, Mr. Chairman, a former chairman of General Motors
once quipped very famously that what is good for General Motors
is good for America. And we would like to believe that is still
true today, but many of us believe, unfortunately, that General
Motors has lost sight of what is good for General Motors or for
America.
I read through the testimony of our witnesses, and what we
will not hear is that any of the industry's problems are at the
hands of any of the witnesses who will come before us. They
will tell us that it is totally some other set of circumstances
that they are affected by, very similar to what mortgage
lenders and brokers did here a year ago in this very room. But
I do hope that when you have an opportunity to answer
questions, you will take some responsibility and work with us
to find a constructive solution.
Our Nation is in the midst of an energy security crisis,
and our planet is in the midst of a climate crisis. And the
fact that these twin crises would have an enormous impact on
your industry should not come as a surprise. For decades,
leaders here on Capitol Hill have asked our domestic auto
manufacturers to look beyond the next quarter and take into
account the looming threats of energy and climate security. But
all we have seen in response is a concerted effort to block
progress. I think we are all, frankly, looking for some
assurances that we will not continue to be here again year
after year lamenting the fact that our domestic auto makers
have chosen to lobby against changed regulation rather than to
innovate and meet new circumstances. We have to make sure that
we are making a wise investment with taxpayer money.
Quite simply, Mr. Chairman, I think there needs to be
strings attached. We need to see some type of guarantee that
fuel economy standards will continue to rise beyond the year
2020. We need to ensure that the California waiver can be
granted without spending money by the industry in opposition to
that effort. What we need is for the Big Three to become part
of the solution for energy security and fighting global warming
rather than being part of the problem.
That having been said, Mr. Chairman, I do worry--I do
worry--about protecting the workers, not those in the executive
offices but those on the manufacturing line, the suppliers, the
dealers, the several million people whose fates are
intricately--fellow Americans--who are intricately tied with
this industry, and how we try to meet this challenge of giving
the assistance necessary to keep the industry alive, but with
the assurances that must come--not a blank check. It must come
with some assurances along the way that hopefully can not only
save the industry but move it into a new era for both America,
for those workers, and for our future.
With that, Mr. Chairman, I ask that the rest of my
statement be included in the record.
Chairman Dodd. I will do that. And, by the way, all the
full statements of our colleagues and the witnesses and any
supporting material will be included in the record.
Chairman Dodd. Senator Corker.
STATEMENT OF SENATOR BOB CORKER
Senator Corker. Thank you, Mr. Chairman, and I thank our
witnesses for being here today and certainly the Senator from
Michigan.
In listening to the opening statements by many and just
reading the tea leaves, my sense is that probably nothing is
going to happen this week and that this is sort of the
beginning of a loan application, if you will, or an application
for equity injection. This is a beginning, and, in fact,
probably in January you will be back.
I know most of us have read the data on the companies and
realize, by the way, that these companies are not homogeneous.
These are three very different companies that have very
different criteria that they are dealing with. And I hope that
today you will begin giving us a glimpse as to what each of the
companies individually are doing. I realize that Ford may be in
better shape to do some things they have done a few years ago.
But I hope you will begin doing that.
I would ask the witnesses, since in essence you are asking
the American public for a loan or equity or whatever it might
end up being, I would ask you to be realistic with us. I know
that there has been continual talk about how Chapter 11 just
does not work. We realize there are lots of legacy issues that
handicap these companies, and we understand that.
I would like for each of you during your testimony to walk
us through why that does not work and why you would not be
asking for money from the Federal Government for a prepackaged
reorganization. I actually wonder, somewhat facetiously, if in
your boardrooms you are not hoping that we will turn down this
so that you have that as an option that you might emerge more
strongly and focus on those things that you do well.
So I hope you will talk about all those things. I realize
that in all likelihood this is the beginning. I think each of
you know that I am fairly skeptical in looking at this, but I
do thank you for being here, and I actually hope--I feel for
you in the fact that hopefully you are carrying the burden of
responsibility of all the employees and the many distributors
across the country that are involved in marketing your
products.
Thank you for being here.
Chairman Dodd. Thank you very much, Senator.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, and thanks to
Senator Stabenow and Senator and Congressman Levin both for
your advocacy every day here.
The American auto industry needs our help and needs it now.
The surest way to turn today's recession into a depression
would be to let this industry founder. Like the banking
industry, the auto companies have made some poor decisions, but
they have had plenty of help.
In 2005, for example, the House and Senate decided against
raising fuel efficiency standards. Most of the Members of this
Committee took the position that CAFE standards were fine as
they stood. I wish the Federal Government had acted sooner on
CAFE, but we didn't and so we are on shaky ground if we now
shake a finger at Detroit for being ill-prepared for $4
gasoline.
I wish the government in Washington had acted a lot sooner
to address the housing crisis, too. It was only a little over a
year ago that the Bush administration began to realize we had a
serious problem on our hands. But before that, through all of
2007, the administration and boosters in the housing industry
told us the problem was largely contained. It was contained in
their view to the subprime mortgage market and to States like
Ohio, Michigan, and Indiana. If you set aside those three
States, according to one economist, the market was doing just
fine.
We have seen the success of that approach. Before long,
every State in the Nation felt the impact and every sector of
the economy was dragged down by the troubles in housing. It
spread from Main Street to Wall Street.
But that mistaken approach is exactly what some of my
colleagues are suggesting we take in response to the crisis in
the American automotive industry. Sure, the biggest and the
most immediate impact will be in places like Ohio, places like
Senator Stabenow's Michigan, places like Senator Bayh's
Indiana. But auto suppliers and dealers and related industry,
from Chuck Eddy in Austintown, Ohio, to suppliers in every
corner of our Nation, will soon feel the impact. The industry
is woven into the fabric of our economy every bit as much as
Lehman Brothers and AIG or the three banks that testified
before us in this Committee last week.
Each one of these three banks that testified last week
received $25 billion under the Emergency Economic Stabilization
Act. If it makes sense to give one bank $25 billion, we can
certainly invest the same amount to save the entire domestic
automobile industry.
As we heard last week, the banks may or may not lend the
money anytime soon. They may or may not use it to buy other
banks. They may or may not use it for executive bonuses or
dividends. I don't know what those companies are going to do
with the funds they receive from taxpayers and we don't know
what impact it will have, but I do know what the American auto
industry will do with the loans it seeks.
It will build cars using parts from every State in the
Nation. It will provide good jobs to hundreds of thousands of
middle-class families in places like Lordstown and Toledo and
Sharonville. And it will support a decent retirement for a
million senior citizens in every corner of this Nation.
Nobody wants to write this industry or any industry a blank
check, and if Detroit were indifferent to the challenges it
faced, then I don't think it would have a very good case to
make. But if you need evidence that Detroit gets it, look at
last year's labor agreement. Labor and management made
unprecedented changes to bring their costs in line with the
competition. They didn't anticipate the current economic
environment any more than did Secretary Paulson or Alan
Greenspan.
But if failing to see the future foreclosed access to
Federal help, the line of applicants would be very, very short.
If that were our standard, the government wouldn't aid the
victims of flood or fires. But we don't turn a blind eye to
people who live near the Gulf Coast or in the California hills.
We help them.
Economically and politically, we are the United States, not
some confederation of islands, and we must be united in
rebuilding a strong and vibrant manufacturing sector, a sector
that has withered over the past decade as we tried to build one
Potemkin village after another. Our economy can't make it on
mouse clicks alone and we cannot live by just lending to one
another. We need to build real things, and that is what Detroit
does. Helping bankers is fine, but we have it exactly backwards
if we help those who don't need it and we ignore those who do.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you, Senator Brown.
Senator Allard.
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. Mr. Chairman, thank you for holding this
hearing. I am just sitting here and thinking, as a businessman,
somebody has handed me the payroll. I have had to compete
against my own tax dollars. And I sit here thinking, we don't
have the entire automobile industry here before us. I mean, we
have a section of the automobile industry and workers who are
able to survive, at least show a better balance than what we
are seeing here before us.
I think I know how they must feel if they have to compete
against their own taxpayer dollars if we give them a subsidy,
and my question is, are we really serving the consumers of this
country a real service if we take one sector and give them a
subsidy and another sector of the automobile industry and don't
give them a subsidy and we put those workers, we put those
companies at risk because they have to compete against
companies that are subsidized by the tax dollar.
So I am glad we are holding the hearing and hope that we
will have a genuinely open and deliberative legislative process
on this matter. To do otherwise often produces some of
Congress's worst legislation and generally fails to address the
root causes.
Based on the testimony submitted by the witnesses, it is
unclear that we have even identified the single root cause.
Thus, I am unsure how we can be confident that the proposed
solution will have any effect. While we will hear about the
dire consequences should the domestic auto industry fail, it
should be even worse if the industry fails and our Nation faces
those consequences after pouring tens of billions of dollars of
taxpayer money into the industry.
So I thank the witnesses for being here today and look
forward to their testimony and thank you, Mr. Chairman and
Ranking Member Shelby, for holding this hearing.
Chairman Dodd. Thank you very much, Senator.
Senator Bob Casey.
STATEMENT OF SENATOR ROBERT P. CASEY
Senator Casey. Mr. Chairman, thank you very much for
calling this hearing, especially at this time in our history
when we are facing so many economic challenges. We want to
thank Senator Stabenow for being with us today and for
listening to our statements before she gives her testimony,
Senator Levin and Congressman Levin, and the witnesses.
One of the questions I think we have to ask today, in
addition to the important questions we will pose to the
witnesses, one or two questions, at least, threshold questions.
One is, what are the consequences of doing nothing today, or
this week, I should say, as opposed to doing something down the
road? That is a question we have to ponder. And what are the
consequences of doing nothing at all? If the Congress takes a
position that these companies must survive or not on their own,
what are the consequences of that?
We have seen the evidence in the public record already, and
these are not exaggerated numbers. We know that potentially
millions of jobs are at risk across America. I know in
Pennsylvania, for example, even though the job loss number
might be in the thousands, maybe not like in some other States
where it would be tens of thousands or more, even in
Pennsylvania, we can't afford to lose thousands of jobs. When
you look at September 2007 versus September 2008 in our State,
the unemployment number is up above 90,000 jobs. We cannot
afford thousands of jobs lost in Pennsylvania.
I have to think of the history of my own State. The steel
industry faced an enormous challenge a generation ago and the
government did not help. It did not help in a substantial way.
It helped in some ways, but not in the way that we are
contemplating today. And I wonder, and I leave it to the
economic historians, what if the Federal Government acted in a
prudent way at that time, improving technology, improving the
operations of those companies? Maybe Western Pennsylvania would
not have had their job numbers cut in half--in half--in one
region of one State. I wonder about that, and I don't think we
should make the same mistake again when it comes to our auto
industry.
We know that some economists believe that what is now, in
my judgment, definitively a recession could become a
depression. Some would dispute that, but I think that the
evidence is pretty clear it could head in that direction if
these companies fail in the next couple of months. Even our
national security could be at risk in some way or another
because of the part suppliers that supply both automobiles and
weapons and defense materiel.
So I think the country now is at a crossroads and I think
we have to take a couple of steps. First of all, I believe that
now is the time to finally transform our economy into a greener
one that is more energy efficient. Now is also the time to
invest in the American worker and in our children so we can
continue to have the most productive workforce in the world.
And third, now is the time to modernize our financial
regulations so the Nation of spenders can become a Nation of
savers.
Manufacturers and those who are representing manufacturers
here today know this, and I think it is important in your
testimony you demonstrate that you understand and know this and
put evidence on the table that you understand this. You have to
change. Some have. Some have changed more than others. But you
have to change and you have to become focused enough on change
that you are helping our economy, the United States economy,
transform itself to a green economy. That means efficiency.
That means improvements in technology.
You have to demonstrate that to us if the Congress and the
American people are going to give you the support you are
asking for. You have to improve your operations and you have to
demonstrate that. I would argue you should have to demonstrate
it every single month before money goes out the door from the
Federal Government.
I think that workers have led the way on this in terms of
understanding what is at stake for the industry. Workers have
made tremendous concessions, coming together with management to
do that.
But I really believe that one way to hold these companies
accountable, one way to have taxpayers have a sense that their
money is being spent prudently and judiciously is to have
monthly reporting so that the release of any taxpayer dollars
would be accompanied by not just a broad justification, and the
bill that we have before us has some planning features, but I
think the following should be part of what we need.
First of all, information to the relevant committees in
Congress for, number one, cash and other sources of funding for
current operations.
Number two, expected monthly expenditures by category.
Number three, plans to reduce cash needs and improve
revenues in the immediate future.
And Number four, in subsequent months, a report on the
progress made toward meeting previously established cost and
revenue goals.
That kind of accountability would go a long way to ensuring
the American people that the money that they are spending, $25
billion, if that is the number that is arrived at to help these
companies by way of a bridge loan, to get from here to there
would be spent in an appropriate way.
I have to say that even though $25 billion is a lot of
money, it still only represents 4 percent of the $700 billion
that this Congress approved to help the financial institutions,
and when this government can come up with $150 billion for AIG,
not to mention the other help that it has provided, I think we
can help the backbone of our manufacturing economy represented
by these companies. But the companies have to demonstrate here
today and on an ongoing basis that they get it, that they
understand the stakes for our economy, but they also understand
the sacrifice of taxpayers. Thank you.
Chairman Dodd. Thank you, Senator, very much.
Senator Bennett.
STATEMENT OF SENATOR ROBERT F. BENNETT
Senator Bennett. Thank you, Mr. Chairman. As I have
listened to the executives of the companies that have come to
see me, and I assume they have come to see a number of the
other Members of the Committee, I am fully satisfied that they
are very much aware of all that they have to do in order to
survive and I won't give them a lecture on that score. I think
they understand it better than I do.
The primary problem as I see it is overcapacity in the
industry. They have the ability to produce, what, 17 million
cars a year and they are only selling ten. They have to do
something to reduce their capacity, and they are doing that as
rapidly as they can. But in the process, they are burning
through cash in a way that imperils their survival.
So I am in favor of trying to find a way to provide them
with the cash that will allow them to continue. I agree
absolutely that we need some kind of accountability to make
sure they continue, that they don't take the cash to say, oh,
well, we can stop our attempts to reduce capacity. I am not
quite sure about bankruptcy as the way to accomplish this. I am
unburdened with a legal education, as you know, so I don't
understand all of the implications of that.
But I believe we have to do something to see to it that
they survive while they are on this terribly difficult
challenge of turning a multi-billion-dollar industry into a
smaller multi-billion-dollar industry in a very short period of
time. Everybody is going to get hurt in the process. Executives
are going to lose their jobs. Middle management is going to
lose their jobs. And hourly workers are going to have to have
their contracts renegotiated downward and some of them are
going to lose their jobs.
And any thought that we in the Congress can prevent that
from happening is wishful thinking. All we can do is provide as
soft a landing as possible, and I hope we can find a way to
craft the details of that landing in the timeframe that we
have. I fear that we may not, but I hope that we understand the
importance of what it is we are trying to do.
Chairman Dodd. Thank you, Senator, very much.
Senator Tester.
STATEMENT OF SENATOR JON TESTER
Senator Tester. Thank you, Mr. Chairman, Ranking Member
Shelby, and thank you for the folks who are about to testify.
Over the next many months, we will be dealing with a lot of
economic problems that this country has and I don't think there
is anybody that has a silver bullet on how to get us out of
this situation other than the fact that we need to invest in
infrastructure, roads and highways and water and sewer systems
and education and health care and energy.
About 7 weeks ago, Secretary Paulson came in and handed us
a bill and said, if you don't pass this in 3 days, we are going
to have an economic meltdown. I don't like to be behind the gun
and I expressed that to him at that point in time.
At this point in time, we have the auto industry in here,
and I might add while I am saying this, I get contacts from a
lot of folks. The timber industry is upside down right now. A
mining company just called me from Montana. They are laying off
21 percent of their employees in that company in Montana
because of the economic turndown. Everybody is in trouble.
But we have the auto industry here today, and I talked to
one of your agents on the ground who sells cars and said that I
didn't know if this was going to pass at this point in time. He
said, I don't know if they are going to make it until January.
So once again, we are up against the gun.
And as I said before, I think everybody wants to try to
find the magic key that pulls us out of this, but we have to
look at some of the past performance. And I will tell you that
one of my vices in this world is that I like iron. I like iron
a lot. In fact, 5 days ago, I bought one of your pieces of
iron. I traded off my 2004 pick-up, and to be honest with you,
I had a hard time finding a pick-up that had a number one
leading off the VIN number, an outfit that was built in the
United States. There were a lot built in Canada, a lot built in
Mexico, but very few could I find that were built here. That
distresses me, because we need to encourage our manufacturing
base.
But what even more distresses me, and I heard folks talk
about aware of what we need to do, the outfit I traded out was
a 2004 for a new one. I took a loss and mileage of three to
four miles a gallon by making that trade. That is ridiculous.
And we ask ourselves, why, why, why is the industry going down?
Folks, you need to look at yourselves and make those business
decisions.
Now we are here with a $25 billion bailout, and compared to
$700 billion, it is somewhat of a pittance, but $25 billion, to
put it in perspective, is about 8 years of Montana's budget. So
it is a fair amount of dough. And we need to know, if we are
coming in to bail you out, are things going to change? Are we
going to get decent mileage out of these vehicles?
You have a dependable vehicle. I am not one of those that
will say that any one of you make a vehicle that is not
dependable. You do. But is your business plan for the future
going to offer something that the American people can afford to
buy and that will have limited operation and maintenance
budgets applied to it?
The other thing I would have to ask is, where is the money
going to be spent? Who is it going to be spent on? And what
country is it going to be spent in? Those are all critically
important. If we are using taxpayer dollars, from my
perspective, it ought to be spent here. If Canada wants a
dollar spent up there, go see the Canadian taxpayers. But if we
are putting American taxpayer money on the line, it ought to be
spent here.
I look forward to your testimony. I look forward to hearing
what you have to say as far as the future goes. I can tell you
that I think the auto industry is critically important to this
Nation's economy for all the reasons that have been listed
above before me here today. But the truth is that no matter how
much money we put forth, if the business model isn't changed,
you are going to fail. And so tell us how you are going to
change the business model.
Thank you very much.
Chairman Dodd. Very good, Senator.
Senator Martinez.
STATEMENT OF SENATOR MEL MARTINEZ
Senator Martinez. Chairman, thank you very much, and I will
be very brief because I believe I am all that stands between
the panel and the----
Chairman Dodd. No, no, there are a couple more.
Senator Martinez. Oh, is that right? OK. I will still be
brief.
I have heard, Mr. Chairman, a lot of consensus around the
table. We have talked an awful lot about the understanding that
is, I think, acknowledged by us all that the business model of
these companies is a failed model and that currently they are
not on a sustainable path and that the cash-flow situation is
such that even with $25 billion, it may be February before
there is a cataclysmic failure again.
So at the end of the day, I would love to see us, and I
agree with my colleague, Senator Corker, that it looks to me
like we are poised to stand clear on our positions but get
nothing done, and the American people are tired of this. They
want to see the Congress get things done, things that are
important. No one wants to see the American automobile industry
fail. But equally, no one wants to see the taxpayer dollars put
at risk in an investment that is at best risky and perhaps
destined to fail.
So what assurances will you give us that you are putting
forth a business model that can be sustained and that, in fact,
$25 billion is going to make a difference, that it is going to
be a difference maker? I personally believe that the TARP money
is meant for the financial institutions. That was the problem
we were addressing it to. And the incoming administration,
there will be not more opportunities to talk about what the
Bush administration did or didn't do. There will be a new
administration and it will be their responsibility to try to
keep the financial institutions afloat. That money is going to
be needed for that.
We already have given $25 billion to the auto industry in
the Section 136 program under the energy bill that we did. Why
not take that money and utilize it for this purpose? It is as
if the remodeling of the home for decorative purposes can wait
while the structural problems with the roof are taken care of.
This is an emergency we are looking at today, it seems to
me. There are ways in which we can help these companies to be
on a sustainable model if you can give us those assurances, and
there is a way to get some help. I am not against helping the
industry stay afloat. I am not against seeing these workers
continue to be employed. We are at a very perilous economic
time. The last thing we need is additional unemployment. But I
am also realistic enough to know that the TARP money is going
to be needed for financial institutions and that we do have a
vehicle available through the Section 136 where there could be
broad consensus.
So do we want to get to a solution? Do we want to insist
that these companies give us some assurance that they will be
able to make something happen with $25 billion that will be
sustainable? Or is this a downpayment on even yet more money
down the road? And why not utilize what is already available,
what already was passed by the Congress, where there can be
great bipartisan consensus to get something done, not just to
posture.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much.
Senator Bayh.
STATEMENT OF SENATOR EVAN BAYH
Senator Bayh. Thank you for your leadership, Mr. Chairman.
Senator Stabenow, it is good working with you again. That
is what friends and neighbors are for. But, of course, where I
am from, we kind of consider Michigan to be part of Greater
Indiana, so however we define it, it is good to be working with
you.
And to our witnesses, it is good to see you here today. At
least one of the witnesses, Mr. Chairman, was born in the State
of Indiana. Ron, it is good to see you again.
These are historic times. We face what the Chairman of the
Federal Reserve has described as the greatest financial panic
since the 1930s. That has contributed at least in part to the
greatest real downturn in the economy since at least the early
1980s, possibly before then, and this is really the first
significant economic downturn since the advent of
globalization, which means rather than having some parts of the
world growing more rapidly to serve as a countervailing force
to weakness here, instead, weakness in one part of the world
begets further weakness and it runs the risks of an
accelerating downside to economic growth around the world.
So these are unprecedented times. This has led our
government to take a variety of unprecedented steps, none of
which will be found in your Economics 101 textbook. We have
intervened in the banking sector, taking significant equity
stakes in the largest banks of our country. We have intervened
in the insurance sector, virtually taking over one of the
largest insurance companies, not only here but anywhere in the
world. We have essentially taken over Fannie Mae and Freddie
Mac, the GSEs. We have moved to stabilize the money market
system. We are looking at the credit card situation and student
loans. We are even now debating whether entire States and
municipalities may need financial assistance from our
government to weather these unprecedented and unpredicted
times.
All of this has led to a great deal of instability,
fragility, and an unpredicted situation, and so my own view,
Mr. Chairman, is that there is so much that we don't know, but
this is not the time to add greater instability to this
situation, more unknown to this situation.
I am reminded of decisions that were made earlier in the
year when the decision was made to rescue Bear Stearns because
the thought was that the systemic risk was too great.
Subsequent to that, the decision was made to not intervene on
behalf of Lehman Brothers because the systemic risk was
perhaps--was at that time thought to be not so great. Well,
with the benefit of hindsight, I think if we had to do it over
again, perhaps that situation would be addressed a little bit
differently and the taxpayers, the overall economy, and the
financial system would have been better served.
My point simply is, if we allow tens of thousands of
ordinary people to lose their jobs, thousands of small
businesses, suppliers, dealerships, and others to be imperiled,
three of the largest corporations in the company to run the
risk of going down, it will have unintended consequences, none
of them positive and some of them quite possibly severe. This
is probably not the right moment in our economic situation to
allow such a state of affairs to take place.
Now, having said that, as my colleagues have outlined, that
doesn't mean we should just do anything. I am delighted, Mr.
Chairman, that we have the major stakeholders here. All of you
need to step up and make contributions to setting this right.
Otherwise, we are not going to be able to get the job done and
the help might not be forthcoming.
Fortunately, and the final thing I will say is that we do
have a model to build off of, and one of my colleagues had
mentioned this previously, and that was in 1979 with the
Chrysler Corporation. In that particular case, all the
stakeholders did step up. The right decisions were made. And
the net result was that the taxpayers, or the jobs were saved.
The company was saved. The taxpayers were repaid ahead of time,
and I think, Tom, you mentioned that taxpayers actually
generated a profit. That is not why we are in the business, but
it does go to show that if we do this correctly, Senator
Stabenow, it can be a win-win-win situation.
Mr. Chairman, I am grateful for your leadership in helping
to bring that outcome about.
Chairman Dodd. Thank you, Senator Bayh, very much.
Our last colleague, Senator Crapo.
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. Thank you very much, Mr. Chairman, and I
will be brief since I am the last thing standing between us and
hearing from our witnesses.
I just want to reiterate a couple of points that have
already been made. The first is, I am very concerned about
process. While we are holding this hearing, and I appreciate
very much the fact that we are holding the hearing, the reality
is that the legislation that we are going to vote on has been
drafted already and is on the floor of the Senate. Now, as one
of my colleagues has already mentioned, it may be that this is
just the first step and that tomorrow's votes are simply one of
the steps in the process before we really get to the
legislation that will be more seriously considered by the
Senate.
But my hope is that in some way, we can utilize this
hearing as a part of the real process where we develop
legislation in this Committee as we are supposed to do and have
the process work the way it was intended to work. I am very
concerned about the fact that not only with this legislation,
but increasingly, we tend to see the process, the committee
process and the legislative process which works so well here in
the Senate bypassed and I am very concerned about that.
Also, with regard to the substance that we are going to
hear today from the witnesses and with regard to the substance
of many of the comments of my colleagues here on the committee,
it is very clear to me that we have very different points of
view being expressed about what the problem is, why we have the
problem, and what the solutions should be. Some are saying we
just need this bridge loan and we can get past everything and
we can't allow this problem to get worse and this loan is going
to solve the problem.
Others say that we need to restructure this industry and
the restructuring needs to take place, so it is not a question
of if, it is a question of when we get into a reorganization
and some type of a bankruptcy proceeding. Others say, well, you
know, we don't know exactly what is going to happen, but we are
pretty sure that even if Congress passes this legislation, we
are going to be right back here in February looking at another
tranche.
I would like to see some answers to some of these
questions, and one of the things that the witnesses who are
here today can help with significantly, I think, is to evaluate
that question. Are we headed inevitably to a restructuring or a
reorganization in the context of some type of a Chapter 11
proceeding, and if so, is there a reason why that should not
happen now as opposed to in February or in June or at some
other date, after we have burned through another $25 billion or
who knows how many more dollars? What is the real analysis that
has gone on in the boardrooms with regard to what the options
are and what the best thing for these companies can be?
I think about other companies that did not get these kinds
of bridge loans from the taxpayers necessarily but who have
gone through the difficult process of reorganization, such as
Delta Airlines, which has had to go through a similar type of
restructuring and a reorganization, and we now see some
significant progress there.
So I guess the thing that I would like to hear most from
these witnesses and also from hopefully the future proceedings
of this Committee is what exactly is the nature of this
problem? What are we looking to in the future? And if we are
looking at an inevitable reorganization and some type of a
legal proceeding or, heaven forbid, some kind of a
Congressionally designed proceeding--and I say that only
because I think if Congress gets involved in doing the
reorganization it will probably be worse for everybody--but if
we are headed for that, why should we not deal with it now? Or
what will the benefits of bridging to some future time be?
All of these questions, as well as the others that my
colleagues here have raised, are the kinds of things that I
believe this Committee should have the time to deal with before
we are forced to vote on legislation that has been crafted and
put on the Senate floor before we even have our first hearing.
Chairman Dodd. I thank the Senator.
Let me just thank all of my colleagues for their comments.
We will get to Senator Stabenow, our witness.
Obviously, we are operating here in the lame duck period,
as they say, and I thought it would be worthwhile for my
colleagues to have the opportunity to hear from the major
stakeholders here. We are going to be gone in a matter of
hours, probably, until mid-January. We could come back. We may
come back. But it is always difficult to reconvene committees.
As my colleagues know, over the last 2 years my intention
has always been, wherever possible, to have the Committee act,
not only in hearings but also to move forward legislatively.
Obviously, events can overtake us from time to time, and that
has happened in the past. It happened in September. My
intention certainly would be that we have a normal process
where the Committee goes through it and does the kind of work
that my colleagues have suggested. And that still may be the
case, depending upon what happens over the coming couple of
days. And so it is my intention to proceed along those grounds,
as has been my manner of operating here over the last 2 years,
and I intend to continue in that framework.
There are times when that is not possible, and all of us
here know those moments do arrive from time to time. But we do
not have the luxury of time to act. And I am encouraged as I
hear this--and obviously there are some who, I think, would
never be supportive of any particular effort. But I hear
generally that my colleagues here would like to do something,
recognizing this is not just any industry. It has critical
implications for our country. And so a moment may well arrive
here when we need to act. But I am encouraged as well by the
comments I hear suggesting that we expect to hear more from the
industry itself of what needs to be done in order to put us on
the right track. And so today's hearing gives us an opportunity
for the first time to do that, and I welcome your comments.
I hope it has been worthwhile for the witnesses. Normally
we do not take a lot of time with people making opening
statements, but I thought it was as important for the witnesses
to hear from Members of this Committee as it is for us to hear
from you what is going so you get a flavor of what is being
said up here. Not always do you hear from everyone, but you
have heard, I think, a good smattering. While we disagree on
routes to take, there has been a lot of commonality about what
needs to be done, at least from the industry perspective. So I
hope that has been worthwhile.
With that, Senator Stabenow, we will hear your testimony
and then get right to our other witnesses.
STATEMENT OF DEBBIE STABENOW
A U.S. SENATOR FROM THE STATE OF MICHIGAN
Senator Stabenow. Well, thank you, Mr. Chairman,
particularly to you, thank you on behalf of Senator Levin and
myself for working with us as we deal with what is a very
serious crisis related to the global financial crisis that has
occurred. And I want to thank all my colleagues for thoughtful
comments and important questions that need to be answered. I
know that those who will come after me will be able to answer
those questions.
Let me just say I am not going to spend a lot of time on
what is happening in terms of quality in the industry, nor am I
going to spend time talking about decisions of the past. But I
will tell you that I would put an American-made, a domestic-
made car or truck up against any other vehicle being made on
this planet. And the reality is that we have--the industry
spent last year $12 billion on innovation to focus on fuel
efficiency for the future.
My family owns automobiles made by all of these companies,
but I would invite you to come out and see Motor Trend's Car of
the Year, the 2008 CTS, which is sitting right outside this
building. So I would be happy to have anyone take a look and
compare what is being made by American people every single day
with what is coming overseas.
We passed, as you all know, the increase in CAFE standards
on fuel efficiency, and part of that was Section 136 that has
been referred to here that relates to support for the industry
to be able to get to the new vehicles. And I was very pleased
that before we left in October that we funded that provision to
be able to focus on the future for the industry and support
those vehicles being made here, retooling plants so they will
be made here in America. The Department of Energy has come
forward with what I believe is a complicated set of rules that
relates to a cumbersome process that we need to address to
activate those.
But we thought we were on our way. We thought we were on
our way. And then the global financial crisis hit, and we all
know that it hit everyone, and everyone on this Committee has
debated the ramifications of that. But the credit squeeze has
made it impossible for auto makers to raise capital in order to
invest in advanced technology or to even meet daily operational
costs. Dealers and suppliers are not able to get credit. Motor
vehicle financing companies and the plummeting consumer demand
due to the unavailability of auto loans and the economic
realities facing families have really created the perfect
storm. And that is why we are here.
I would rather not be here. The people behind me would
rather not be here. They want to be out making those new
advanced fuel vehicles that we all want them to make and be
focused on the future. We can debate previous decisions, but I
think we would all agree that the global financial crisis was
not caused by the American auto industry. And that is why we
are here.
In October, we had the worst auto sales month in the entire
industry that we have seen in 25 years. Across the industry,
both American and foreign auto makers saw huge declines, Mr.
Chairman. GM sales dropped 45 percent; Chrysler's, 35 percent;
Ford, 30 percent; Toyota sales dropped 23 percent; Honda sales
dropped 25 percent. We are in a severe global recession that
has, in fact, caused a group of auto makers, including Toyota,
to approach the British Government requesting $56 billion to
help them get through the credit crisis that we have today.
The question I would ask, Mr. Chairman, I think it is
important for us to decide, is: Does it matter if we have an
American auto industry? If we can buy a car, does it matter
where it is made? Do we care about 3 million people who have
helped create the middle class of this country by making things
for us in this country? Is it important to have cars in this
country? Because we are at a point right now where that is a
basic decision that I believe we have to answer.
The domestic auto industry represents 4 percent of our GDP,
10 percent of our U.S. industrial production value, and one out
of ten jobs in America is auto related, with 5 million jobs
across the country that you are going to see represented by the
three CEOs and the UAW today.
They provide health care and pension benefits for over a
million retirees and their families--people that have been able
to share in the American dream and be a part of the middle
class as a result of being a part of the auto industry and auto
manufacturing.
Motor vehicle parts suppliers provide over 780,000 direct
employment jobs, and they are leading the U.S. manufacturing
employers, contributing 4.5 million private industry jobs, 5.5
percent of all manufacturing jobs. The numbers are huge. And
the fact is that you have more computer chips in your
automobile than you have in anything else you own. This is an
industry that is connected with every other industry in the
United States, and certainly with defense. The U.S. military
relies on the Chrysler Company's B series engine, commonly
found in a Dodge Ram, for both propulsion and electric
generation of power. We need to keep that line open for the
national security interests of our country.
ArvinMeritor, a major supplier to all three auto makers,
has been a major supplier of axles for the U.S. Army for over
50 years. Goodyear, GM's second largest tire supplier, has
supplied the military for over 100 years. We could go on and on
and on.
The reality is the failure of the auto industry moves over
into suppliers who do not get paid, who are not able to
survive, and then it moves over into defense and aerospace and,
I would argue, certainly in manufacturing and in technology,
every industry in our country.
General James Cartwright, the U.S. Marine Corps Vice
Chairman of the Joint Chiefs of Staff, has said that an auto
maker failure ``certainly has the potential to diminish our
capability.'' And so we are watching this situation very
closely.
Other countries understand the importance of manufacturing.
While we continue not to focus on partnering with our
industries here at home, Germany has announced the great
Battery Alliance, which is investing $650 million in advanced
battery technology research. By 2010, South Korea will spend
$700 million on advanced batteries and developing hybrids.
China offers multi-billions of dollars in direct funding and
incentives for R&D and so on. India has developed an Automotive
Mission Plan. And that is just related to R&D.
But the reality is we have our companies competing against
countries--countries who pay for research, countries who pay
for health care, countries that fight for their industry on
trade agreements. And I would just give one example. U.S. auto
makers sold just 6,200 vehicles into South Korea last year
while Korea exported to us nearly 750,000 vehicles. Yet, with
the Korean Trade Agreement in front of us, nothing is done to
fix that, Mr. Chairman.
I say that only to say if we want an automotive industry
and American jobs in manufacturing, we need a 21st century
manufacturing strategy that relates to all of these things, not
just leaving our companies to compete with countries.
Despite the challenges of all of this, we have managed to
see the American auto makers remain competitive until this
point with the severe global downturn.
Now, Mr. Chairman, let me just say that I do not believe
failure is an option, nor is bankruptcy. The Center for
American Research found that if one or more of the top three
automotive companies file for bankruptcy, we can expect 2.5
million lost jobs. That includes direct job losses and losses
from other kinds of industries that I have talked about. Now,
think of our economy right now. What happens if we add another
2.5 million jobs to that? And that does not count suppliers and
services and dealers and all of the others that are affected.
Also, bankruptcy would put a disastrous burden on the American
taxpayer through the Pension Benefit Guaranty Corporation,
which already has massive shortfalls, and current estimates are
it will be tens of billions of dollars that we would be back
here trying to figure out how to find to be able to deal with
the pensions that we would assume. This is on top of the check
that taxpayers would pick up for health care, unemployment
benefits, additions for Medicare and Medicaid, and other social
services estimated to total about $50 billion.
Governments, local governments facing crises, loss of tax
base, as well, tax revenue, would be impacted. Bankruptcy would
result in a reduction of personal income of $276 billion, which
would lead to a total Government tax loss of $108 billion over
3 years, not to mention the increased borrowing costs for many
States.
The reality is that at a time when we need people to have
jobs and have money in their pockets so they can pay their
mortgage and stay in their home and have a demand side of an
economy, not just supply, this would be a disaster for us.
Now, Mr. Chairman, in closing, let me just say that
opponents who say that we should restructure--maybe bankruptcy
is all right because it would involve restructuring. Mr.
Chairman, we have been restructuring in Michigan now for a
decade, 400,000 jobs lost, most of those related to the auto
industry. We do not need to be told that there needs to be
restructuring or downsizing or closing of plants. I can take
you on a tour of plants that have been closed in order to
address excess capacity and downsizing.
Also, we do not have to say to the workers that they should
restructure in terms of pay cuts and changes inflexibility and
changes in benefits. The new contracts with the UAW cut wages
for new workers by 50 percent. I do not know any other industry
anywhere who has been willing to make changes on the order of a
50 percent cut in wages.
By the end of the current 2005 and 2007 contracts, the
labor cost gap between domestic auto makers and foreign
transplants will be largely eliminated. Some estimates indicate
that GM's labor costs will be even lower than Toyota's costs.
They have eliminated 50 percent of the company's liabilities
for retiree health benefits, negotiating an unprecedented--an
unprecedented--agreement to take over retiree health care by
the UAW taking the costs off of the companies, the voluntary
agreements.
So, Mr. Chairman, in conclusion, I would say I understand
frustrations about where we are on a number of fronts, but the
reality is this is an industry, long before we told them they
need to restructure, that has been restructuring, has been
downsizing, workers who have been doing their part. We need
this industry as a basic part of the fabric of our economy.
Somebody has to make something in America. Credit default swaps
alone, moving paper, are not going to do it.
And so, Mr. Chairman, we need a 21st century manufacturing
strategy. I am proud that there are those now looking and
speaking with us about how to do that. But we need to make sure
that we are not moving from foreign dependence on oil to
foreign dependence on technology, to foreign dependence on
manufacturing, to depending on others to make our tanks and our
equipment and our planes and our automobiles. And that is what
is at stake here today: whether or not we are going to make a
commitment to the future of an industry that has been an
integral part of creating a strong economy and a middle class
of America over the years. And I hope you will join with us to
support what is on the floor now and that you will join us in
making a commitment to American manufacturing for the future.
Chairman Dodd. Senator, thank you very, very much, and you
are always welcome in this Committee, and we thank you for your
patience as well.
Let me now invite, if I can, our witnesses, first of all,
Mr. Ron Gettelfinger, President of the UAW. Prior to becoming
the President of the UAW, Mr. Gettelfinger in 2002 served as
the Vice President of the UAW. We welcome you to the Committee,
Mr. President.
Our next witness is Alan Mulally, President and CEO of the
Ford Motor Company, a member of the company's Board of
Directors. Prior to joining Ford in 2006, Mr. Mulally was
Executive Vice President of the Boeing Company and President
and Chief Executive Officer of Boeing Commercial Airlines. And
we thank you, Mr. Mulally, for joining us.
Our next witness is Robert Nardelli, Chairman and CEO of
Chrysler LLC and a member of the Board of Managers. Mr.
Nardelli spent nearly three decades at General Electric in a
number of leadership positions. Mr. Nardelli served as
Chairman, President, and CEO of The Home Depot prior to joining
Chrysler last year.
Next we will hear from Mr. Richard Wagoner, Jr., who has
been Chairman and CEO of General Motors Corporation since 2000.
Mr. Wagoner also serves on GM's Board of Directors. Previously,
he served as President, Chief Operations Officer, and Chief
Financial Officer of GM.
And our final witness is Dr. Peter Morici. Dr. Morici is a
professor at the University of Maryland's Robert H. Smith
School of Business, a well-recognized expert on international
economic policy, World Trade Organization, and international
commercial agreements. Prior to joining the university, he
served as the Director of the Office of Economics at the U.S.
International Trade Commission.
You have all been very patient, but I hope what I said a
moment ago was received in the spirit in which it was offered,
that it may have been worthwhile for you to hear from our
colleagues here, both Democrats and Republicans, coming across
the spectrum ideologically as well as geographically. I think
that can be worthwhile at a moment like this to give you a
flavor of how they feel and the reflection of how their
constituents feel about these issues. So, again, we are very
grateful to you for being here this afternoon.
I am going to take all of your statements and any
supporting documentation you think would be worthwhile for this
Committee to have. But it has been suggested by Senator
Corker--and I think it has some value here. Normally, we put
clocks on. You have heard a lot of the questions, and I have
read all your testimony. But I would like you, if you could,
maybe on a more informal basis here--your testimony is going to
be part of the record, and if you want to just read the
testimony, you can do that. But you heard some of these very
direct questions about what needs to be done, and I would like
you to take a little bit of time and respond to those, if you
will, in your testimony, and then we will get right to the
questions.
So I am not going to put the clock on you as we normally do
for 5 minutes here. We will give you a bit more freedom in
terms of expressing your thoughts on these matters--not
unlimited time, I would say as well, but a chance to have a far
more responsive, I think, conversation. We know you prepared
the testimony in advance, but you did not have the benefit of
hearing my colleagues in advance. And I think in light of that,
it might be worthwhile for you to respond. Several of our
colleagues here on the Republican side of the dais up here have
strong reservations about doing anything at all. Others I think
are willing to consider some ideas. But they want to know what
needs to be done to retool. Some want to know whether or not
you are willing to acknowledge any mistakes by the industry at
all in the last number of years that brought us to this point.
And I agree with those who said the testimony did not really
reflect that at all.
So you have heard some of these points that I did not find
necessarily in your testimony, but we would like you to comment
on them if you would, anyway.
With that, let me begin with you, President Gettelfinger,
and we thank you for coming before the Committee. You have to
pull that microphone right up to you as well.
STATEMENT OF RON GETTELFINGER, PRESIDENT, INTERNATIONAL UNION,
UNITED AUTOMOBILE, AEROSPACE, AND AGRICULTURAL IMPLEMENT
WORKERS OF AMERICA
Mr. Gettelfinger. Thank you, Mr. Chairman. Thank you for
the opportunity to testify today on the state of the domestic
auto industry.
First of all, I just want to say that UAW strongly supports
the legislation to amend EESA to clarify that the Treasury
Department should use the existing financial rescue program to
quickly provide a $25 billion emergency bridge loan to General
Motors, Ford, and Chrysler to enable these companies to
continue operations.
I believe and the UAW believes--and we have brought in
outside experts--Stephen Girsky, who was a top auto analyst for
17 years in a row, knows the industry extremely well--brought
him in to assist our union to analyze the situation. Without
question in our mind, it is dire, it is critical, it is a
crisis.
As has been mentioned, as we all know, the sales plummeted
to the lowest level in 25 years, 10.8 million for the month of
October.
I am going to step away from my prepared remarks here and
try to address some of the things that I have heard. But I do
want to mention this: In regards to the retirees from the
Detroit-based companies, their spouses, and their dependents--
and we are talking about a million people here--they could
suffer sharp reductions in their pension benefits and the loss
of their health insurance coverage, an especially devastating
blow to the roughly 40 percent of these who are younger than 65
and are not yet eligible for Medicare. So if the auto makers'
pension plans are terminated, the PBGC, as Senator Stabenow
pointed out, would be saddled with unprecedented liabilities,
and the Federal Government would be liable for a 65 percent tax
credit for the health care costs of pre-Medicare auto retirees.
And there is no question--it has already been stated about the
impact on the economy as a whole.
But I do want to address point blank--and I think the
American people and the Senate of the United States as well as
the entire Congress has a right to know--what the UAW has done.
And I am not going to go back beyond 2005. But a mid-contract
year for us as a union, a commitment, a vow made to retirees
that they would not have to contribute to their health care.
But in mid-contract, our union negotiated a Voluntary Employee
Beneficiary Association with these companies. That was a
difficult decision for us. It was the hardest decision that I
have ever made as a leader in our union. But we did that
because, again, we brought in outside experts to help us
analyze the situation and say as a union what should we do to
help these companies be more competitive.
We asked our workers at that time--again, mid-contract--to
give up a 3 percent wage increase. We put in current operating
agreements to address the work rule issue that was brought up
here, and Ford alone, a year from those current operating
agreements, is a billion dollars in savings. But we have done
business a lot differently. As a union and with the company, we
have continued to build a strong relationship to be as
competitive as we possibly can in this environment.
When we went into the 2007 negotiations, we had a lot of
discussion about taking the entire VEBA off of that company's
books. By so doing that, we have reduced, effective January the
1st of 2010, we have eliminated their OPAB obligation, or other
post-employee benefit obligation, by 50 percent. That is major
to them. For 4 years, workers at General Motors, Ford, and
Chrysler have a negotiated agreement that they will not receive
an annual improvement factor, a wage increase. We settled for
bonuses. We diverted COLA to help pay for health care, both for
retirees and for active workers. Again, both unprecedented in
the terms of our agreements and what we as a union have been
willing to do to help these companies.
Furthermore, I would just want to mention to you as well,
we work hard on productivity every day, and the men and women
of the UAW are proud to go to work and receive a fair day's
wage in exchange for a fair day's work. And that is what they
do. Safety records at our facilities, second to none. We work
extremely hard because that is a major savings to the
corporation if we reduce injuries in the workplace. And the
quality, we are proud of the ratings that we got from J.D.
Power, and we have made continued improvements in all of these
areas.
I may have even gone a little bit over my 5 minutes here,
but I am willing to come back in the questions and take more
because, point blank, there are a lot of misconceptions about
our union.
The last one I want to close on is about the articles that
we read and hear about in regards to jobs banks. Since
September of 2005 through September of 2008, we have lost
47,000 workers at General Motors. By the same token, during
that period of time and with that loss, we have all but
virtually eliminated our jobs banks at all three companies. We
recognize that in order for these companies to be competitive,
we had to make the tough calls. We had to take the political
heat for these kinds of decisions, and we did it. And we are
proud as a union--workers, men and women, and I as a union
representative, as well as all of our board--to work with these
companies to make sure that the consumers get the absolute best
quality product that we can give them.
Thank you very much.
Chairman Dodd. Thank you very much, President Gettelfinger.
We appreciate it very, very much.
I mispronounced your name earlier and I apologize.
STATEMENT OF ALAN R. MULALLY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FORD MOTOR COMPANY
Mr. Mulally. Thank you. Thank you, Mr. Chairman, Senator
Shelby, and Members of the Committee. I appreciate the
opportunity to be here today representing the Ford Motor
Company.
As you know, the auto industry has been heavily affected by
the turmoil in the financial markets. Much of the recent
commentary has suggested that our companies need a new business
model. I completely agree. In fact, we at Ford are well on our
way to transforming our company and building a new Ford that I
believe has a very bright future.
There are two fundamental questions that I think we are
dealing with today. First, is there a competitive and
sustainable future for our domestic automobile industry? And,
second, is a Government bridge loan through these difficult
economic times better for our country than inaction? I believe
the answer to both of these is yes.
As a relative newcomer to this industry, I have the benefit
of seeing the auto industry and its transformation in a much
different light. I see parallels to what I witnessed at Boeing
after the 9/11 tragedy and the steps we took to transform the
commercial airplane business. I can tell you that the
transformation of Ford is even more aggressive, and the
progress we are making is even more remarkable.
Our plan for the past 2 years has been consistent:
Aggressively restructure to operate profitably at the current
lower demand and the changing model mix. Accelerate the
development of safe, fuel-efficient, high-quality new products
that our customers want and truly value. Finance our plan and
improve our balance sheet, and work together as one team
leveraging our global assets worldwide. Our goal is to create a
viable Ford Motor Company and a lean global enterprise
delivering profitable growth for everyone involved.
Few companies have restructured more aggressively. We have
taken out that excess capacity that we talked about earlier,
closing 17 plants and reducing our workforce by 51,000
employees. We negotiated a new contract with the UAW to improve
our competitiveness, many of the features of which Ron
delineated earlier. We shifted to a balanced product line-up
offering high-quality, proven-safe, and good-value cars,
utilities, and trucks, small, medium, and large. We are
delivering the best or among the best fuel economy with every
new vehicle we are launching today.
The speed and the breadth of our transformation is evident
by the actions in just 1 week alone. Tomorrow, at the Los
Angeles Auto Show, we will introduce two new all new hybrids.
Our new Ford Fusion hybrid beats the Toyota Camry hybrid by at
least 6 miles per gallon. Today we are submitting our
application for direct loans authorized by Congress last year
to help us speed advanced technologies and vehicles to the
market. On Friday, we end large SUV production at our Michigan
truck plant, and we begin converting to fuel-efficient, small-
car production at that plant.
To fund our new products and restructuring, we went to the
capital markets early, and we divested all of our non-core
assets. In addition, our Ford credit business has consolidated
abroad to preserved capital in support of our U.S. customers
and dealers.
We appreciate the recently introduced asset-backed
commercial paper funding facility and anxiously await the
administration's term securitization facility being considered.
In the same way, FDIC's approval of Ford Credit's pending
industrial loan bank application will enable us to meet the
financial needs of our dealers and our retail customers.
As a result of all of these actions, we were profitable in
the first quarter of this year and well on our way to
sustainable profitability before the economic and the credit
crisis hit. And we have taken now decisive action to deal with
this new crisis. We have reduced production. We have further
reduced employment. We have eliminated all raises and all
bonuses through 2009. We took these measures while protecting
the heart of our company, the new vehicles that will secure our
future.
Now, we believe we must join our competitors today in
asking for your support to gain access to an industry bridge
loan that would help us navigate through this difficult
economic crisis. We suggest that the loans be structured in a
revolving format so that the exposure to the taxpayer would be
limited--and, if used, we would repay, of course, with
interest. We at Ford are hopeful that we have enough liquidity,
but we also must prepare ourselves for the prospect of further
deteriorating economic conditions in 2009.
In addition, the collapse of one of our competitors would
have a severe impact on Ford and our transformation plan
because the domestic auto industry is highly interdependent. It
would also have devastating ripple effects across the entire
U.S. economy.
I am more convinced than ever that we have the right plan
to transform Ford. With your help, we will create a safeguard
to deal with the growing economic uncertainty. We at Ford will
continue to deliver on our plan to create a thriving auto
business for the benefit of all of us. This is really an
important industry. It is a pillar of our economy, and we look
forward to working with you to be part of a solution on the
road to economic recovery in the United States.
Thank you very much.
Chairman Dodd. Thank you very much, Mr. Mulally.
Let me turn to you, Mr. Nardelli. Thank you for being with
us.
STATEMENT OF ROBERT NARDELLI, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, CHRYSLER LLC
Mr. Nardelli. Thank you, Mr. Chairman, Mr. Shelby, and
Members of the Committee. I really appreciate this opportunity
to be here today and we are asking for assistance for one
reason: To address the devastating automotive industry
recession caused by our Nation's financial meltdown.
With the credit markets frozen, the average working
American just can't get competitive financial to purchase or
lease a vehicle. Our dealers don't have access to market
competitive funding to place wholesale orders for new vehicles,
which result in severe constriction of cash inflow to the auto
manufacturers.
At the same time, Chrysler has billions of dollars in cash
payment obligation to pay wages, pay suppliers, to pay health
care, pensions, all in the range of about $4 to $5 billion a
month. Therefore, without an immediate bridge financing
support, Chrysler's liquidity could fall below the level
necessary to sustain operations. Independent research firms
have quantified the fallout of a domestic auto maker in
bankruptcy to overhaul the economy, and the impact, as Senator
Stabenow said, would be devastating.
Now, you asked the question on why bankruptcy is not a good
idea. It is not a good option for Chrysler, and more
importantly, for the auto industry or the broader economy for
some following reasons.
One, we believe that retail sales will plummet
dramatically. We saw this happen, sir, when all options were
put on the table when our previous owners announced they were
going to divest Chrysler. Sales fell 37 percent. Consumers were
leery of buying vehicles from manufacturers whom they didn't
think were going to be in existence. Our existing inventory,
some over 400,000 units out in the field, would require heavy,
heavy discounting to convince a customer to buy them.
Given our common supplier base, the bankruptcy of any one
automotive manufacturer, we believe threatens the viability of
all auto makers.
Our factories would likely be idle for a significant period
of time while we negotiate contracts with literally thousands
of suppliers and our primary lenders. This would put severe
pressure in having to pay COD or cash up front and would turn
the whole financial equation upside down, where we would have
to pay for material prior to assembly, wait through the
assembly process, collect our funds. So we think it would be a
more costly solution than what we are asking for today.
The overall amount of costs of financing and restructuring,
as I said, would be significantly higher in a Chapter 11
process than the working capital bridge that we are asking for
and presenting to this committee.
And finally, we just can't be confident that we will be
able to successfully emerge from bankruptcy.
That is why as an industry, collectively, we are requesting
$25 billion of working capital to survive this liquidity
crisis. We are willing to provide full financial transparency.
We welcome the government as a stakeholder, including an equity
holder, and we are fully prepared at Chrysler to comply with
all the current conditions and policies under the recently
enacted Emergency Economic Stabilization Act.
Furthermore, Mr. Chairman, our private equity owner,
Cerberus Capital Management LLP, has made it clear that they
will forego any benefit from the upside that would in part be
created from any government assistance that Chrysler LLC may
obtain.
Being new myself to the auto industry, I recognize the need
to challenge the status quo and seek significant improvements
throughout the business. For example, you asked some questions.
Since August of 2007, when we emerged as the first
privately held auto manufacturer in 50 years, we have reduced
and taken out 1.2 million units of capacity, or 30 percent of
our installed base. We have identified over $1 billion in non-
earning assets to sell, and we are more than 75 percent along
the way toward achieving that goal. This year alone, we have
reduced our fixed costs by $2.2 billion. And unfortunately, by
the end of the year, we will have furloughed over 32,000
employees. Twelve thousand of those employees are salaried
employees.
Mr. Chairman, through the first half, we were meeting and
exceeding all of our performance targets. We had generated over
$1 billion in VEBA, and we closed the first half with over $11
billion in cash, both restricted and unrestricted.
So it is equally important that the lack of liquidity to
provide loans and leases to customers and financing to dealers
is addressed immediately. We talked about our financial
companies. It is imperative that our affiliate financial
companies receive access to competitive liquidity and financing
capacity. At Chrysler, 75 percent of our dealers rely on
Chrysler Finance to finance their business, and 50 percent of
all customers finance their vehicles through purchases at
Chrysler Finance. Now, normally, these loans and leases are
securitized and sold in the secondary market to generate fresh
liquidity and financing capacity. Today, there is virtually no
secondary market, and therefore no way to raise capital.
With immediate financial assistance, the lifeblood of the
U.S. economy will continue to flow and Chrysler will be able to
continue to pay its current levels of obligation, $6 billion in
annual wages, $2 billion in annual pensions, $20 billion in
health care commitments, $35 billion annually to suppliers, and
$3 billion annually in capital reinvestment back into our
company for new energy efficient and environmentally friendly
products.
Clearly, Chrysler's plan to emerge from the current
downturn as a lean, agile company, and we are and will continue
to be what I will call the quintessential American car company.
Why is that, Mr. Chairman? Seventy-three percent of our sales
are in the U.S. Sixty-one percent of our vehicles are produced
in the U.S. Seventy-four percent of our employees work in the
U.S. Seventy-eight percent of our material is purchased in the
U.S. And 62 percent of our dealers are based in the U.S.
Now, Chrysler has a strong pipeline with product
renaissance scheduled for 2010, and in September, we revealed
three electric-driven vehicles, one for each brand, and they
will be launched by 2010. I recognize that this is not an
insignificant amount of money. However, I believe that this
request is the least costly alternative considering the options
that we have faced with less impact on human capital and one
that would provide stimulus as opposed to further depression in
the economy.
Thank you for your attention.
Chairman Dodd. Thank you very much, Mr. Nardelli.
Mr. Wagoner, welcome to the Committee.
STATEMENT OF G. RICHARD WAGONER, JR., CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, GENERAL MOTORS
Mr. Wagoner. Thank you very much. I really appreciate the
opportunity to appear in front of you, Mr. Chairman, and the
Members of the Committee, as well, and appreciated your
comments.
I would just like to comment briefly about the state of
affairs as we see them for the domestic auto industry and
General Motors. I would like to start by acknowledging for the
Committee that I represent and am privileged to represent a
number of important constituents today. We directly employ
approximately 96,000 people in the United States. We have 6,500
dealers who employ another 340,000 people. We have more than
2,000 suppliers located in 46 States. We purchased $30 billion
of goods and services from them last year. Our pension plan
covers 475,000 retirees and spouses. Our health care benefits
extend to about one million Americans. We have about a million
registered stockholders.
And 70 million of our vehicles are registered to U.S.
citizens, 22 million of them purchased in the last 5 years. To
the comments made by one of the Members of the Committee, I can
assure you that I feel very personally responsible for every
one of them.
As recent news coverage has made abundantly clear, many
people have a picture of GM that has not kept pace with our
efforts and with our progress. In fact, GM has made a lot of
progress in transforming our business in recent years, progress
which is absolutely necessary for our survival.
Since 2005, we have reduced our annual structural cost base
or fixed cost base in North America by 23 percent, or $9
billion. We expect to reduce them by 35 percent, or $14 to $15
billion, by the year 2011. Within that, a little bit of a
different number. Between the years 2003 and 2010, we will
reduce our U.S. hourly labor costs, expense off our income
statements, from $18 billion to $6 billion, and I think this
does really indicate that President Gettelfinger has made some
very tough calls and worked with us in order to make sure that
we can have a competitive labor cost situation. We, as he
mentioned, negotiated a landmark agreement last year which will
enable us to virtually erase the competitiveness and cost gap.
We have addressed pension and health care retiree costs in the
U.S. We have spent over $103 billion on those expenses over the
last 15 years. As a result of these and other actions, we are
now matching or beating foreign competitors in terms of
productivity, quality, and fuel economy, and by 2010, we will
match them on labor costs, as well.
On the product side, we are building vehicles that
consumers really want to buy. Senator Stabenow referred to her
Cadillac CTS, the Motor Trend 2008 Car of the Year. The Chevy
Malibu, the 2008 North American Car of the Year. And while we
have been doing that, we have made huge progress developing
advanced propulsion technologies, which I know you were so
interested in.
In 2009, GM will offer 20 models in the U.S. that get at
least 30 miles per gallon highway. That is twice our nearest
competitor. We will have nine hybrids next year. We have more
than three million flex-fuel vehicles on the road in the U.S.
We have established the world's largest hydrogen fuel test
fleet right here in the United States, and we are running all
out with all of our capabilities to get the Chevy Volt extended
range electric vehicle to market as soon as possible.
In short, we have addressed what we think were definitely
competitive shortcomings and we have moved as aggressively as
we could to position GM for long-term success and felt that we
were, as my colleagues mentioned, well on our road to turning
around the North American business. Just last October,
following the negotiation of the new labor agreement that Mr.
Gettelfinger mentioned with the UAW, our stock price climbed to
almost $43 a share based on analysts' views that we had finally
overcome the cost competitiveness gap with foreign
manufacturers.
Since then, the industry and the economy, of course, has
been hit hard by global financial markets and the crisis
therein, and the recent plunge in vehicle sales threatens not
only GM's ongoing turnaround, but, in fact, our real survival.
In response, we moved quickly to keep our company on track.
Since June, we have taken steps to--further steps to further
reduce our North American manufacturing capacity, further shift
production to cars and cross-overs, sell off parts of the
company, suspend dividend payments, reduce head count,
eliminate raises, discretionary bonuses, and 401(k) matches for
salaried employees, and eliminate health care coverage for
salaried employees after they reach age 65. These and other
actions are designed to improve GM's liquidity by $20 billion
by the end of 2009, and they obviously affect every employee,
retiree, dealer, supplier, and investor involved in our
company.
Mr. Chairman, I do not agree with those who say we are not
doing enough to position GM for success. What exposes us to
failure now is not our product lineup, is not our business
plan, is not our employees and their willingness to work hard.
It is not our long-term strategy. What exposes us to failure
now is the global financial crisis, which has severely
restricted credit availability and reduced industry sales to
the lowest per capita level since World War II.
Our industry, which represents America's real economy, Main
Street, needs a bridge to span the financial chasm that has
opened before us. We will use this bridge, and we will use it
effectively to pay for essential operations, new vehicles and
power trains, parts from our suppliers, wages and benefits for
our workers and suppliers, and taxes for State and local
governments that help deliver essential services to millions of
Americans. And in the process, we will continue to reinvent the
automobile and to improve the Nation's energy security through
development of advanced technologies like those in the Chevy
Volt.
What would it mean if the domestic industry were allowed to
fail? You heard Senator Stabenow, so I won't repeat other than
to say the cost would be catastrophic in jobs lost, income
lost, government tax revenue lost, and a huge blow to consumer
and business confidence. I believe it is fair to say that such
a level of economic devastation would far exceed the government
support that our industry needs to weather this current crisis.
That is why this is all about a lot more than just Detroit.
It is about saving the U.S. economy from a catastrophic
collapse. In short, helping the auto industry bridge the
current financial crisis will not only prevent massive economic
dislocation now, it will produce enormous benefits for our
country later. We want to continue to play the vital role we
have played for America for the past 100 years, but right now,
in today's circumstances, we can't do it alone.
You can help us through this crisis. In return, we will
repay the taxpayers' faith and support many times over for many
years to come.
Thank you very much, and I look forward to your questions.
Chairman Dodd. Thank you very much, Mr. Wagoner. We
appreciate it.
Mr. Morici, we welcome you to the Committee.
STATEMENT OF PETER MORICI, PROFESSOR, ROBERT H. SMITH SCHOOL OF
BUSINESS, UNIVERSITY OF MARYLAND
Mr. Morici. Thank you, Senator. My name is Peter Morici. I
am an economist and professor at the University of Maryland. I
am the sole panelist here to speak against the bailout. I guess
three CEOs and a president of a labor union, one Terrapin, I
think it is a pretty fair match-up, actually. I feel sort of
like the mouse that stowed away on the Titanic.
The automobile industry has two major components, the
Detroit Three and the Japanese, Asian, and European transplants
that assemble vehicles here. Both contribute vitally to our
national economy and ensuring that these companies have the
means to compete is of the most important national interest.
The gradual erosion of the market shares of the Detroit
Three over the last several decades stems from higher labor
costs, having origins in wages, benefits, work rules, poor
management decisions, and less than fully supportive government
policies. Although the government has been sympathetic to the
needs of this industry, the industry has fallen victim to
currency manipulation and other forms of protectionism,
predominately in Asia, in Japan, Korea, China, India, and
elsewhere.
The Detroit Three are rapidly running out of cash and face
filing for Chapter 11 reorganization. It is my position that it
would be better to let them go through that process and
reemerge with new labor agreements, reduced debt, strengthened
management that would permit these companies to produce cars at
costs comparable to those enjoyed by their Japanese and other
foreign competitors assembling vehicles in the United States.
Circumstances today are dramatically different than in
1979, when Chrysler received assistance from the Federal
Government. In those days, the challenge for Chrysler was to
become competitive with Ford and General Motors, and Lee
Iacocca had a clear plan to achieve that objective. Today, the
Detroit Three have achieved remarkable progress in improving
productivity and lowering labor costs thanks to a new agreement
with the UAW, but they still don't have costs quite as low as
the Japanese transplants.
This is an industry with very thin margins. I have heard
over and over again, for example, when Ford decided to locate a
small car factory in Mexico, that the UAW had tried to persuade
Ford that it could be competitive enough in the United States.
There is no such thing as competitive enough in the automobile
industry. Either you hit the mark that Honda hits in Indiana or
you are not competitive. The margins are too thin. There is too
much excess capacity. Either the costs are the same or they are
not. There is no such thing as almost as competitive.
By assisting the Detroit Three, Congress can delay one or
all of them from going through Chapter 11 reorganization, but
sooner or later, one of them will march down that path. Twenty-
five billion dollars to tide over firms would create another
AIG. I ask you to consider the promises that were made to you
when that happened. I realize that was really the Federal
Reserve that did that. If things are so dire that they have to
come here and submit to a government oversight board,
government ownership, is $25 billion really enough in the grand
scale of things? I would suggest that if you give them $25
billion this month, they will be back.
Without a new labor agreement that brings wages and
benefits absolutely in line with those at the most competitive
transplant factories, without reduced debt and other
liabilities, the Detroit Three will continue to lag in
innovation and build too few attractive vehicles because their
higher costs, debt, and other liabilities require them to spend
less on new product development than they should.
General Motors makes about the same number of cars globally
as Toyota. It simply has a smaller product development budget
because of the costs it bears. They have very fine engineers.
They are capable of producing very good cars. The same applies
at Ford. If you have less money to develop product, you put
fewer products on the street. They have a longer life. For
example, the Impala was a great car, but it was left sitting
out there for 7 years. Camry recycles every four.
If Chapter 11 is put off, the industry will continue to
shrink, and inevitably when it happens and we go through the
process, fewer jobs will be saved because fewer jobs will be
there to be saved. Sooner or later, this industry has to go
through the ultimate reorganization that brings its cost
structure absolutely in line with its competition. It may not
be fair. It may not be what we would want to see. But it is
inevitable.
In my mind, Chapter 11 is viable. The assets of these
companies are needed by the domestic automobile market. They
make over 40 percent, near 50 percent depending on which
estimate you use, of the cars driven in America. They can't go
out of business completely. The factories can't shut down
completely and then there be adequate cars to be sold. Someone
is going to run these factories.
They have creditors. To the creditors, the companies are
worth more operating than they are shuttered because the assets
of the companies will be worth more if the companies continue
to operate than if they are permitted to fall merely into
Chapter 7. That is where the debtor and possession financing
lies, in the existing creditors. Not enough attention has been
given to that option simply because, unfortunately, we have
created in America what my profession calls moral hazard. Now
that AIG has been able to put a pistol to the head of the
country and say, ``If you don't bail us out, the credit markets
will collapse,'' we face the same kind of issue with the
Detroit Three.
When Americans buy automobiles from the Detroit Three, more
is contributed to the vitality of the U.S. economy than when
Americans buy cars that were assembled here by transplants or
when they buy imports. These vehicles have more U.S. content in
terms of job, engineering, and profits and so forth, and the
vitality of manufacturing to a strong American economy cannot
be underestimated and it has too long been neglected by the
people who live and work in this city.
The Congress could take steps to improve the attractiveness
of making cars and parts in the United States by improving the
public policy environment. This would include finally
addressing directly and forthrightly undervalued currencies in
Asia, currencies kept cheap by massive government intervention
in foreign exchange markets.
In addition, assertive efforts could be made to address
foreign protectionism. It is very difficult to sell a car in
China that is not made there. It is very difficult to make a
car there with imported parts from the United States. So
General Motors is criticized for encouraging its parts
manufacturers to move there. It, frankly, has no choice. It is
high time that we take that trade policy imperative quite
seriously.
Congress could provide substantial product development
assistance to U.S.-based auto makers and suppliers. I would say
include Toyota, Nissan, and Honda in that process in the
interest of fairness and our WTO obligations, battery makers
and suppliers, to accelerate the production of high-mileage
cars. I would condition that assistance, though, on all the
participants sharing what patents they develop with one another
at fair patent fees, the Japanese model that was employed in
the 1970s and 1980s.
In addition, we could have a clunker rebate program. Bring
in a Tahoe, trade it in for a Volt and we will give you a big
rebate. Bring in a small Chevette that is 30 years old, you get
a small rebate. The newer the car, the more miles you save, but
the only part of the deal has to be it has got to go through
the crusher. It has got to go through. You can't recycle them
and put them on the street.
There are things that we can do to provide incentives for
Americans to drive fuel efficient cars that we have not done,
and there are things that we could do to improve the
environment in the United States. But I don't think that giving
these guys $25 billion right now is a smart idea.
Thank you for your time.
Chairman Dodd. I would call you the mouse that roared here.
[Laughter.]
Chairman Dodd. You did pretty well, Mr. Morici, I will tell
you.
Thank you all very, very much----
Senator Shelby. Mr. Chairman, maybe a lion.
Chairman Dodd. Yes. Well, let me open up a question here
and then we will move right along pretty quickly. But one of
the things that struck me, and Mr. Wagoner, you began to
address this in your comments and I appreciate them, but in
most of the testimony I went through and read, we talk about
the economic implications, and I want to read for you, because
Hank Paulson the other day, in fact, he is quoted in, I think
it is today's Wall Street Journal speaking why he is reluctant.
Let me first of all say, as someone who was directly
involved in the writing of the Emergency Economic Stabilization
Act, there is no question in my mind whatsoever that within
that Act, within that authority we extended, the authority
exists to respond to this issue. Now, it doesn't require it. It
doesn't mandate it. But I think even the Treasury has
acknowledged that if they wish to respond to this situation,
they could do so, and so I want to at least as one of the
coauthors of that bill state clearly that that authority
exists.
Now, he has taken the position, however, though, that the
purpose of this bill, and I quote him here, ``I don't see the
purpose,'' talking about the automobile situation, ``of the
bailout program, which is intended to stabilize jittery
financial markets and get lending flowing more freely, which
eventually should help revive the ailing economy.''
The point I want to make here is that I don't think we have
addressed as effectively as we could and as you could the
financial implications, because that is the argument he is
making. They are not financial implications to the conditions
facing the automotive industry.
I wonder if each of you would begin, and Mr. Wagoner, why
don't we begin with you, to talk about the financial
implications. We know about job losses. We know about all of
these other elements. But what are the financial implications
if your company fails, your company goes into bankruptcy,
putting aside the questions that Professor Morici has raised.
And then, Mr. Nardelli, if you would go down the line, and then
Mr. Mulally, if you would also comment on this, and Ron, if you
would, too, what are the financial implications of a failure.
Mr. Wagoner. I think they are numerous. I would start by
saying, obviously, we all have captive finance companies. In
our case, it is 49 percent owned. I think it is fairly clear
that difficulties in one or another of the manufacturers would
significantly impact the finance company, which in every case
are huge borrowers, and affect the financial system.
The inability of any one of us or all of us to meet our
post-retiree obligations, pensions and health care, I think
would have a significant effect on financial markets, and I
suspect the inability to make supplier payments and what I
believe would be a domino of bankruptcies through the supplier
community, which as Al Mulally said, is very integrated for all
of us, would have a huge impact on their ability to meet their
financial obligations.
And finally, I suspect it would affect State and local
governments and their ability, in fact, in some cases, to
service their obligations in communities that are heavily
vested in the auto business.
So I would--my own view is the potential impact on the
financial markets would be severe.
Chairman Dodd. And may I ask you, Mr. Nardelli, this is
talking about systemic risk. We were told here that we had to
provide $150 billion to AIG because of the systemic risk issues
here. Tell me if you agree by what has been said by Mr.
Wagoner, the additional points. Is there systemic risk? I
realize there is financial risk, but is there systemic risk
with the failures we have been talking about?
Mr. Nardelli. Mr. Chairman, I believe there is. In our
case, for example, if we were to go into bankruptcy or fail, we
have over $7 to $8 billion of outstanding payables. Those
suppliers, those contractors, those equipment manufacturers
basically would be helpless in the recovery of those funds.
We have about 3,600 entrepreneurs, small business owners we
call dealers. They have in excess of over $1 billion of
inventory in their lots today. They would basically be totally
exposed relative to the risk.
I think the systemic risk that we talk about here, of our
top 100 suppliers, 96 of them are common to my colleagues on
either side. And given the fragileness of that supplier base
today, because we basically have taken--the industry has
basically contracted equivalent to the U.S. production that
both Alan and I ship in a full year. That is the magnitude of
contraction we have seen in this industry. So I think the
systemic risk would be dramatic across the entire economy.
Chairman Dodd. I agree, and again, maybe I am not making
myself clear. I am talking about bonds, credit default swaps,
these other elements that are part of your business that really
haven't been discussed here today. We have talked about exactly
what you have just mentioned, but I want to get at this other
set of issues that Hank Paulson is raising as an objection for
them to deal with this under the existing emergency
stabilization bill, and that is these other financial
instruments which are deeply involved in your business. Are
they at risk? That is the financial risk I am talking about.
Mr. Nardelli. There is no question that the lenders, the
financial institutions, would be at total risk relative to
being able to recover their investments in this company.
I would disagree with the gentleman on the left from the
standpoint that, again, if any one of us went into liquidation,
I would submit to you that there is very minimal recovery, and
if you look at the institutions today and how they have
remarked their investments, the 20 to 30 cents on the bond, I
believe there is absent--there is really no recovery and there
would be tremendous impact on the financial institutions.
Chairman Dodd. Mr. Mulally, do you want to----
Mr. Mulally. Mr. Chairman, I think the only thing I would
add is I think the most significant risk would be what would
happen to the economic development, to the GDP growth,
especially with the unemployment and with the debt, because
clearly with the interdependence that we have with the supply
chain and all of that, they are highly leveraged, also. I think
the biggest single risk would be further slowdown in the
economic development.
Chairman Dodd. President Gettelfinger, do you want to
comment on this?
Mr. Gettelfinger. Well, the one thing I think that is
important from our perspective, if one of the big three goes
into so-called Chapter 11, the American public is not going to
buy an automobile from a company that is in bankruptcy.
Chairman Dodd. Let me ask you something. Someone asked me
today if it was a prepackaged bankruptcy with Federal
guarantees behind it. Is your answer still the same?
Mr. Gettelfinger. My answer would still be the same. I do
not believe it would happen successfully, and more importantly,
the way that the supply base is interlaced with all of the big
three and even some of the foreign brands, if one of these
companies was to go into bankruptcy, I would almost bet it
would take two of them or another one with it and possibly all
three of them.
But I did want to go back again and point out the risk here
to the PBGC with the pensions and then the 45 percent of the
retirees who are not Medicare-eligible, so another major
addition to our woes, if you will.
Chairman Dodd. Yes. Let me ask you something one of my
colleagues raised, and I will raise it and they may want to
raise it, as well. Again, going back in the early 2003/2005,
when interest rates were the lowest they had been in 45 or 50
years, there was a real pushing money out the door. That is
when you get to the 17 million, I think, those numbers, which
are high numbers, and obviously the oversupply.
The question was raised earlier, aside from talking about
obviously the financial crisis we are in, looking back
introspectively, what mistakes did the industry make that
contributed in addition to this? Is it only the financial
crisis, or were there other decisions that were made by the
industry that could have helped avoid this or minimized the
kind of problems we are looking at today?
Mr. Mulally. I probably--Bob and I are relatively new and I
would never feel qualified to comment too thoroughly on the
past strategic decisions, but I think your issue about what the
real run rate is, what the real demand is, is a very serious
question. And I think in the conversations that we have all
had, the direction we are going with the companies, we are
assuming that--we should assume that there is a lower run rate.
What is the real----
Chairman Dodd. What do you think that might be? If it is
not 17, what should it be?
Mr. Mulally. Well, we clearly don't know, but separating
out what has happened because of the current financial crisis
and economic slowdown has kind of masked that right now. But we
are going through vehicle by vehicle, each size, what is the
real demand? But I think there is a real possibility that over
the long term, it could be a lot less than that 17 million.
Chairman Dodd. Yes.
Mr. Mulally. And we are sizing our companies accordingly.
Chairman Dodd. Mr. Nardelli.
Mr. Nardelli. So, Mr. Chairman, let me answer two or three
points, please. First of all, having been there a year-and-a-
half, let me share with you what we did find and what we did
do. We immediately eliminated four vehicle nameplates because
what we found is they were designed for Europe and being sold
in the U.S. We immediately put in the first ever Chief Customer
Officer. We have identified over 400 line items to improve
performance, reliability, durability, and finish. So yes, we
have made some mistakes in Chrysler and what we are trying to
do is move expeditiously to remedy those. Our warranty costs as
a result of that in the last 15 months has gone down 29 percent
by focusing on customer first and quality, period.
Your other point, and having spent a lot of time in the
housing industry, I can share with you that there was this
unbelievable bubble. As you know, people were extracting a
tremendous amount of equity, trillions of dollars, and
reinvesting and rolling up. The mistake the Chrysler probably
made during that period is that we were responding to the
customer who wanted bigger, more expensive, higher horsepower
vehicles to go with their second homes, their boats, their
trailers, and we chased that consumer demand up. Lesson learned
for us, and we are moving as fast as we can to make sure our
product portfolio is much more balanced, that we have smaller,
more fuel efficient, more efficient cars to blend with those
things that we are doing, both like Alan and Rick, in producing
hybrids, producing electric vehicles, to make sure that we have
the appropriate blend as we go forward.
Chairman Dodd. Mr. Wagoner.
Mr. Wagoner. I just want--your comment about the 2003,
2004, 2005 period, I think it was a period that in retrospect
was definitely fueled by low-cost credit, ready availability of
credit to just about anybody who wanted it under, frankly,
looser terms than probably would have been appropriate in
retrospect. I think the wealth that was in the housing market,
or perceived wealth, I think a lot of that was taken out by
people with home equity loans and they would trade up and buy
vehicles.
And then I would have to say, within the industry, we had a
bit of a structural issue, which I know from GM's side we had a
lot of employees. We had huge cash obligations. I mentioned we
owed $103 billion, or we paid over a certain period that in
health care. And so the pressure to keep revenues quite high,
and I think the learning from that period is we really have had
to significantly reduce our structural costs so we don't have
to force, if you will, try to push a string when the market
isn't really there.
And second of all, we are all going to have to adapt to a
period of, I think, not only much more realistic credit terms,
which means much less leasing, needing customers to offer some
sort of downpayments, but we are also going to have to stick on
this path that while energy prices have plummeted here
recently, we don't for a second believe that that is a long-
term situation. It is driven by the current credit crisis, and
eventually with the growing demand for autos around the world,
we have got to stick with the fuel economy.
So, I mean, it was a heady period to a certain extent, and
for, like, 5 or 6 years, the industry ran over 17 million. I
think, as Alan suggested, for me, a more likely trend volume,
if we weren't in a massive credit crisis, and it is probably a
million and a half, two million less anyway, rather than if we
were normal conditions today we would probably be running more
like, I would guess, 15-and-a-half or 16 million units than 17-
and-a-half or 18 million units.
And it could actually be lower, and the other lesson we
have learned is we are planning our business on a much lower
volume than that, and if we have to stretch on the up-side,
that is a more fun thing to do, anyway.
Chairman Dodd. Let me respectfully suggest, as well, here,
in addition to--we are talking about credit as if it were some
sort of outside source. I mean, you were providing the sources
of credit.
Mr. Wagoner. Right.
Chairman Dodd. You were making these decisions involving--
--
Mr. Wagoner. Sure.
Chairman Dodd. So some acknowledgement of the fact that
while certainly that was going on in the housing sector, we all
acknowledge that, we had 75 hearings on the housing. But in a
sense, GMAC is providing that credit at those low rates and so
forth at the time.
Mr. Wagoner. Yes. It was----
Chairman Dodd. Was there any acknowledgement at the time--
--
Mr. Wagoner. Sure.
Chairman Dodd. ----that what you were doing here was
actually going to end up in a bubble kind of situation, that
could only end up in the situation we are now facing?
Mr. Wagoner. Fair question. We had at GMAC and continue to
track the performance on their loans of consumers. And while we
have had some increase in delinquency and stuff, we----
Chairman Dodd. Were you pushing them at all? Were we
pushing them out the door? Is there any acknowledgment of----
Mr. Wagoner. Pushing loans?
Chairman Dodd. Pushing the credit out the door, people
coming in and wanting to buy that bigger, faster, heavier
automobile. Was anybody saying, wait a minute?
Mr. Wagoner. Well, I think GMAC management was focused on
the fact that they needed to be paid back because the margin--
to be fair, I can give you the data later, get it, but the
consumer payments on automobiles, the records are pretty good.
We really haven't seen a huge spike up in losses there. I mean,
I don't think--I am not sure I would put the responsibility on
GMAC. I think our industry was running to a revenue model to
try to make sure we could meet the financial obligations, and
so--and by the way, the domestics did it, but the foreign-owned
manufacturers, very aggressive on leasing, as well. So it was
kind of an industry culture and I think we have had to address
it rather painfully here in the last 2 or 3 years.
Chairman Dodd. May I ask the other two to respond to my
point? And again, I realize you have only been here a short
time, but obviously you have followed the industry.
Mr. Nardelli. Mr. Chairman, I would say, if I understand
your question directly, I don't think our captive finance
company at the time, which was, of course, owned by Daimler,
told customers, no, you should not buy a bigger, more luxurious
vehicle. I think the customer came in, had extracted a
tremendous amount of equity out of their home, they were
financially sound at the time, and therefore the transaction
took place. And as Rick indicated, if you look at our
delinquency and our repossessions, while they are up, it is
modest compared to what we are seeing in the housing industry
relative to foreclosure or bad loans.
Chairman Dodd. I am going to get back to you, Doctor, in a
minute. Finish up here, Mr. Mulally.
Mr. Mulally. Yes, Mr. Chairman. I would--I think it is a
really good point. I would just add in our case, we were just
looking at the data, that I would say we didn't offer easy
credit because we always had relatively high FICO scores. But
to your point, the relative interest rate was relatively low to
the consumer. You combine that with the low fuel prices and I
think that, along with the lifestyle, that did incentivize a
lot of borrowing. It kind of goes back to the issue we all have
of kind of living beyond our means, and with a lower savings
rate, it just continued to decline. But as far as fueling that
with low credit scores, we have not done that. It has been a
good business for us, a good prudent business with our finance
company.
Chairman Dodd. Doctor, you wanted to make a comment.
Mr. Morici. Yes. I think it is important to recognize that
these three companies in the context of the other major
Japanese competitors and Korean competitors, no one of them can
decide to sit on the sidelines when there is a credit hysteria
and not participate because of the loss of market share, then
the consequent impact on their product development budgets and
so forth. It isn't like they could get together and say, gee,
we are making too much credit. You become part of the economy.
It is much like the homebuyer in 2005 saying, gee, there may be
a bubble out there. I should sit this out. And they sit it out
2 years and they find out the house costs $100,000 more than
before. They have to participate.
That said, America is over-car-ed just as it is over-
housed. I am a macroeconomist and I know something about this.
We can expect to sell fewer cars going forward for a variety of
reasons. Credit is going to be more expensive. People are going
to be saving more than they have in the past. The cars last
longer. They are much more durable. People have been buying
cars because they get tired of them, not because they wear out.
I drive a Ford truck.
Mr. Mulally. Yes.
[Laughter.]
Chairman Dodd. Why don't you move your chair? Would you sit
down over at this end here?
Mr. Mulally. Ask Mark Fields who sold it to him.
Mr. Morici. In any case, they are going to last a long
time. As a consequence, and this is important, the industry
each year needs fewer people to make the same number of cars
and it is going to be making fewer cars. Therefore, those
severance charges that we see, those special charges, are going
to continue for a very long time. What is it, $105,000 per
worker? We are going to continue to see severance charges. It
is going to be difficult for these guys to balance the books
with the cost structure they have in that kind of environment.
When you talk about things like if we let them do Chapter
11 or not, you have to realize that probably at some point
there is going to be a crisis over that issue and that if you
talk about things like prepackaged Chapter 11 and so forth, it
is probably not best to prepackage so it is administered by
this body or the executive branch.
You are very good at writing banking regulations, despite
what your critics say, but you are not good at reworking
companies. That is why we have bankruptcy courts. If we are
going to have some sort of prepackaged process, we want to
access the expertise that those people have, but we have to do
it in a way that mitigates the real issues that are raised.
Warranty issues can be resolved. There are such things as
third-party warranties and assurances of continued operation.
We need to accelerate the payments to suppliers to ensure that
they get paid.
This isn't an airline. They do raise a valid point. This is
not an airline going under. But it has to be carefully
conceived in those terms. This is not a matter of whether it
happens now or not at all. Some kind of reorganization process
has to happen because of the very issues you are raising.
Chairman Dodd. I took a lot of time and I apologize.
Senator Shelby.
Senator Shelby. Thank you. All of you are here today
because you realize, and I think a lot of us realize you are in
dire circumstances. You wouldn't be here otherwise. But with
both your market share declining and the overall market for
automobiles contracting, why should we believe that your firms
are capable of restructuring now when you were unable to do so
under better conditions, more benign conditions? A lot of
people think you have already failed, that your model has
failed, that you are here to get life support. You have burned
billions collectively, the three of you, the companies have
earned billions and billions and billions of dollars in trying
to turn around your industry.
What would you do with the money if you were able to get a
tranche of $25 billion, and I am sure if you got $25 billion,
you would want 25 or 30 or 40 more. What would you do with it
specifically, and how would you pay this money back to the
taxpayer, which is a very important question for me?
Mr. Wagoner, we will start with you. You are GM.
Mr. Wagoner. Yes, sir. First of all, you said, what is
different. I mean, the fact is that our capacity in 2005 was
about five million units in North America in total and now that
is--or U.S. and Canada, and now that number, by the time we
finish the adjustments that we have announced, or around 2010,
will be, as I recall, down to about 3.3, 3.4 million units. So
we have taken a huge chunk of capacity out, and we have also,
we have taken out 47 percent of our workforce over about the
last six----
Senator Shelby. Well, why aren't you making money?
Mr. Wagoner. Because--well, I think two reasons. Our
financial results have reflected quite significant costs to
restructure, and that has cost cash for sure, but hopefully
with the amount we have going forward, we won't have to
decrease our capacity another 30 or 40 percent. And the other
issue we are obviously facing today is that the market has
simply plunged, in part because people who want to buy our cars
can't get credit. But we try to run models as accurately as we
can. It has been a little tough getting----
Senator Shelby. Wait a minute. You weren't making money
when you had cheap money flowing everywhere a year or two ago.
Mr. Wagoner. When you take away the charges for
restructuring the company, from an operating perspective----
Senator Shelby. Well, I know, but you have to consider the
whole.
Mr. Wagoner. Sure. I mean, obviously, we have put $103
billion over the last 15 years in----
Senator Shelby. You have put over $100 billion in
restructuring?
Mr. Wagoner. No, this is just in post-retiree health care
and pensions.
Senator Shelby. OK.
Mr. Wagoner. So there is an amount----
Senator Shelby. What have you spent on restructuring, sir?
Mr. Wagoner. I am sorry?
Senator Shelby. What have you spent in the last 5 years on
restructuring? You have spent billions of dollars.
Mr. Wagoner. We have. We have spent a lot. I can't give you
an exact number, but----
Senator Shelby. You can't give it to me----
Mr. Wagoner. I can----
Senator Shelby. Will you furnish that for the record?
Mr. Wagoner. Yes, sir, we can certainly do that. But as we
look at the business model going forward, at what I would say
conservative industry, so let us say 12 million--we thought was
conservative--12 million units next year, which would be a very
low number, maybe 13 the following year, and then trending up
to, say, level out at 14.5, 15, we believe in a business model
that we have got structured today we can be profitable, not as
profitable as we would like, so we have more work to do in all
aspects of our business. I guess that will never end. But we
believe----
Senator Shelby. What would you say to people, though, that
have said, we have heard that before? You are the CEO of GM. We
have heard that you are going to be profitable, that you are
going to make money off of this----
Mr. Wagoner. Well----
Senator Shelby. ----but you haven't.
Mr. Wagoner. I mean, I would say, Senator Shelby, if you
look at the actions that we have taken, this is hard stuff and
it has required a lot of good cooperation with our unions, but
I would take as evidence coming out of the labor agreement last
year, obviously the people who were frequently critical of us,
the Wall Street analysts, said, hey, these guys have gotten
their labor costs competitive finally, layered on with the fact
that they have got good products now. They are moving hard in
technology, quality, productivity, et cetera. And so our stock
price went up a lot, to, like, $42 a share. I think that was
evidence that people felt like if the industry had continued
even at 15, 16 million units, we would have had a decent
business.
But this has come down pretty quickly. We reacted. We said
we will come up with additional steps to save $20 billion----
Senator Shelby. What are you going to do with that money if
you were to get it?
Mr. Wagoner. We are going to use it to continue product
programs, because we know over time, as Dr. Morici said, if you
don't have competitive products, you don't win. We are going to
continue programs like the Chevy Volt, because obviously it is
a high priority to be able to meet the fuel economy standards.
And we are going to need some of that money to pay suppliers to
keep the system going.
Senator Shelby. Ford? And how are you going to pay the
money back? Neither one of you answered that.
Mr. Mulally. I welcome your question.
Senator Shelby. Yes.
Mr. Mulally. We started on this plan. It was a very
exciting vision to create, and the most important thing that we
had to decide is are we going to create a sustainable
automobile company, meaning exactly that, that year over year,
are you going to reverse this decline and start to grow again
and can you grow profitably so you can continue to invest in
the business.
So what we decided, a couple of just really fundamentals.
It doesn't sound like rocket science, but the most important
thing is we had to make products that people really did want
and value. And the four things that we decided is they had to
be absolutely the best in quality, they had to be the best in
fuel efficiency, they had to be the most safe, and they had to
be the best value.
So the first thing we decided was to leverage all of our
global assets, because we make, as you know, dynamite smaller
vehicles around the world where fuel prices are higher and they
are absolutely best in class. So we complemented our best-in-
class larger vehicles in the United States by starting to bring
in and bring online smaller, more efficient vehicles. Number
one thing.
The second thing, on the quality, every year we continue to
improve the quality where we are now statistically equal to or
better than our Japanese competitor.
Senator Shelby. Are you making money yet?
Mr. Mulally. And we made money in the first quarter before
we had this economic decline. But let me finish on the
strategy----
Senator Shelby. OK.
Mr. Mulally. ----because it has got to start with the
product. The second thing, on the fuel efficiency, we made a
commitment, and it was kind of a highlight for us last year to
be asked to participate by Congress in the 2007 Energy
Independence and Security Act, and we made a commitment that in
every vehicle that we put out going forward, we would be world
class in fuel efficiency and we would move right up that CAFE
line. So fuel efficiency, we believe has moved right up to the
top of the consumer's decision, so we have got to be best in
class in that.
And on safety, it is just a given, and right now, the Ford
vehicles have more five-star ratings than any other brand. So
we are in a good place right there.
Now on the making money and the productivity, all those
actions we put in place, starting with the agreement that we
made with Ron on getting our costs in line and our work rules
and everything we could do on productivity, we ended up with
all of that being able to deliver profitability in the first
quarter of this year. And then we all know what happened to us
after the first quarter. And the only reason that we are here
today is that with the market coming down so fast and the
credit getting so tight, that we are just overwhelmed by the
revenue falling off so much that our liquidity is threatened.
But the key to us going forward is as we go through this,
continue to invest in the new products, continue to invest in
the new productivity, and we will come out the other side and
we are going to be a turbo machine. This is a near-term problem
that we are addressing.
Senator Shelby. Mr. Nardelli.
Mr. Nardelli. Yes, sir, Senator. One of the questions that
was asked and responded to is there is a third-party
organization called the Harbour Report and they basically track
the number of hours it takes to assemble a vehicle.
Senator Shelby. I am familiar with that.
Mr. Nardelli. This year, Chrysler is spot-on Toyota. I
noticed that the comment was made from the Committee, but we
are spot-on Toyota relative to number of hours. As Ron said, by
2010, Ron Gettelfinger said, our hours, our pay per hour will
be competitive. So therefore, on a vehicle production
standpoint, we think we will be U.S. and globally competitive.
We are working with our dealer network. We have about 3,500
dealers. We have created a Genesis program where basically we
will consolidate dealers and put three brands under one roof to
continue to minimize cost. We have taken our overall structure
down basically assuming a little more conservatively than what
the little two fellows said. We are assuming that our exit rate
will be our entrance rate next year, at about 11 million units.
We are continuing to de-layer the organization and increase the
span of control of our salaried personnel. We are continuing to
try and drive efficiency and inefficiency out.
We are adding between $400 to $500 per vehicle on the fit,
the finish, and the interior to move us up in the J.D. Power
ratings so that we are more competitive with the transplants,
so consumers do have a higher reliability confidence level, and
in fact, they will see the value of the products that we are
producing.
We do all those things, sir, and we would assume to pay you
back just like we would the investors----
Senator Shelby. Not me, the taxpayers.
Mr. Nardelli. ----the taxpayers----
Senator Shelby. How would you pay the money back?
Mr. Nardelli. Because we will generate profit and we will
have to return that. Just as we will pay our debt down from our
investors, we would pay it back to----
Senator Shelby. What if you don't, though?
Mr. Nardelli. Well, sir, we wouldn't be here today asking
for this if we didn't have a high confidence level that we
could weather this economic trough, continue to resize, make
these gut-wrenching decisions to come out the other side
leaner, more agile, and for us, a higher quality, higher
reliable product.
Senator Shelby. Doctor, let me ask you this question, the
same thing. Why should we believe--we have got the three CEOs
here. Why should we believe that they are capable of
restructuring, considering their past, their immediate past,
that they have burned through billions of dollars trying to
restructure? What will be different, and has their model
failed, and how are we going to get this money back if we pay
it?
Mr. Morici. I am skeptical that you will get it back.
Senator Shelby. I am, too.
Mr. Morici. Let me explain why----
Senator Shelby. Yes, sir.
Mr. Morici. ----and it is no disrespect to these fine
gentlemen. They really know how to make automobiles. If you go
to China, where they have a clean slate, and they are competing
with the Japanese there, they do very well. Here, they don't.
Even if their labor costs are spot-on, which I don't believe
that they are, but even if they are, you are in a perpetual
model of downsizing because you get more productivity every
year, and we have a chart here that shows that phenomenon from
Harbour. Then you are laying people off and you have to pay
them $105,000 apiece to leave. You are going to have special
charges forever. That is a problem.
In terms of productivity, Chrysler is on a par, according
to Harbour, with Toyota. Ford is not by a fairly large margin,
about 10 percent, and General Motors is not by about two-thirds
of that, according to the data from Harbour as published by the
Wall Street Journal. If they have better data, I am not aware
of it.
So I am somewhat skeptical. It is not that they are not
capable managers, but they are burdened by history and they
need a labor agreement that truly places them on a par with
Honda in Indiana and with work rules that are truly on a par
with Honda in Indiana or they can't get there from here because
the margins in the industry are simply too thin.
Senator Shelby. If there is not drastic change, no matter
what we spend on it, it is not going to work, is it?
Mr. Morici. More than that, it is possible to accomplish
drastic change. Remember, Chapter 11 reorganization hasn't been
seriously considered. What has been seriously considered is the
AIG model.
Senator Shelby. Sure.
Mr. Morici. Show up here and say, look, if you don't give
us this money, the world is going to come to an end. I mean, it
has already worked. We have seen it work. AIG has got $150
billion of my money and your money, too.
Senator Shelby. That is what bothers me.
Quickly, and I know my time has run over, I would like to
ask each one, and I will start with you, Mr. Wagoner, I am
going to ask three questions, but you can answer them quickly.
How many product lines do you currently have?
Mr. Wagoner. We have about--currently about 60 model
offerings.
Senator Shelby. How many?
Mr. Wagoner. About 60.
Senator Shelby. Sixty. How many of these lines are
currently profitable and how many are losing money out of the
60?
Mr. Wagoner. Profitable at what level?
Senator Shelby. Well----
Mr. Wagoner. I mean, contribution margin, net income--I
would say about half at the low industry level.
Senator Shelby. How long have these lines performed as they
are currently performing? In other words, how long have they
either been making money or losing money?
Mr. Wagoner. I would say, generally, because of the higher
fixed costs for lower-priced vehicles, it is harder to make
money, particularly when fuel economy wasn't as highly valued
because energy was so cheap here, but I think that is changing
over time.
Senator Shelby. Mr. Mulally?
Mr. Mulally. Let us see, on the product lines, on brands,
the ones that we----
Senator Shelby. How many product lines do you currently
have?
Mr. Mulally. Right. We have Ford, Lincoln, and Mercury, and
we also----
Senator Shelby. I know that, but how many others?
Mr. Mulally. We have divested all of the other brands, so
we have divested Aston Martin and Jaguar and Land Rover so we
could absolutely laser focus on----
Senator Shelby. How many of these lines are currently
profitable and how many are losing money?
Mr. Mulally. Well, in January, at the end of the first
quarter, and the first quarter would be----
Senator Shelby. We are talking about, say, now.
Mr. Mulally. Well, we are losing money now----
Senator Shelby. Sure, you are.
Mr. Mulally. ----because the volume is way down. But when
we completed the first quarter, the larger vehicles made a
little bit more money. The ones that were harder to make were
the smaller ones, but that is where the transformational
agreement with labor comes in that we will be able to make
money on all the vehicles on all the sizes.
Senator Shelby. Mr. Nardelli, quickly.
Mr. Nardelli. Yes, sir. We have three brands, as you know,
Chrysler, Dodge, and Jeep. Today, we have 22 brands, or lines,
as you are suggesting. One of the things I mentioned is we
eliminated several lines already because they were not
profitable and weren't carrying the volume. If you look at the
newest products that we just rolled out, the new minivan, the
new Challenger, the new Journey, the new truck, the new
Liberty, we are making money on a variable cost basis and we
are driving our fixed cost per unit down so that we will be
making money across the board.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Dodd. Senator Carper.
Senator Carper. I just observe that your fixed costs per
unit, driving it down, you obviously have to sell more
vehicles. Your Newark, Delaware, assembly plant where you make
the Durango and the Aspen, is selling some of the most highly
rated quality products of any SUV, I think, by J.D. Power. In
fact, I think they won the award for the best quality vehicle
earlier this year. But it is a plant where you can actually
assemble about 225,000 vehicles a year. I think last month
roughly 3,000 vehicles were sold. And when you try to spread
out the operating costs, you know, the fixed cost across 3,000
or 4,000 vehicles as opposed to 200,000 or 225,000 vehicles, we
know that it does not work.
I tend to see most glasses as half-full, even when they are
almost bone dry. This one is not bone dry. And I want to just
lay out what I am hopeful may be a confluence of events and
maybe by 2010, and in 2010, Mr. Gettelfinger, correct me if I
am wrong, but I think some of the labor savings that you
negotiated and gave up with great reluctance to make this work,
but some of those labor savings--in fact, quite a few of those
labor savings will really kick in in the year 2010. The product
mix that sees the Big Three pivoting from largely a light
truck/SUV mix to something that includes far more efficient
vehicles and a lot more cars, vehicles propelled not just by
flexible fuels but also to include hybrids. Anyway, we are
going to see a product mix that looks a lot more like what the
marketplace is asking for and is demanding.
In 2010, my hope is we are going to see a rebound in the
economy by then, and one of the things we know about
recessions, we have them from time to time. We know they do not
last forever, and history would suggest that when we have them,
the sharper it is on the way down, usually the sharper it is on
the way back up. So this one, as bad as it looks right now, is
not going to be around forever, and we will get through it.
And the last thing that is out there is consumers. A good
example. I have the 2001 Chrysler Town and Country minivan, and
we have driven the wheels off of it. We have several other
vehicles as well. But the Town and Country minivan is in the
shop today. It is in for regular maintenance, and they told me
that we need to do something to keep the transmission fluid
from leaking so that it will go a bit farther. It has 210,000
miles on it. I have been saying I wanted to keep it until we
are able to buy one of those flex-fuel plug-in hybrid Chevrolet
Volts. I am not sure we will make it that long unless you guys
speed up even faster.
But somewhere down the line, and certainly by 2010, all
those millions of people that are not buying cars, trucks, and
vans are going to finally decide they need one and they cannot
keep taking their Chrysler Town and Country minivans, however
good they are, back to have it serviced and to keep them on the
road.
Some would say that I am being maybe too optimistic, and I
think our third witness here, Dr. Morici, your job here, I
think, is to be--I do not know if ``truth teller'' is the right
word, but what is unrealistic about what I just suggested?
Mr. Morici. Keep making these mistakes----
Senator Carper. Just leave your microphone on.
Mr. Morici. OK. Well, I do not want to say something in----
Senator Carper. That is OK.
Mr. Morici. My feeling is it is unrealistic to expect that
on a sustainable basis we will be selling 16 million vehicles a
year again, perhaps even 15 million vehicles, simply because
the vehicles are too good. They make them too well. They do not
break anymore.
Senator Carper. Like my minivan.
Mr. Morici. Like my truck. As a consequence, they will be
selling fewer vehicles.
Senator Carper. Except my son wants my minivan.
Mr. Morici. I understand that.
Senator Carper. He wants me to buy one of those Ford Fusion
hybrids.
Mr. Morici. I am a macroeconomist, and I do deal with
things like population growth rates, GDP growth rates, and
things of this nature. And we have been buying cars at a very
accelerated pace, and it is reasonable to expect over the next
several years, though there might be one blip year, that by and
by we will be buying fewer cars than we did in the good days.
That does not mean it is terrible. It just means--it is like
your refrigerators last a long time these days. As a
consequence, they will be requiring fewer and fewer workers to
do that job. And with the kind of buyouts the contract
requires, that is indeed a significant challenge for the
industry if it is going to make cars at the same labor costs as
an expanding group of Asian manufacturers in the Southeast who
do not, you know, pay $105,000 for people to leave. It is going
to be challenging with such thin margins. That is what is wrong
with that.
Senator Carper. All right. Thanks very much.
Anybody else want to comment at all in response to what I
just said? Yes, Mr. Gettelfinger, quickly please.
Mr. Gettelfinger. Please. Thank you. The one point I want
to make is the labor cost savings are incremental coming in. As
an example, in the parts depots, we took a 5 percent pay cut.
We took people out of the defined pension benefit plan, and we
put them in a 401(k) health care, and that is for all employees
that come in there. Janitor work that used to be work that
belonged to the companies is now at a much lower rate of pay,
and the work does not even belong to the company. It is going
to somebody else.
So the changes that we have made are huge, and I think the
one thing the professor on the end there is missing is, just
like in General Motors' case, if we look at the value of COLA
and wage concessions from 2002 to 2008, that is $700 million.
We take the projected value of COLA and wage concessions from
2003 to 2011, that is $1.8 billion. And then when we look at
the number of employees that have been reduced, we look at the
fact that there is going to be no general wage increase,
according to our research department, the cost savings at
General Motors from 2003 to 2011 is almost $49 billion.
Senator Carper. All right. Thank you, sir.
I made a statement earlier. I went back to 1980 when at the
time I was State treasurer of Delaware, and I negotiated the
State of Delaware's loan to Chrysler, interest-bearing loan,
collateralized loan. We made money off of it. We talked earlier
about the 1979 bailout of Chrysler where we agreed to make not
a loan, but a loan guarantee, and in return for taking on that
risk, the American taxpayers something in return. What we got
were warrants to buy Chrysler stock. At the time Chrysler stock
was selling at 5 bucks. We got warrants to buy it at $13. We
exercised those warrants in a couple years. And at the time
when we bought the Chrysler stock for $13, we turned around and
sold it the next day or the next week for $30 a share, and we
made about $300 million. I think that was a pretty good deal
for the American taxpayer. I think it was a pretty good deal,
frankly, for Delawareans as well.
My question of you is this: If we were to go forward with
this, with some bridge loan, how can we turn and honestly face
the taxpayers--particularly in States where they do not have
these auto assembly operations or parts operations, how do we
turn around and say this is a good deal for you, too?
Mr. Wagoner. I think, Senator Carper, the first thing, you
almost cannot find a State where it is not relevant. We buy
components in 46 States. I assume between us we cover all 50
States. And, second of all, we have dealers in every State who
have even more employees than we do. So I think the issue is
one that does affect every community in the United States,
virtually, is the first point.
The second one, you know, we will--given the opportunity to
bridge through this financial crisis, I think you can take our
commitments that we will do everything we can to ensure the
money is paid back, paid back with interest, and certainly
understood that the expectations would be something additional,
whether it is warrants or whatever. And we would fully agree to
that.
So I tell you our interest would be 100 percent aligned
with the shareholders, with the taxpayers, with you all, in
making sure that your willingness to support us was rewarded,
because that is the way our company is going to survive and
prosper in the future.
Senator Carper. All right. Well, the last question I want
to raise deals with the hydrogen infrastructure. We are going
to have a new administration in about 63 days. I like to say 63
days, 14 hours, 7 minutes. But we are going to have a new
administration soon, and the new administration is going to
come in, and they are going to be calling for a major stimulus
package. And I think part of what they are going to focus on is
infrastructure improvement, infrastructure development, and
infrastructure. And one piece of that could be to focus on a
hydrogen infrastructure. It could be doing something in the
Northeast corridor here. It could be something on the West
Coast.
Do you have any advice for us in this regard? Are we
getting ahead of ourselves? Is that something that should be in
the mix of things that we discuss?
Mr. Mulally. Just one thing I would offer is that with
respect to the use of hydrogen in automobiles, the two key
enabling technologies are going to be the fuel cells and the
batteries. So along with a commitment on the infrastructure, I
would make sure that we have in place a comprehensive
technology development plan for those two key technologies,
because they are needed absolutely in addition to the
infrastructure.
Senator Carper. Any other comments? Mr. Nardelli.
Mr. Nardelli. Yes, Senator. The only thing I would say is
for us at Chrysler, we did not have the financial strength to
look at a variety of different technologies to gain energy
independence and environmental sustainability. So when we
looked at the infrastructure, we felt what had the highest
potential of success was electric, like our new electric
minivan that will be rolling out here soon. We wanted to make
sure with 6 million plugs out there, we wanted to have
technology that was common to the consumer, that did not
require a significant amount of infrastructure cost before the
technology would be able to be applied into the street.
So I think the only thing I would suggest is to take a hard
look at the rate with which the infrastructure and the cost,
the fully loaded cost, cost of operation of that on the vehicle
might be going forward.
Senator Carper. All right. Mr. Wagoner, do you have a
closing comment?
Mr. Wagoner. I think Dr. Morici did.
Senator Carper. Dr. Morici.
Mr. Morici. Yes, if you want a quick bite on energy
efficiency, it has got to be electric, not hydrogen. And that
is going to require enormous infrastructure investment because
what I have been told by General Motors officials is the grid
is only--and please correct me if I do not remember this
correctly--but the grid is only good for about 1.5 million
volts. So we are going to have to invest substantially in the
grid.
Now, if we are going to do that in the context of CO2
emissions, it means that President Obama is going to have to
sit the American people down and have a long chat about nuclear
power.
Senator Carper. Nuclear power and offshore wind, which New
Jersey and Delaware and some others are bit time into.
Mr. Morici. God bless you, yes, but, unfortunately, the
wind does not always blow when you want it to blow.
Senator Carper. Well, we can use both.
Let me just close with this, my colleagues. In the end, in
this country it is all well and good--and I am from a State
where we are big in financial services. We have science and so
forth. But in here we have got to make something. We have got
to make things that people in this country want to buy and that
people in other countries want to buy. And we cannot walk away
from our manufacturing base. And the question here for me is:
Can we do something that is realistic, that provides the
resources that these folks and the companies need going
forward, to a point in time where they can recover, the market
comes back, consumers are ready to buy, they have the
technology, the products to offer, and we as representatives of
the taxpayers can make sure that whatever risk we take on,
there is going to be a reward for taking on that risk? I am
encouraged that we can find that and make it--if not this
month, in 63 days perhaps we can.
Chairman Dodd. Thank you.
Senator Bennett.
Senator Bennett. Thank you very much, Mr. Chairman, and
thank you to the witnesses. This has been a very interesting
experience to sit here and listen to you go back and forth. I
appreciate the fact that you have clashed a little bit and that
the unions have come to the defense of management on some
circumstances, and that is kind of historic in and of itself
given the past history.
If I can draw this parallel, Mr. Chairman, as we worked on
TARP, what we were basically doing was replacing private
capital with public capital in the conviction that, once the
market was stabilized by virtue of patient capital--that is,
the public capital was impatient, would not do it--or pardon
me, the private capital was impatient, would not invest
anything, but public capital would be patient. And we have put
public capital in, and it could wait 2, 3, 5, 7 years, whatever
it took, for the toxic mortgages to all be flushed out and
everything to be done. And in the end, we would have done the
right thing.
I see the parallel here. What we are being asked to do is
put public capital into the investments of the automobile
industry, specifically these companies, in the belief that, as
patient capital, it can be paid back with interest over time.
And we have a contrarian here who is saying that is not going
to happen.
Now, is that a fair summary of what we are hearing?
Mr. Wagoner. I think it is, yes. As you know, the reason
that we need the public capital at this time is that the
private market, which we have traditionally relied on, simply
has gone away.
Senator Bennett. OK. Now----
Mr. Morici. I guess I am skeptical about that hypothesis.
My feeling is that the cost structure is not quite aligned. I
heard Mr. Mulally this morning, either on Fox or on CNBC----
Mr. Mulally. CNBC.
Mr. Morici. Right. I was working out, and you said that
the--well, I get information where I can. I do not have much
staff.
Chairman Dodd. You were driven to the gym in that Ford
truck.
Mr. Mulally. So do we all.
Mr. Morici. No, I heard with my own two ears, sir. But in
any case, that he had narrowed--the labor agreement had
permitted him to narrow the labor cost differential. He did not
use the word ``eliminate.'' He used the word ``reduced'' or
``narrowed.''
Senator Bennett. Yes, you have made that point.
Mr. Morici. But I am saying, that is very important. That
is very important, because if it was zero--if it was zero, then
your hypothesis would be correct.
Senator Bennett. I recognize the difference between your
analysis, but----
Mr. Morici. At least potentially correct.
Senator Bennett. OK. We are being asked to put public
capital in. Now the question is: Are we going to be able to get
it back? Is it going to work? And the thing you have said,
Doctor, that I find interesting is that even if the wage is
spot on and presumably all of the other elements of the car are
the same as you--you used Honda of Indiana. My wife has a Honda
that was made in Ohio, so I do not know about Indiana, but
Honda of Indiana. As the industry shrinks, by virtue of
increased productivity and increased length of time--and I
contribute to that, too. I drive a 1996 Oldsmobile, Mr.
Wagoner, and I am sorry but it is holding up just fine. That
will continue. Uniquely--this is the thing I want to get, is
the difference. Uniquely, among these three, they will have to
have the $105,000 buyout, and Honda of Indiana will not.
Mr. Morici. That is right.
Senator Bennett. Is that the sum and substance of----
Mr. Morici. That is right, and they have to do other things
like fund the VEBA and so forth. Theoretically, those things
end at some point. But the issue of having to perpetually pay
severance benefits is a real challenge, and also, they still do
have work rules in----
Senator Bennett. Yes, OK. But----
Mr. Morici. Well, that does make a difference in
productivity.
Senator Bennett. I understand that.
Mr. Morici. A couple of hours will really do you in.
Senator Bennett. I understand that. Now, the UAW is saying,
no, over time by virtue of the agreements that they have made,
there will be subsequent benefits that will flow over time. Are
you saying that they are sufficiently strong to overcome the
buyout? And will the time ever come when Honda of Indiana will
have to have a buyout and level the playing field that way? And
if they do, then Kia will come in and undercut Honda of
Indiana.
Mr. Morici. They are not required to pay their workers
$105,000 apiece.
Mr. Gettelfinger. Senator, first of all, as far as
productivity goes--and we ran some ads. I hope you saw one of
them here in the papers on the Hill. Our plants are more
efficient than factories run by our non-union counterparts,
including nine of the ten most efficient plants of North
America. That is not the UAW saying that. That is a Harvard
report saying that.
Senator Bennett. OK. But address the question of the
$105,000 buyout.
Mr. Gettelfinger. The $105,000--you kind of got me on a
curve there. I do not know where that number is coming from.
Senator Bennett. I have been a CEO, and I know if I have
that sitting on my back, I have got a real problem.
Now, the three CEOs, what is your reaction to this argument
about the $105,000 buyout? Because if you take the numbers--we
cannot repeal the laws of arithmetic, and if there is a
shrinking workforce coming as a result of your increased
productivity and your deal with the UAW that makes you more
productive and, therefore, more competitive, but that every
time you get the advantage of becoming more productive and more
competitive in the form of a worker who is laid off, instead of
getting the advantage of that, that you no longer have a
problem, you have a cost of $105,000 which Honda of Indiana
does not have.
Square this circle for me. Help me understand exactly where
we are.
Mr. Wagoner. Well, there is one other factor. I think he is
referring to when we induce people to leave before regular
retirement age. So I think it is fair to say all of us, because
of the competitive situation, the need to downsize, have
encouraged people to leave quite before their normal retirement
ages, and so these kind of payments, a little different from
company to company, have been made to induce people to do that.
But, you know, in our case we still have a relatively high
average age of our hourly workforce, and so for us over time,
the model would be, having shrunk the base of the workforce,
you know, in our case from 133,000 in 2002 to about 60,000
today, we will get eventually some natural attrition because
our workforce--our average workforce age I think is about 47,
48, 49 right now, and a lot of people retire about early 50s to
mid-50s. So we are going to get some natural attrition, and
that should help us to be able to fund some of this
productivity growth that we do need, which Dr. Morici is
correct in saying to be competitive.
So hopefully we do not have to rely in the future to the
extent we did in the past on these costly bailouts, or at least
not to the great extent we have had to pay the last 3 or 4
years.
Mr. Morici. Will you continue to have to pay them? Will you
continue, as you lay off workers, to have to pay people to
leave?
Senator Bennett. Yes, that is a key question. We will not
go any deeper. My time is--oh, you wanted to comment?
Mr. Mulally. I would just like to add one comment. Clearly,
if you are in a declining business and you have a cost to
separate people, your overall costs are going to be more. To
your point, the absolute goal of the automobile industry is to
arrest this market share decline and start to grow again. That
is why we have to have a competitive set of products. We have
to have products in every segment that people really do want
and value and we are productive making them. We turn that
corner, and then we are growing, and we do not have the costs
that are being described by the professor.
Mr. Morici. You only accomplish that if you have a growing
market share if the number of cars purchased every year is
relatively fixed, which has already been conceded here.
Senator Bennett. All right. We could go on, but thank you
very much. Our responsibility as stewards of the public money,
which would be the patient capital, is to decide whether or not
we--not just whether we are going to get our money back, but
whether the cost to the country would be greater if we did
nothing than if we used the patient capital to prevent a
meltdown. And at the moment, everybody is guessing. I think
everybody is guessing in good faith, but I think everybody is
guessing. And that is the challenge that we have, and
regardless of how we guess, we have to go home to our
constituents and explain why we were absolutely brilliant in
the decision that we made.
Chairman Dodd. Let me thank Senator Bennett. He always is
tremendously helpful, and I think he done a lot.
I will turn to Senator Menendez for questioning. I was
looking at the cash on a quarterly basis that the three
companies have gone through in the last quarter, the third
quarter, a total of about $27 billion, the cash, if I total up
the amounts. I have totaled here, looking at GM, $6.9 billion
in cash; Ford, $7.7 billion in cash; and Chrysler, it is about
$4 to $5 billion a month. I am going to come back to this in a
minute, but this cash burn idea and the $25 billion in terms of
a 2010 restructuring, what would be helpful to us as well is if
we get a real total number. The 25 is bridge, but I want to
hear at some point what you think the total package is you are
going to be coming to the U.S. Congress for, not just now but
over the coming months. We need to know that.
What bothers most of us a lot of times is we go home and
say, well, we did the 25, and then you come back again. We went
through this with Hank Paulson last summer on the GSE issue,
and you may recall what that was like. And then all of a sudden
it was something different.
I am going to let my colleague go because I have been
talking a lot, but I want to come back to that point. Bob, why
don't you go ahead?
Mr. Nardelli. Mr. Chairman, can I--I apologize. But when
you said $4 to $5 billion, that is what we were paying out a
month. I want to make sure for the record that is not what our
cash burn is per month. I am sorry.
Chairman Dodd. Well, that is another question. That is all
right. I had that number here, 4 to 5----
Mr. Nardelli. I apologize.
Chairman Dodd. That is a wrong number?
Mr. Nardelli. Yes, sir.
Chairman Dodd. OK.
Mr. Nardelli. The right number is in the third quarter we
burned about $3 billion, so about $1 billion a month in cash
burn.
Chairman Dodd. A month?
Mr. Nardelli. A month.
Chairman Dodd. So it is the quarter number?
Mr. Nardelli. We burned about three--if you relate to the
numbers you just cited for GM, Ford, our number would be about
$3 billion.
Chairman Dodd. OK.
Mr. Nardelli. Thank you, sir.
Chairman Dodd. Go ahead. I am sorry, Bob.
Senator Menendez. Thank you, Mr. Chairman. You just asked
the first question that I intended to ask, but I will ask it a
little differently because I still don't quite get the answer,
and that is, you know, we have gone in this Committee in
different contexts, just so you gentlemen understand, from
being told that everything in the economy, the fundamentals of
the economy were fine, to being told by the Treasury Secretary
that he needed a bazooka in order to not use it on behalf of
the American taxpayers, a very large check that was largely
blank, which he ended up using in Fannie Mae and Freddie Mac,
and then to being told $700 billion to purchase illiquid
assets, which now have totally been jettisoned out the window.
So I hope you understand some of the skepticism that exists
here based upon the immediate history that has taken place.
And so that brings me to the question that I think the
Chairman was getting at. How did we get to $25 billion as the
magic number that is necessary to transition in this period of
time or to bridge this period of time? You know, I would like
to hear the specifics of it. You know, we did not take a dart
and say what can we get or look at the $700 billion and say how
much is left and figure out how much can we get. How is it that
$25 billion is the number that meets the challenge that you
have all described here?
Mr. Nardelli. Well, Senator, one way that we have looked at
it is we look at the cash consumption we have done through the
first three quarters. We look at an industry basically that is
not----
Senator Menendez. And what is that? What is that? What is
the cash consumption of the first three quarters?
Mr. Nardelli. If you look at our cash consumption, we ended
the third quarter with about $6.1 billion in cash, about $6.1
billion. And so we basically have gone----
Senator Menendez. That is what you ended up with----
Chairman Dodd. Left with or ended up----
Mr. Nardelli. Yes. So we basically--our biggest----
Senator Menendez. Which is it? Is that what you ended up
with or what you spent?
Mr. Nardelli. That is what we ended up with.
Senator Menendez. What did you spend in the three quarters?
Mr. Nardelli. In the third quarter, we went through $3
billion, but as I said, in quarter 1 and 2, we were basically
holding our own. We ended the first half at about $9.4 billion,
which includes a $2 billion pull-down from our private equity
owners, both Cerberus and Daimler at the time. And so----
Senator Menendez. So what is the net amount that you burned
through for the first three quarters?
Mr. Nardelli. We burned through $5 billion.
Senator Menendez. $5 billion.
Mr. Nardelli. $5 billion.
Senator Menendez. OK.
Mr. Nardelli. So what we have looked at is what is the
production level for the fourth quarter, because we only
generate cash through production. We have used that number
against what we are getting from our field relative to sales
and wholesale reorders. We then extend that through 2009, and
as I said, we become dangerously close to a minimum liquidity
level by the end of the year. And that is why we are asking for
the immediacy of cash infusion. We believe that cash infusion,
given a very conservative industry number and retaining our
share, which we have been able to hold share over the past
several years, comes to a number that is part of the $25
billion that we are asking for.
Senator Menendez. The other gentlemen from the other
companies, how do you all come here and say $25 billion?
Mr. Wagoner. Basically, this is obviously--the key
assumption is to estimate what you think the industry is going
to run at in 2009, and so as I said, we have used $11.7 million
light or $12 million total industry, and on that basis have
tried to be, you know, as conservative as we can in figuring
out what might be the cash outflow next year. I believe each of
us supplied that to the people writing the legislation, and
they added it up and came up with the 25.
Senator Menendez. So what was your figure? Mr. Nardelli
gave me a figure. What was yours?
Mr. Wagoner. Our cash burn for the first 9 months, we
burned about $3 billion each of the first and second quarter.
As Senator Dodd mentioned, $6.9 billion in the third quarter,
and we indicated we expect the fourth quarter to be more like
the first and second quarters.
Senator Menendez. So the total number you are projecting
is?
Mr. Wagoner. For the year it will be in the range of--sorry
I did not do that math, but around between--let's say in the
range of $15 billion.
Senator Menendez. So 15 and 5 is 20. That only leaves 5 for
Ford. Is that the case?
Mr. Wagoner. Sorry. That was 2008.
Senator Menendez. Well, but you are looking forward, right?
Mr. Wagoner. We have obviously taken----
Senator Menendez. Do you expect your burn to be less?
Mr. Wagoner. We do, yes, sir, because we----
Senator Menendez. How much dramatically less?
Mr. Wagoner. Well, we have taken significant cost-cutting
actions, and we have reduced capital spending.
Senator Menendez. You must have a figure. You are a CEO.
Mr. Wagoner. Yes.
Senator Menendez. And I am a fiduciary to the taxpayers in
my State and the country.
Mr. Wagoner. We would expect to be able to reduce it by at
least $5 billion.
Senator Menendez. By at least $5 billion, so that is $10
billion that you would still burn.
Mr. Wagoner. Right.
Senator Menendez. And your $5 billion is still intact, what
you are looking at next year as well?
Mr. Nardelli. Between 5 to 7.
Senator Menendez. All right. So now we have between 15 and
17.
Mr. Mulally. I think we went about it maybe a little bit
different way, but when we announced our third quarter results
and provided our forward guidance, we said that our plan was
that we are going to enhance our cash position by actions that
we could take between $14 and $17 billion, so that we could
slow down this cash burn rate to be able to make it through
this.
Senator Menendez. So what is it that you expect to have to
draw upon if you get the $25 billion?
Mr. Mulally. Well, yes, that depends on the assumption for
the industry and whether it is--how much it slows down. Sol
what we did, our best assessment is that the industry was not
going to be any better in 2009 than it is in 2008, and we--our
best estimate is that we would finish the year at a run rate of
around 13.7 million vehicles. And so our assumption is, it is
not going to get better in 2009. And then whether it is----
Senator Menendez. What does that all equate to at the end
of the day in terms of money that you are going to be seeking,
your best projection?
Mr. Mulally. Well, we can't give forward guidance in public
more than what we already have.
Senator Menendez. Well, here is the problem. You asked us
to give you $25 billion of the taxpayers' money. We have to
have a sense of how that, in fact, takes you to a time period
that gets you past what you all described as your major
challenge, which is the credit freeze and the economy. I don't
think there is any economist in this country who suggests that
we will be out of the doldrums that we are in, to put it
mildly, for a year, year-and-a-half, which means that I don't
hear this figure taking you to where you need to be in order to
achieve your goal, which is where the Chairman is at, saying
are you going to comeback?
And let me just say that I know that several of you said
that you were new to the industry, and I appreciate that, but
part of the problem, Mr. Chairman, we have here is a
credibility issue with the industry. In the 1970s, all of the
domestic manufacturing auto makers argued that enacting fuel
efficiency standards would force them to make nothing but
subcompact cars. Well, we know that, in fact, we did it anyway
and we had the fuel efficiency standards raised and we were
flooded with sport utility vehicles.
In the 1990s, the big three made a deal with the Clinton
administration for over $1 billion to help commercialize hybrid
technology. In exchange, the Clinton administration reportedly
did not push for higher fuel efficiency standards. But when
President Clinton left office, that deal was broken and you
stopped pursuing the technology. Now Japanese auto makers have
at least a 7-year head start developing hybrids.
And these are not isolated instances. You know, I was one
of those who voted for the $25 billion to help you restructure
and provide for the new higher fuel efficiency cars, but when I
hear you not being able to give us how this $25 billion takes
you to that place in time in which you will be able to not only
repay the taxpayers of the country, but at the same time have
met the challenges that you have described, it is a difficult
proposition. I am inclined to be helpful, but I have got to
hear a better fundamental of how it is that this gets you--why
this number wasn't just picked out of the sky and said, this is
a good number to try to go for, and how it gets you to where
you need to get.
So that is what I was trying to add up here, to give a
sense of time. Now, you can't tell me how much, but there is
not much left in that package after your two colleagues here
projected what they need. So I just don't see how the $25
billion is finite and gets you there. I hope we get better
accounting, Mr. Chairman, in order to be able to decide----
Chairman Dodd. Well, the point is, and this is the point we
are trying to get at, because you are looking at 2010, I think,
in terms of Senator Menendez makes the point that our economy
is not going to recover quickly here, and so we are going to
have a period of at least a year or longer of recovery. And we
are talking about the restructuring efforts really beginning to
take hold by 2010, I think is what we are now talking about. So
we have got all of 2009 to go through, and these numbers look
like, if you take the totality of the three companies, they
look like basically good for about a quarter, is my concern.
Senator Menendez. Mr. Chairman?
Chairman Dodd. Yes?
Senator Menendez. One last point, if I may.
Chairman Dodd. Yes.
Senator Menendez. The energy bill that we passed that had
the $25 billion that is now in the regulations of the Section
136 program, I understand that Ford announced that it applied
for the loans today, which I applaud. What about Chrysler and
GM?
Mr. Nardelli. Sir, we applied the first day it was
available by five o'clock.
Mr. Wagoner. We applied Monday morning at 8:43 a.m.
Senator Menendez. OK. I am glad to hear it.
Chairman Dodd. You knew that number.
[Laughter.]
Senator Menendez. I am glad to hear those answers because
that certainly appears to be a viable program that is
necessary. I do hope that the history of the industry as it
relates to fighting the Congress about fuel efficiency is an
issue of the past, not the present. I hope that we are going to
hear from you that you are not going to fight, for example,
California's waiver the other States are looking for, as well,
and use the resources that we may very well give you here in
the Congress to fight against such proposals. I hope that we
will be partners at the end of the day in this regard and not
be adversaries.
Chairman Dodd. Senator Corker? You sure you don't want to
move up a little bit? You are so far away.
Senator Corker. I couldn't abandon my friend the cameraman
here.
[Laughter.]
Senator Corker. Mr. Chairman, thank you for this great
hearing. I appreciate all of you being here and understand the
tremendous problems this is creating in all of our States. We
have one of our most respected business people here tonight.
That is one of your dealers who has 300 employees, and we
understand about all the many workers and much employment. So I
do have some tough questions, but I want you to know I do
understand the turmoil that this is creating throughout our
country.
We have talked a lot about the TARP program and we talked
about the fact that we were willing to, quote, ``bailout'' the
financial institutions. But one of the things that is occurring
in the TARP program that is not happening here is that the OCC
that regulates these banks, or the FDIC if that is the case,
has to certify to Treasury that these are strong institutions
and they actually make recommendations to Treasury as to which
institutions are the strong banks, the good banks, and should
succeed.
I find it really interesting that we, quote, have the big
three here, if you will, because I know that all three of you
are in different circumstances, and my sense is if the OCC was
performing the same ordeal, if you will, on you all, some of
you would not be recommended to get credit.
My sense is that Ford has done a better job and is in a
slightly stronger position, that GM has made some changes but
is spiraling downward and in serious trouble, and my sense is,
and I could be wrong, I know it is a private company and
results aren't available, but that Chrysler just barely has a
heartbeat. So I do wonder why we are talking to three companies
in very different situations about all being treated the same
way. It seems to me that that premise to begin with is very
flawed.
Now, obviously you all have created a pact. You wouldn't
share with Senator Menendez how much each of you have asked. I
know that one of you shared with us that you have given those
numbers to Levin. But I would like to know exactly what each of
you has asked for, and I think that is only fair, and I think
dancing around that is incorrect.
And then I would like Mr. Gettelfinger, if he would, since
he says he went in and looked at these companies, to tell us
which of these three should survive and which shouldn't. But I
would like to have the numbers first.
Mr. Nardelli. I would be happy again to say----
Senator Corker. I just want the numbers. Just give us the
numbers that you gave to Mr. Levin to create the legislation.
Mr. Nardelli. Seven billion.
Senator Corker. Seven billion. What is the number from GM?
Mr. Nardelli. Seven billion.
Senator Corker. And the number from GM?
Mr. Wagoner. Senator, sir, I think you have to be fair and
look at it----
Senator Corker. I just want----
Mr. Wagoner. ----what industry----
Senator Corker. Of the $25 billion that you have asked for,
how much of it have you guys decided at GM----
Mr. Wagoner. We felt that if we get our proportionate
market share of that----
Senator Corker. Just give me the number.
Mr. Wagoner. ----which would be in the $10 to $12 billion,
that we would have a very----
Senator Corker. And how much is Ford getting in this three-
way pact?
Mr. Mulally. Seven to $8 billion.
Senator Corker. Seven to $8 billion. So it is seven, seven
to eight, and ten to 12. Those are the numbers.
Mr. Gettelfinger, you have been in to these three
companies. They are all three in different positions. Some of
them are stronger than others for lots of reasons. Rank them,
one, two, three.
Mr. Gettelfinger. In being in the best shape to the worst?
Senator Corker. Yes.
Mr. Gettelfinger. I would rank them Ford, Chrysler, and
General Motors.
Senator Corker. OK. I have to say that we have gone to ten
million sales a year in our country and there may not be a need
for three auto makers. I just want to say that we are going
down this road in a really odd way in that when we went through
the financial mechanisms, we actually had the OCC go in and
make sure these were going entities. I just want to say, if we
are going to try to do something this week, we are bypassing
something that to me is an incredibly important thing for us to
do as it relates to the taxpayers.
We have mentioned Section 136 and some people have said
that maybe that is the vehicle we ought to use to fund the auto
makers if we do it. There are two provisions there. One says
that you have to be making alternative types of vehicles or
alternative energy-type vehicles. The other is you have to show
that you are a going concern and that you are going to survive.
I assume that when you applied at 8:43 and the others of
you the same day, that you put in place--there was a plan that
was submitted that showed you to be going concerns, is that
correct, because that is one of the stipulations of 136.
Mr. Wagoner. It is part of the process, yes. I am not sure
that all has to be submitted up front, but yes, we are all
aware of it and we are all doing that analysis.
Senator Corker. I would just say to the Committee that it
seems to me that we would like to at least look at those prior
to putting money into these firms.
Chairman Dodd. Look at what Bob--what do you want?
Senator Corker. Well, they are going to have to submit for
their 136 applications----
Chairman Dodd. Right.
Senator Corker. ----they have to submit something that lays
out a business plan that shows that they are a going concern,
that they can be successful, that they can pay this money back.
Chairman Dodd. Very good point.
Senator Corker. And it seems like that before we would rush
to take action this week, we could at least see those, because
it is pretty evident, I think, to all of us in this Committee
that $25 billion was sort of thrown up on the wall and it
stuck. There has not been any real thinking behind that number.
It is what might be attained today. I think we all know if that
occurs, they are going to be back. I don't think there is
anybody on this Committee that believes otherwise.
So it seems to me that we would be so much better off to
actually see these submittals that you are going to have to
submit to get the 136 money you are already after. We should
judge those and we should see if you are actually going
concerns.
Now, I was just in Russia last week and noticed that
General Motors was opening a plant there, I guess the next day
after I was there. And I understand that you make money in
Russia and you make money in other places, but you don't make
money here. I would just like to ask a very blunt question, if
it has something to do with your relationship with Mr.
Gettelfinger or the UAW. I mean, what is it that allows you to
make money in all these other countries but not make money
here?
Mr. Wagoner. Well, each market, to be fair, has its own
circumstances, but in general, we have done quite well in most
markets outside the U.S. recently. Part of the reason is a
little bit of the issue we discussed earlier, very rapid
growth. Frankly, it is easier to make money when things are
growing than when you have to shrink, and it is fair to say
that if you look back over the last 10 or 15 years, as I
mentioned, we have had a fairly significant cost to restructure
our business in the U.S. And so that is a fair point. I think
the point we were trying to make today in our earlier comments
is that a lot of that is behind us.
Senator Corker. It is a pretty big point, but let me just
say you all have been very careful, and I appreciate this. Mr.
Gettelfinger, I want you to know I have been a card-carrying
union member and been a trustee and I don't have a major issue.
I do with card check, of course, but they keep saying that by
2010, they are going to be competitive and it makes me think
that what we are doing is loaning these guys possibly money so
that at some point in the future, they are going to be
competitive because of agreements that they have with you. And
I would ask, why not 2009? Why not 2008? Why don't you go ahead
and make the changes you need to make to make them competitive
now?
Mr. Gettelfinger. Well, just one example, Senator. The
Voluntary Employee Beneficiary Association, we had to go
through a court process after the negotiations. That is a
Federal court-approved settlement. Just transferring that over
to the union, we have had two trustees meetings to this point
in time. But this is major. Because of the time that it is
going to take for everybody's eligibility, we have to set up a
complete structure, because what we are doing is we are
creating the Voluntary Employee Beneficiary Association, which
has more independent trustees than it does UAW trustees, and we
are going to be responsible for everything. So just the
magnitude. We are on a push now to get this through to 2010.
Senator Corker. Yes. Mr. Nardelli had a representative in
our office earlier today that was sharing that even when they
are not making cars, when there is not a demand for cars, in
their plants, they have to operate at 80 percent regardless,
and I would like for you to acknowledge whether that is true or
not and then I would like to ask you, Mr. Gettelfinger, why
that would be the case.
Mr. Nardelli. Senator, I am not sure, when you say operate
at 80 percent, if you are suggesting that we----
Senator Corker. I understand you have agreements in place.
Mr. Jim Press was in our office earlier today explaining that,
in fact, even when your plants are not needed, they have to
operate. There have to be some issues that still cause you to
lose money unnecessarily.
Mr. Nardelli. Maybe what he was referring to, Senator, is
that there is a contractual obligation that when we have to
idle a facility, that we do have to continue to pay wages at
about 95 percent. I think Ron can be more specific than that--
--
Senator Corker. That seems kind of problematic to me, I
mean, just on the surface, and it seems to me that you are
asking us for $25 billion to support a clause that in no other
business in this country would be tolerated. I understand the
good job Mr. Gettelfinger is doing on behalf of the employees
that are not working but still being paid, but I find it very
difficult that you would be in here asking us for $25 billion,
which we know is just the beginning, when you have an agreement
in place like that that causes you to have to pay 95 percent of
the workers that are not working. Could you elaborate, or Mr.
Gettelfinger, could you all change that tomorrow before you
make another application?
Mr. Gettelfinger. Senator, first of all, I gave some
numbers here earlier on. General Motors, 9/30/05, had 110,000--
--
Senator Corker. I know what you have done. I am talking
about this----
Mr. Gettelfinger. But they are not getting paid, is the
point. We were able to reduce that----
Senator Corker. I know what you are talking about, about
the bank, but this is a different issue. This is a different
issue.
Mr. Gettelfinger. You are talking about the sub-pay.
Senator Corker. Mr. Nardelli, do you want to explain to him
the issue?
Mr. Nardelli. I think what he may have been alluding to,
Ron, is, for example, if we have to idle a facility that we
have ongoing labor contractual obligations to pay those
employees.
Mr. Gettelfinger. That is their unemployment plus----
Senator Corker. For how long?
Mr. Nardelli. Ron?
Mr. Gettelfinger. I would have to look at the contract.
Senator Corker. You have got to be kidding me. I would like
to know, and I would like to know at what expense that is to
the companies. But it seems like things like that--let me go
back to prepackaged bankruptcy. I have to tell you, I don't
understand the stigma that would come with prepackaged
bankruptcy, where you knew that there was money coming if
certain things happened. You lay out a plan, either in 136 or
some other way that laid out how all that would happen. And
these changes that are so necessary to cause these companies to
be competitive were put in place overnight, not in 2010 or
2011.
And again, I have got to believe that there is a piece of
each of you as CEOs, which I respect, I really do, and I
respect the challenges you are going through, that would almost
like to see that happen, but you can't say it. I don't know how
that could possibly be detrimental.
You have 7,000 dealers across this country. People that
sell the same amounts of cars have, like, 1,200 dealers across
the country. It seems to me that that is highly problematic and
that State laws keep you from doing things that you feel like
you really would like to do but you can't. It seems like those
things are very, very important and very tangible and things
that we ought to be talking about today and I would love a
response.
Mr. Wagoner. Well, if I could start, Senator, I am not an
expert in bankruptcy, but I have seen research by an
independent party as recently as this summer which said that 80
percent of consumers, and it was broken out by brand, so maybe
it was 60 for Honda and I think it was 90-plus for one of the
brands here, it was about 80 percent for us, would not
consider--would not consider--buying a car from a company that
was in bankruptcy. Eighty percent. If any of us had an 80
percent reduction in volume, then this idea of a prepackaged
bankruptcy is pure fantasy.
Senator Corker. Would the industry be----
Mr. Wagoner. You would be talking--excuse me. You would be
talking about a Chapter 7 liquidation----
Senator Corker. No, no, no----
Mr. Wagoner. ----which would affect the supply base, affect
the other two, and ripple across this economy like a tsunami
that we haven't seen, and it seems like to me a huge roll of
the dice to weigh that, the risks of that, which I personally
believe are very high, against the request we are making here
today. So I----
Senator Corker. Well, today, but you are going to come back
for more, and I think you all--let me ask you this. Would you
all make the pledge that if you get the $25 billion, you will
never be back to see us again?
Mr. Wagoner. Well, I think----
Senator Corker. I don't think you are under oath, but I
would love it if----
Mr. Wagoner. Sir, if you could make the pledge to us that
the U.S. economy will turn around on a certain point in time,
then--and the financial markets will rejuvenate, then we would
be glad, based on that data, to come back to you and give you--
--
Senator Corker. You are going to be back, aren't you? You--
--
Mr. Wagoner. ----our exact best estimate of how much
financing we think we need, sir. We will be very glad to do
that.
Senator Corker. I thank you all.
Mr. Nardelli. Senator, may I answer your question?
Senator Corker. Yes.
Mr. Nardelli. We did look at--two parts to your question,
if I may, sir. We did look at prepackaged. We looked at
prenegotiated. We have looked at almost every alternative
within Chrysler as a privately held company before we came here
and asked for support to provide a bridge, if you will, through
this economic trough, and to a certain degree, all of these
take an extensive amount of time, certainly in a prenegotiated.
We have to get all of the players, all of the suppliers, all of
the lenders, all of the labor, and you can imagine, sir, that
would take an extensive amount of time to be able to
renegotiate that, and in fact, we are in a very fragile
position, Chrysler is, point one.
Point two, I think I would be remiss as being the newest
guy in the auto industry if I didn't respond favorably to your
challenge. Chrysler, again, has been looking for partnerships.
We are looking for alliances. We are looking for opportunities
to make the auto industry, either within the United States or
globally, more efficient. I don't think there is any question
that there are opportunities for more synergies. There are
opportunities for more sharing, whether it be in technology in
136, for example, to create a National Science Center where
rather than paying each of us a dollar to develop the same
technology we would pay one dollar. That technology would then
be transferred over to the auto companies. It would make the
$25 billion go further. It would be more cost effective. If it
became a wholly owned affiliate, you could get private equity
to invest in it and then market that.
So there are many creative ideas, I think to your point,
that the auto industry could look at, but the immediacy of why
we are here today is to give us a chance to get through this
period and then to look at those on how the U.S. auto industry
can be more formidable, can be more competitive, not only to be
profitable here in the U.S., but on a global basis.
Senator Corker. I know you are alluding to the fact that
you would like to see a merger between GM and yourselves. I
don't know that, again, Mr. Chairman, that things like that we
shouldn't force to happen if they are going to get this money.
But I will stop. I know I have taken my time. I thank you.
Chairman Dodd. No, I thank you.
Senator Corker. And I asked tough questions. I respect the
problems you are going through and I thank you for coming
today.
Chairman Dodd. We thank you, Senator.
Let me just turn to Senator Casey, but I can't resist
commenting on this idea of providing some compensation to
employees in an idle plant. I don't think that is outrageous at
all. I mean, these are people we hope will be back at work in a
facility that is not working, and the idea that we take care of
people, the assumption somehow we just get rid of them without
taking into consideration their needs, I am not going to--I
don't know all the details of the contract, either, Mr.
Gettelfinger, or in the case of Mr. Nardelli, but I just, for
my part, I don't find that offensive at all. I think that is
taking good care of people who work damn hard for our country,
and the fact that you are able to provide some benefits for
them during a downtime in their lives is not something that I
think we ought to deplore. I commend you for it.
Senator Casey.
Senator Casey. Mr. Chairman, thank you very much, and thank
you for calling this hearing. We have had a number of hearings
the last couple of months that tried to shed some light on the
financial crisis that grips the country. It is affecting each
of your companies as well as the broader economy, but I want to
thank Chairman Dodd for making these opportunities available.
I really have two fundamental questions, two broad
questions for the three CEOs, Mr. Mulally, Mr. Nardelli, and
Mr. Wagoner. The first pertains to the dollars if the Congress
were to pass legislation which would provide $25 billion. A
broad question, which I think you could probably amplify for
the record later, as to how you would spend the money and what
are your most urgent needs maybe by way of a list, an
itemization.
And second, on the question of the environmental questions,
the question of environmental technology, fuel efficiency, that
whole set of questions, how far advanced are you? Where are
you? Give us kind of a status report.
But first of all, with regard to how you would spend the
money, because as you know from my opening, I propose that if
this were to go forward, that there would be a monthly
accounting on cash, on expenditures by category, a whole host
of monthly reporting and justifications for the further
expenditure in the next month of public dollars. But maybe we
will just kind of go left to right on what you need the money
for and the environmental progress.
Mr. Mulally. Sure. One, just, question for clarification,
because clearly, each of our businesses are in different
States. But in our case in Ford, we believe we have sufficient
liquidity to make it through this slow-down in the economy, and
we took action pretty aggressively over a year-and-a-half ago
to go to the markets and raise money. But clearly, none of us
know what the market is going to look like going forward, and
you could argue pretty easily that it looks like things could
deteriorate further. There is more risk of that than it getting
better.
Senator Casey. I don't want to interrupt your answer, but
can you put a timeframe on that?
Mr. Mulally. Yes----
Senator Casey. In terms of what you think, what period of
time you can get through.
Mr. Mulally. Yes. Our assumption was that if the market
doesn't deteriorate significantly more than how we came out of
2008, that we could get through 2009, assuming that the economy
started to come back in 2010. But clearly, there is a
significant risk that the economy is going to continue to slow
down. I mean, like you have pointed out, we are all a little
disappointed that some of the actions we have put in place have
not--we haven't seen the immediate benefit of that.
So the reason we are here together is that this is a really
important industry, and if any one of us gets to the place
where our financial viability is at risk, we are putting the
entire industry at risk. So we believe together, absolutely
together, that we should put in place this bridge loan
capability and then draw on that as we need it.
Now, each of us will be in a different situation. How much
we would actually draw would be dependent on the situation,
what happens in the economy. But we are not asking for a lot of
money right now. We are asking for the money as we need it.
So against that backdrop, I would like to answer your other
question on the enabling technology. Just to kind of back up a
little bit, we are really pleased for the work that we did
together with the Congress last year on the 2007 Energy
Independence and Security Act, and we know there is a lot of
history about standing up for things but not standing up for
what you really stand for, and we took a stand together that we
absolutely believe in energy independence, energy security,
sustainability, fuel efficiency, and we wanted to be part of
the answer.
And we were very gratified with the debate that went on and
the recognition to accelerate that advanced technology and
those fuel efficient vehicles. That was a substantial
investment. So we are also very pleased with what was put in
the 136 to allow us to access that money to accelerate the fuel
efficient vehicles, and as you heard, we are all aggressively
applying for that.
Now, each of us is in a little bit different place, but
generally, this is led by technology. This is high tech and we
all understand it, and so the fundamental building blocks are
if we continue to improve the internal combustion engine, and
there is lots that we can do on that, on turbocharging, direct
fuel injection, you know, a 20 percent improvement in fuel
efficiency, a 15 percent reduction in CO2 right off the top of
that technology which we can get across all of our vehicles,
across all of the engines.
Then we go to alternate fuels, and we all believe, and we
have been taking action to make our vehicles compatible with
alternative fuels like ethanol. Then you move to
electrification. We all believe that moving to hybrids was a
natural first step, but the real goal is to get rid of two
power trains and move to all-electric vehicles, and each of us
are working that really hard.
Then as the Senator mentioned about hydrogen, clearly,
there is another technology later on with hydrogen and really
capable fuel cells and new batteries that you could have a
hydrogen alternative, also.
So none of us know which one is going to be the dominant
one, and each of us have our plan to deal with that. But we are
dealing with all those technologies. But in Ford's case, we are
trying to make the biggest impact we can on fuel efficiency by
making a significant improvement in the internal combustion
engine as it is today, followed by working on the research to
make the other ones come true, too.
Senator Casey. I have some follow-ups, but I will resist
them for now.
Mr. Mulally. OK.
Senator Casey. Mr. Nardelli.
Mr. Nardelli. Senator, if we are granted the opportunity
for this cash infusion, fundamentally, we will use it for
operating cash-flow. One of the things you talk about is a
monthly or quarterly report. We do it every week. We have a
cash call review. We look at--we have gone back to the old days
where the owner-operator signs the check so they basically know
where the funds are going. We have gotten down to that level of
granularity, and our CFO, who is here with me today, basically
runs a cash committee meeting once a week. We bring in all the
requests. We prioritize those requests and then we make those
distributions. And we are looking at how we can conserve cash
in every opportunity.
So those funds fundamentally would go for ongoing
operations. They would go for, as my colleague said, Alan, we
will continue to drive for a new product portfolio. We have to
make sure that after the separation from Daimler, that we make
a major cash infusion in new product portfolio, new product
cadence, product performance, product quality, reliability, and
durability.
So simply said, that is where the majority of the funds
will go if we are granted the opportunity from this Committee.
Mr. Wagoner. Senator, I won't repeat. I would just add on
the--because I think all of us have similar kinds of buckets,
pay suppliers, pay employees, keep product programs on
schedule, and bring forward these new technologies. I would say
the other thing that we are doing a lot of work in, we have
done a lot of work as part of the Energy Security Act, is gone
back and relooked at our whole product portfolio. So even in
this time of cutbacks, and we have had to cut back quite a bit
to get where we need to be, but we have continued our pull
forward most of the smaller vehicles. Chevy Cruise would be a
good example. So if we have had to delay vehicles, we have
basically put some of the, frankly, less fuel efficient
vehicles on the back burner for now, and frankly, some of those
may not continue in the market over time.
Senator Casey. Thank you. What I will do for the record is
follow up with some questions about--maybe you can provide kind
of a progress report in writing as to where things are. And I
know I am out of time and Senator Tester has been very patient
waiting.
Just one last point, and it is not by way of a question,
but Mr. Gettelfinger, I want to make sure that I highlighted
some of your testimony which I think is important to highlight
with regard to retirees. We have talked a lot about bottom
lines and budgets and all the important matters we have
discussed today, but I think it is important to point out some
of the points that you made in your testimony on a whole host
of fronts, but in particular with regard to retirees.
I am reading from page four. Taken together, the changes
made by the 2005 and 2007 contracts reduced the companies'
retiree health care liabilities by 50 percent. And then you
made the point earlier on page three with regard to the
potential adverse impact to retirees that a loss of retiree
health benefits would be devastating to the roughly 40 percent
who are younger than 65 and thus not eligible for Medicare.
I want to commend all of you for the work you have done to
try to reduce those costs, but also to remember the human
impact that these decisions have on people. If we had more
time, I would ask you to amplify on that, as well, but thank
you very much for pointing that out in the testimony.
Senator Casey. Thank you.
Chairman Dodd. Senator Tester.
Senator Tester. Thank you, Mr. Chairman. I have a few
questions. I hope you can make your answers short because I am
sure your bladder feels about like mine does right now.
[Laughter.]
Senator Tester. First of all, I appreciate you guys' time
here today. This has been--we are going on 4 hours here pretty
quick. I guess the first question is, for each one of you, will
this money be spent here in the U.S.? This was part of my
opening statement.
Mr. Wagoner. Yes.
Mr. Nardelli. Yes, sir. We are primarily a U.S.-based
company.
Mr. Mulally. Yes.
Senator Tester. OK. There was a question earlier asked by
one of my fellow Senators here that said that, I think it was
GM, you are making some dough in Russia. Why not take the money
and invest it in Russia if that is where you are making the
money?
Mr. Wagoner. Well, we make money in other markets. China
might even be a bigger example where we did initially years
ago, 10 or 12 years ago, invest a significant amount, but that
business is profitable, so with the profits, they are able to
continue to invest, to expand the business there and actually
send dividends back to the U.S. So most of the business models
we have outside the U.S., they have been able to get to be
self-sufficient.
Senator Tester. OK, and I will go to Ford here in a second
since Chrysler is mainly here in this country, but how would we
know? I mean, you are a big company. How do we know that you
just don't take it from one pocket to the other and put it
somewhere else? I am really--I want to see you guys succeed. I
have the impression from each one of you that you are happy
with the way each one of your companies are going. You would
like to see the market and liquidity and the credit. But how do
we know? I mean, I am a farmer. If I am making more money
somewhere, I usually go there and make it.
Mr. Wagoner. So the question is how do you know that we are
going to spend the money here?
Senator Tester. How do I know that you are going to spend
it here and not just shuffle it around and go somewhere else
with it?
Mr. Wagoner. We would be glad to work on source and uses of
funds----
Senator Tester. On accountability, and Ford----
Mr. Wagoner. ----and find a way to ensure that for you,
yes, sir.
Mr. Mulally. Plus, I would add that the fact that we
operate globally, that we get the scale of that globally, which
even brings us more competitiveness to the United States.
Senator Tester. OK, so let us take it the other direction.
Why not bring some of those funds from those profitable markets
over here?
Mr. Mulally. We do. We operate globally and the profits
that we make, we use together to further invest in the future--
--
Senator Tester. OK----
Mr. Mulally. ----in all of those markets.
Senator Tester. So do you really need the money? If you are
global and you are able to take money from other areas, other
countries, and bring it back here, can't you do that in the
short term to get through this, hopefully, out of this gully
economically?
Mr. Mulally. I understand your question. I think that the
reason we are here is from a total enterprise point of view.
Clearly, with all of the markets slowing down worldwide, we are
giving you a status of the companies.
Senator Tester. OK, but----
Mr. Wagoner. Senator, maybe if I could just take it from
our side----
Senator Tester. Yes, go ahead.
Mr. Wagoner. ----we have tried to, to the extent we can,
repatriate money from other businesses, but I would like to
reemphasize what Mr. Mulally said. Basically, we see kind of
with 2 or 3 months' time lag what has happened in the U.S.,
where the cutoff of credit led to really additional plummeting
of the U.S. market. That played out over the last 60, 90 days
in Western Europe and literally as we speak today is playing
out in Brazil. So while we have been able to be, for example,
very profitable in Brazil up until now this year and be able to
remit some money to the U.S., we see this, unfortunately, this
crisis as we did in the financial markets roll around the
world. We are seeing the availability now affecting auto sales
around the world, as well.
Senator Tester. So you anticipate the profit margin in
those countries where you are profitable is also going to--OK.
Mr. Wagoner. Yes.
Senator Tester. Do you think there should be any strings
attached? The President-elect has talked about increased CAFE
standards with any sort of bail-out. Would you have a problem
with that? And all three of you can answer that.
Mr. Mulally. Well, I think on the CAFE, on the fuel mileage
itself, I think the work we did last year was very, very good
work. We completely stretched the enabling technology to be
able to meet the fuel efficiency improvement requirements that
we have outlined. I don't think we know of any more technology
that we could bring to bear that would accelerate that.
With respect to other strings----
Senator Tester. So how far are you going to exceed the CAFE
standards that we passed a year ago?
Mr. Mulally. We are absolutely committed to meeting those
requirements.
Senator Tester. Those--OK. Go ahead. Keep going.
Mr. Mulally. And they are, as you know, when we all
negotiated together that those are tremendous stretches using
all the enabling technology that we have.
Senator Tester. And those are fleet-wide averages, and I am
here to tell you from personal experience, in 30 years, the
mileage increase in light trucks is very, very minimal. That is
my experience.
Mr. Mulally. I personally would be glad to sit down with
you. We think the data, the improvement we have made over the
last 35 years in trucks, because we have improved the fuel
mileage tremendously in trucks, also. Now, you are absolutely
right in the recent experience. In our case, we let the fuel
mileage of our recent trucks not improve as fast as what we
should have----
Senator Tester. I am talking half-tons.
Mr. Mulally. Oh, OK. Well, that would be something good to
compare notes on.
Senator Tester. I mean, it is one of the things I think is
a very good marketing tool for domestically made vehicles that
you need to pound on, and if you get those up, your CAFE for
your fleet average would go up significantly because I know
each one of you are making fuel efficient cars.
Mr. Mulally. I agree. We are making--just like the last
trucks that we are introducing, we are making tremendous
improvement----
Senator Tester. Getting back to the question, though, you
would be opposed to any sort of strings attached for increased
CAFE standards with any kind of bail-out, is that correct? Is
that a correct assumption?
Mr. Wagoner. I think it would--from our perspective, we are
stretching to meet the requirements as they are, so we
understand there will be strings and expectations----
Senator Tester. OK----
Mr. Wagoner. ----but from our perspective, it would be
tough to increase them.
Senator Tester. I see the head nod from Ford and Chrysler.
Mr. Nardelli. Sir, I might say it a little different. I
would say that obviously, given our situation, we would be open
to any requirements that you felt appropriate. I would have to
obviously come back and be candid with you whether our ability
to schedule inventions beyond where we are, but the short
answer is, in our position, we would be open to any of those
discussions.
Senator Tester. OK. Back in 1979 when we bailed out
Chrysler, it has probably been pointed out to you already at
some point in time, Lee Iacocca said that he would take one
dollar in executive compensation until those companies became--
until Chrysler became a profitable model. Where are you guys at
on a proposal like that?
Mr. Nardelli. I would be willing to accept that.
Mr. Wagoner. I would be willing to contribute to the
sacrifice. A couple of years ago, I cut my own salary
unilaterally 50 percent, so I am willing to be part of the
solution.
Senator Tester. I understand that, but 50 percent of
$20,000 is a whole lot less than 50 percent of a six-digit
figure.
Mr. Wagoner. Agree.
Senator Tester. OK.
Mr. Mulally. I absolutely respect the intent of your
question as a symbolic gesture.
Senator Tester. Yes.
Mr. Mulally. But it is a symbolic gesture.
Senator Tester. That is correct.
Mr. Mulally. We have absolutely taken action on all the
salaries. We have no more merits. We have no bonuses. We have
no incentives because for the entire company, we believe this
is the right thing to do during this critical period. We also
need to make sure that we can keep fielding a skilled and a
motivated team to deliver this plan that we are talking about.
Senator Tester. That is right.
Mr. Mulally. So I think that I sure respect the intent of
it, but I think the most important thing is that we not degrade
our ability to be competitive and deliver this plan.
Senator Tester. You guys are down the line a little bit,
but I will just tell you, from my perspective, when you see
things that happen with AIG--you are not AIG, thank God for
that, but when you see things that happen with AIG, with what
they have done, and I can go through the list, when I go back
home, they ask me why I give money to anybody, including the
auto manufacturers, because of what those executives have done.
That is just a side comment.
The last thing I will say is this. You all talked about--I
believe you all talked about at some point in time that credit
was a problem selling your vehicles at this point in time. I
believe for every $1 billion invested of Federal dollars, it
creates about 47,000 jobs. Wouldn't it be better just to throw
the money into jobs building infrastructure, whether that is
research and technology infrastructure that would help the auto
industry or whether that is highways and bridges and roads,
that would employ people and they would have money to go out
and buy your vehicles? Just your thought on that. And by the
way, that could hit the ground very quickly, some would argue
quicker than a check.
Mr. Wagoner. From my perspective, we really have three
issues if we want to get the industry back in the position we
would like. First of all, because of the complete failure of
the credit system, the auto companies need support to be able
to survive. At least over some period of time, we need direct
funding support.
Second of all, the auto finance companies do need to be
able to continue or to increase their ability to finance
consumers.
Senator Tester. Yes, OK.
Mr. Wagoner. And third, there needs to be, I believe, some
way to improve the consumer sentiment toward buying cars and
other products.
Senator Tester. OK. The same question.
Mr. Nardelli. I would agree with those three points and
only add that certainly providing job opportunities for hard
working men and women here in the country is a great idea. My
only concern, Senator, would be the time lag between actually
getting that started, and again, I only reemphasize the sense
of urgency, hopefully that you are hearing from me and my two
colleagues.
Senator Tester. Yes. Go ahead.
Mr. Mulally. And the only thing I would add is that what
you are really--the question is, how quickly can we get this
economy going again, and so I would applaud every effort we do
on that. I think that, like you said earlier, I think we know
there is a lot of work to do to get that going, so it is back
to the time lag, because we are here because of a near-term
challenge.
Senator Tester. OK. Doctor, go ahead.
Mr. Morici. I know you like to talk about strings, and I
would admonish you, whatever solution you come up with, don't
try to micromanage these companies from here. Although I
understand your concern about fuel economy, if you want to talk
about strings, the most significant string you could tie to
resurrect these economies would be on some of that money from
the Federal Reserve to the nine largest banks to get them back
into securitizing the debt that their finance companies
generate.
Senator Tester. OK. So just the last point, and that is a
very good point, but the last point is, in your opinion, has
the $300 billion that has been spent by the Treasury so far
done anything to help your business from a credit standpoint?
Yes or no would be fine.
Mr. Wagoner. I--yet, we haven't seen any measurable change,
except for we have had the capability to use the commercial
paper facility at the Fed, so that has helped some.
Senator Tester. OK.
Mr. Nardelli. Not at this time.
Senator Tester. OK.
Mr. Mulally. I agree.
Senator Tester. Thank you, gentlemen, very much. I
appreciate your time.
Chairman Dodd. Thank you, Senator, very much.
Just a couple of points I want to raise, and again, you are
very patient and I thank my colleagues, as well.
Our colleague from Maryland, Barbara Mikulski, has raised
an issue, and I won't do her justice by getting into the
details of it, but I am reminded of it with a comment I think
Mr. Wagoner made, and that is her suggestion is to provide a
tax deduction for the purchase of new automobiles. The idea is
to encourage consumption. I think the total cost of it, her
package, is around $8 billion. It involves a deduction for
sales taxes and the like. Do you have any quick comments on
that idea, and I am not doing it justice, but just to
conceptually the idea?
Mr. Nardelli. Mr. Chairman, we have heard that idea and
obviously we would be the last to turn down any offer of help.
My concern, back to my testimony, was that before you could get
the credit, you have to be able to buy the vehicle, and today,
relative to the crisis, the liquidity crisis, the FICO scores
that are necessary to qualify, my concern would be that it
would--while it would be great if we can get consumers into
cars, our biggest immediate challenge is to get our affiliate
finance companies, whether they get bank holding company
status----
Chairman Dodd. The point the Doctor just made.
Mr. Nardelli. ----or ILCs, sir, we must get--it is a
parallel path. We have got to get the financial companies
healthy. We have got to get cash infusion to our companies. And
certainly then the tax credit would be beneficial, but I don't
think in and of itself would be enough.
Chairman Dodd. And I agree with the point that Dr. Morici
has made, and that is, of course, to try and use this money to
get lending going so we get securitization moving, and I think
that is a very important point, as well.
There are some of these, and I agree, as well, on the
notion about micromanaging. It is one of the reasons why we
wrote the Emergency Economic Stabilization Plan. We stayed away
from micromanaging to give flexibility and latitude so they
could respond to the situation. So I appreciate that point.
But let me come back to the executive compensation issue,
and I will tell you why. And again, you heard Senator Tester
talk about Montana. I have got to say, just last weekend in
Connecticut, we went to get lunch at a little diner, stood in
line, and constituents came up. The only issue they had for me
about the economic stabilization was about executive
compensation. I hear it every day.
I know it is symbolic, but I want to suggest to you here,
and again, I know the compensation packages that you all have
are pretty rich ones. Mr. Nardelli, I think you got $200
million when you left Home Depot. At least that is reported. I
think, Mr. Mulally, you got last year some $28 million in
compensation as the Chief Executive Officer of Ford. And I
don't know, Mr. Wagoner, what your compensation is.
We are going to be talking about assistance here, and I am
one who believes we ought to try and do this, but I think it is
very important you understand the public's reaction to all of
this. And while you can make a case that there is not a direct
correlation to this, it is the concern that people have that
somehow they are subsidizing this. And so I would strongly urge
you, because I would certainly would write things in about
golden parachutes and the like, but I can't begin to tell you
what sort of reaction there would be from the public if you on
your own would be willing to take some steps that would
reassure the American public that their dollars that are going
to be forthcoming are not going to be used in any way to
provide exorbitant salaries and fees to people.
You are asking an awful lot, and I suspect what Senator
Corker raised, this $25 billion is not going to be the end of
it. We are going to be asking for more at some point here. And
I would like to tell you that in the next couple of days, this
is going to happen. I don't think it is. You heard a lot of
negative reaction to any ideas of providing help at this table.
And I know that Senator Reid, the Majority Leader, would very
much like to achieve this if he could, but I think it is going
to be difficult under the circumstances.
So we will have to regroup and decide how to move forward.
We understand the magnitude of the problem. But I wouldn't want
you to leave here without a clear idea, at least from this
member, as to the difficulty of getting something done in the
next few days on this matter. There are a lot of unanswered
questions that our colleagues will have and we will have to
work our way through this. And I am prepared to roll up my
sleeves and work through it with my colleagues, as well. I am
ready to stay here every day as long as it takes because of the
magnitude of the problem and the implications.
Inaction is not a solution. That is not an answer to this
Member. And it may be an answer to some, but I think the
majority of my colleagues would like to take some action to
help out here, to move forward.
So on that note, I thank you immensely. You have been very,
very patient. I want to thank Ron Gettelfinger, as well, and
you, Dr. Morici. You were rather an eloquent spokesman on the
other side. We thank you for your testimony.
We will leave the record open for a few days here for
additional questions that may come and additional comments you
want to make in response to some of the questions that have
been asked here today.
Again, I thank you all very much for being here. With that,
the Committee is adjourned.
[Whereupon, at 7:05 p.m., the hearing was adjourned.]
[Prepared statements and response to written questions
supplied for the record follow:]
PREPARED STATEMENT OF RON GETTELFINGER
President,
International Union, United Automobile, Aerospace, and Agricultural
Implement Workers of America
November 18, 2008
Mr. Chairman, my name is Ron Gettelfinger. I am President of the
International Union, United Automobile, Aerospace, and Agricultural
Implement Workers of America (UAW). The UAW represents 1 million active
and retired workers, most of whom work or receive retirement benefits
from the Detroit-based auto companies or auto parts suppliers around
the country. We appreciate the opportunity to testify today on the
state of the domestic automobile industry.
The UAW strongly supports legislation to amend the Emergency
Economic Stabilization Act (EESA) to clarify that the Treasury
Department should use the existing financial rescue program to quickly
provide a $25 billion emergency bridge loan to GM, Ford, and Chrysler
to enable these companies to weather the current credit and economic
crises that have had such a devastating impact on our entire country.
This bridge loan would be paid from the funds that Congress has already
provided under the financial rescue program; there would not be any new
federal funds. As with other rescue efforts under this program, the
bridge loan to the auto makers would be conditioned on stringent limits
relating to executive compensation, as well as provisions granting the
Federal government an equity stake in the auto companies in order to
protect the investment by taxpayers.
The UAW believes that the Treasury Department already has the
authority under existing law to make the bridge loan to the auto
companies. But because there is disagreement on this point, we believe
Congress should act quickly to approve legislation to make it clear
that the Treasury Department should act now to provide this urgently
needed relief.
The Detroit-Based Auto Companies Are Facing a Crisis
The situation now facing GM, Ford, and Chrysler is extremely dire.
Because of the credit and financial crises that have engulfed our
Nation, overall vehicle sales have plummeted to the lowest level in 25
years. In October, sales were at an annualized level of 10.8 million
vehicles, far below the normal level of 16-18 million vehicles.
There is no great mystery as to why this enormous decline in sales
has occurred. Buying a vehicle is the second biggest purchase that
families make. Because of the overall credit crunch, most families
cannot get credit on reasonable terms to finance the purchase of a
vehicle. And because of the general economic uncertainty, many families
are simply deferring any major expenditures.
The net result is that all auto companies, not just the Detroit-
based auto makers, have seen a sharp drop in their sales. This means
that the revenues received by the companies have declined drastically.
As a result, GM, Ford, and Chrysler are burning through their cash
reserves at an unprecedented rate. As the recent earnings reports
indicate, this scenario is not sustainable. If the government does not
act to provide immediate assistance, GM, Ford, and Chrysler could be
forced to liquidate. The UAW wants to underscore that this would not be
a painless, ``prepackaged'' bankruptcy reorganization as some
columnists have suggested. Consumers will not purchase vehicles from a
company that has filed for bankruptcy. And bankrupt auto companies
would not be able to obtain ``debtor-in-possession'' financing to
enable them to continue operations. Thus, the stark reality is that
these companies would be forced into a Chapter 7 liquidation, with
their operations ceasing entirely and their assets sold for pennies on
dollar.
Devastating Consequences if the Detroit-Based Auto Companies Collapse
If the Detroit-based auto companies are forced into liquidation,
the consequences would be truly devastating, not only for UAW members,
but also for millions of other workers and retirees across this Nation,
and for the entire economy of the United States. In addition to the
hundreds of thousands of workers who would directly lose their jobs at
the Detroit-based auto companies, according to the Center for
Automotive Research a total of almost 3 million workers would see their
jobs eliminated. This includes persons who work for auto dealers,
suppliers of components and materials, and thousands of other
businesses that depend on the auto industry. In addition, because the
auto manufacturers depend on many of the same suppliers, a disruption
in the supply chain would have serious negative consequences for the
remaining auto manufacturers.
The liquidation of the Detroit-based auto companies would also have
devastating consequences for millions of retirees. The retirees from
these companies and their spouses and dependents--about one million
persons--could suffer sharp reductions in their pension benefits. And
they would face the loss of their health insurance coverage--an
especially devastating blow to the roughly 40 percent who are younger
than 65 and thus not yet eligible for Medicare. In addition, if the
auto makers' pension plans are terminated, the Pension Benefit
Guarantee Corporation (PBGC) would be saddled with unprecedented
liabilities. To prevent the collapse of the PBGC, which would
jeopardize the retirement security of millions of workers and retirees,
the federal government would have to provide a huge bailout for the
pension guarantee program. Furthermore, under existing law, the Federal
government would be liable for a 65 percent tax credit to cover the
health care costs of pre-Medicare auto retirees costing about $3
billion per year.
The liquidation of the Detroit-based auto companies would have
serious negative repercussions for the entire U.S. economy. Almost 4
percent of our Nation's GDP is related to the auto industry, and almost
10 percent of our industrial production by value. The collapse of the
auto sector would severely aggravate the current economic downturn,
sending production and consumer spending into a deeper tailspin while
unemployment spirals higher. Federal, State, and local government
revenues would shrink even further, forcing harmful cuts in a wide
range of social services at precisely the time they are most urgently
needed.
The UAW submits that it would be far better for the auto industry
and its workers and retirees, and for the Nation as a whole, for the
federal government to take prompt action now to prevent the imminent
collapse of the Detroit-based auto companies. The human toll will be
far less. And the ultimate cost to the government will be far cheaper.
Myths About the Auto Industry
A number of objections have been raised by various commentators
against this type of government assistance to the Detroit-based auto
companies. These objections are largely based on myths about the auto
industry that do not stand up on closer scrutiny.
The Current Problems Facings the Detroit-Based Companies Are Not Due to
``Overly Rich Union Contracts''
Some commentators have asserted that ``overly rich contracts''
negotiated by the UAW are to blame for the companies' current
situation, and suggested that workers and retirees should be required
to take deep cuts in their wages and benefits. This totally ignores the
recent history in the auto industry and the facts regarding wages and
benefits at the Detroit-based companies.
The truth is that in 2005 the UAW agreed to reopen the contracts
mid-term, and accepted cuts in workers' wages and in health care
benefits for retirees. Then, in the general 2007 collective bargaining
negotiations, the UAW agreed to what industry analysts have called a
``transformational'' contract that fundamentally altered labor costs
for the Detroit-based auto companies. This contract slashed wages for
new hires by 50 percent. Furthermore, new hires will not be covered by
the traditional retiree health care and defined benefit pension plans.
In addition, this contract stipulated that beginning January 1, 2010,
the liability for health care benefits for existing retirees would be
transferred from the companies to an independent fund (a Voluntary
Employee Beneficiary Association, or VEBA). This agreement has
subsequently been approved by federal courts, which have appointed a
majority of the trustees who will be independent of the UAW and
responsible for managing the VEBA. Taken together, the changes made by
the 2005 and 2007 contracts reduced the companies' retiree health care
liabilities by 50 percent.
As a result of all these painful concessions, the gap in labor
costs that had previously existed between the Detroit-based auto
companies and the foreign transplant operations will be largely or
completely eliminated by the end of the contracts. Indeed, one industry
analyst has indicated that labor costs for the Detroit-based auto
companies will actually be lower than those for Toyota's U.S.
operations. Thus, the truth is the UAW and our active and retired
members have already stepped up to the plate and made the hard changes
that were necessary to make our companies competitive in terms of their
labor costs.
It is also important to note that union negotiated work rules
cannot be blamed for the current problems facing the Detroit-based
companies. According to the Harbour Report, the industry benchmark for
productivity, union-represented workers are actually more efficient
than their counterparts at non-union auto plants. And union-made
vehicles built by the Detroit-based auto companies are winning quality
awards from Consumer Reports, J.D. Power, and other industry analysts.
The current plight of GM, Ford, and Chrysler is simply not
attributable to ``overly rich union contracts.'' Instead, it is the
result of the larger credit and economic crises that have engulfed our
Nation, and the unprecedented drop in auto sales that has affected all
auto makers.
Because the recent contracts negotiated by the UAW are now
competitive with the rest of auto industry in the U.S., we do not
believe there is any justification for conditioning assistance to the
Detroit-based auto companies on further deep cuts in wages and benefits
for active and retired workers. We would also note that in the cases
where the Treasury Department has acted to rescue financial
institutions, it has only imposed restrictions on executive
compensation. It has never mandated cuts in wages or benefits for rank-
and-file workers and retirees. Thus, there is no basis for singling out
the auto industry for different treatment.
The Current Crisis Cannot Be Blamed on the Detroit-Based Companies
Producing Gas Guzzling Vehicles
Some pundits also have asserted that the Detroit-based auto
companies are to blame for their current predicament because they
insisted on producing gas guzzling vehicles, rather than more fuel
efficient vehicles that consumers wanted. According to this point of
view, GM, Ford, and Chrysler simply were not producing vehicles that
consumers wanted to buy.
Unfortunately, this argument ignores the fact that the current
credit and economic crises have resulted in a sharp drop in sales by
all auto manufacturers, including the Japanese companies. The immediate
problem is not just that consumers aren't buying the vehicles produced
by the Detroit-based auto companies. The problem is they aren't buying
vehicles from any company!
It is true that earlier this year the sharp spike in gas prices
resulted in a sudden shift in the product mix demanded by consumers,
with sales of more fuel efficient vehicles increasing, and sales of
pickups, minivans and other larger vehicles dropping. This shift in
product mix hit the Detroit-based companies the hardest, because their
product mix was more oriented towards these larger vehicles. But it
also caught Toyota and Nissan by surprise. Because these companies had
been aggressively expanding production of larger vehicles, they also
experienced significant dislocations.
The Detroit-based auto companies have been investing massive
amounts of money to change their product mix and to provide consumers
with a wide range of more fuel efficient vehicles. They are
aggressively moving ahead with advanced fuel saving technologies. For
example, GM plans to introduce the Volt plug in hybrid in 2010.
The landmark energy legislation that was enacted by Congress in
2007, with the support of the UAW and the auto companies, will require
substantial improvements in fuel economy until the entire fleet of
autos and light trucks sold in the U.S. by all companies achieves at
least 35 mpg by 2020. In addition, the Advanced Technology Vehicles
Manufacturing Incentive Program (ATVMIP), which was authorized by this
legislation and subsequently funded by Congress in the fall of this
year, will provide assistance to all automakers--the Detroit-based
companies and the foreign transplants--to retool facilities in this
country to produce the advanced, fuel efficient vehicles of the future
and their key components. This will help to accelerate the introduction
of these more fuel efficient vehicles, while ensuring that they are
produced by American workers.
Some commentators have questioned why this advanced vehicle
retooling program doesn't provide sufficient assistance for the auto
companies. The answer is the ATVMIP is part of a long term energy
policy that will provide assistance to the auto companies and parts
suppliers over a ten year period, tied specifically to the production
of very high mileage vehicles. This program was not designed to address
the type of immediate cash flow crisis that the Detroit-based auto
companies are now facing as a result of the sudden drop in overall auto
sales. Even if the ATVMIP is implemented quickly--which is by no means
clear--at most it will only provide modest assistance to the Detroit
based auto companies in the coming years.
Other observers have questioned whether the ATVMIP could simply be
expanded to allow the Detroit-based auto companies immediate access to
the entire $25 billion that was authorized and appropriated for this
program. The UAW believes this would not make sense because it would
undermine the fuel economy objectives of this program. Furthermore,
there simply are not enough retooling projects in the short term--for
advanced vehicles or more conventional ones--to make this approach
feasible.
Some commentators and groups have suggested that any new assistance
to the Detroit-based auto companies should be conditioned on even
greater improvements in fuel economy. We recognize that President-elect
Obama campaigned on a platform that included increases in fuel economy
and the production of plug in hybrids, as well as assistance to the
auto industry to ensure that the vehicles of the future are produced in
this country. The UAW is looking forward to working with the Obama
administration and the next Congress to help achieve these objectives.
But we firmly believe it would be an enormous mistake to rush to
include these important new initiatives in the current emergency bridge
loan for the Detroit-based companies. To begin with, we do not believe
there is adequate time to develop thoughtful proposals that are
workable and effective. In addition, given the desperate situation
facing the Detroit-based auto companies, and the devastating
consequences their collapse would have for millions of workers and
retirees and the entire U.S. economy, the UAW does not believe it is
appropriate to hold emergency assistance hostage to broader fuel
economy/environmental initiatives.
The Detroit-based companies need an immediate bridge loan from the
Treasury Department in order to have sufficient cash to be able to
continue their operations. These companies will not be able to continue
on the path to producing the greener vehicles of the future if they are
forced to liquidate in the coming months.
Conclusion
The UAW appreciates the opportunity to testify before this
Committee on the state of the domestic auto industry. We strongly urge
Congress to act this week to approve legislation that will provide
immediate assistance to GM, Ford, and Chrysler to enable them to
continue in business, and to avoid the devastating consequences that a
collapse of these companies would have for millions of workers and
retirees across our country. Thank you.
______
PREPARED STATEMENT OF ALAN R. MULALLY
President and Chief Executive Officer,
Ford Motor Company
November 18, 2008
Thank you Mr. Chairman, Senator Shelby and Members of the
Committee. I appreciate the opportunity to be here with you today
representing Ford Motor Company as you consider issues that are
absolutely critical to this venerable American company and to the
Nation.
In my judgment, there are two fundamental questions on the table
today:
Is there a competitive and sustainable future for our
domestic automotive industry?
Is the provision of government assistance to help bridge
the domestic auto industry through these difficult economic
times more favorable to our Nation than the costs of inaction?
I respectfully submit that the answer to these questions is a
resounding yes. The domestic industry is increasingly more competitive
and sustainable and is in many respects on par with our foreign
competitors. A decision to make government assistance available makes
much more sense than taking the tremendous risks to our already fragile
economy that come with inaction.
Ford's Competitive Transformation
As you are well aware, we face serious problems in our economy, and
the auto industry has been among the most heavily affected by the
turmoil in the financial markets and the impact that turmoil has had on
spending for consumer products. As public attention has shifted from
the credit and financial institution crisis to larger economic issues,
we in the auto industry find ourselves at the center of a national
debate on the future of our industry. Much of the commentary I've read
in the last few weeks is highly critical of our industry, and a common
refrain is that our companies ``need a new business model.''
I completely agree. What many of the commentators and critics fail
to recognize, however, is that we at Ford are on our way to realizing a
complete transformation of our company--building a new Ford that has a
very bright future.
The reason I came to Ford 2 years ago after 37 years in the
aerospace industry working for Boeing was because of my confidence that
the incredible talent and resources of the Ford Motor Company could and
should be redirected into an effort to transform Ford so it can be one
of the strongest competitors in today's global automotive market.
Inspired by the compelling vision outlined by our Executive Chairman
Bill Ford, Ford had already begun its transformation from a company
focused in this country largely on trucks and SUVs. All of our efforts
over the last two years have been directed toward speeding up the
transformation of Ford to a global profitable business based on the
highest quality, sustainable, fuel-efficient, safe, fun-to-drive and
best-value world class vehicles.
With that in mind, I'd like to take a few minutes to tell you about
the transformation under way at Ford to give you a vision for the
future that we are creating today.
Our plan for the past 2 years has been consistent.
We have been aggressively restructuring to operate
profitably at the current lower demand and changing model mix.
We have been accelerating development of the safe, fuel-
efficient, highest-quality new products that customers want and
value.
We have been working to finance our plan and improve our
balance sheet.
And we have been working together as one team--with our
employees, dealers, suppliers and union partners--leveraging
our global assets like never before.
Our goal has been and remains to create a viable, highly focused,
fully integrated Ford Motor Company--a lean enterprise delivering
profitable growth for all over the long term.
Restructuring. Few companies in the history of our country have
restructured more aggressively. I can tell you that in my experience,
the union under Ron Gettelfinger is working with us as part of the
solution.
In a very short period of time, working together, we have reduced
excess capacity, closing 17 plants in North America--including more
than one-third of our assembly plants--in the past 5 years. We have
also reduced our workforce by 51,000 employees in the past three years,
shrinking our hourly workforce from 83,000 to 44,000 and reducing
salaried head count by around 12,000 from a base of 33,000.
We negotiated a new contract with our UAW partners to begin a path
toward competitiveness and offset some of the massive legacy costs that
come with doing business in America for more than 100 years. Most
significantly, that contract established a trust that funded our
retiree health care obligation and removed the liability from Ford's
balance sheet effective 2010. Ford has fully met the funding
requirements associated with that agreement, including setting aside an
initial $4 billion contribution in January of this year.
Our agreement with the union also established an entry level wage
that reduces future costs and will make us more competitive going
forward longer-term. And, for the first time ever, it included no base
wage increase during the 4-year period covered by the agreement.
We have also been engaged in a broader effort to cut our costs, and
in North America alone have reduced our costs by $5 billion compared
with year-end 2005. We also plan further cost and cash improvements to
offset the increasing weakness in the global automotive industry.
Product. We are not simply on a journey to cut and shrink our way
to profitability. Instead, we very much recognize the need for a
product-led transformation, and believe we have the products to achieve
just that. We have dramatically accelerated the introduction of new
vehicles; 43 percent of our vehicles will be new or refreshed in 2009,
and 100 percent of the Ford, Lincoln and Mercury lineup will be new or
refreshed by the end of 2010 compared with 2006 models.
Keenly aware that the world is changing as we transform our
company, we are shifting from an emphasis on large trucks and SUVs to a
more balanced portfolio that also emphasizes smaller and more fuel-
efficient vehicles here in the U.S.--the same world-class small
vehicles that have been so successful for us in other high-fuel-cost
markets. By the end of 2010, two-thirds of our spending here will be on
cars and crossovers--up from one-half today.
We are delivering the best or among the best fuel economy with
every new vehicle we introduce. This is possible through affordable,
fuel-saving technologies like EcoBoost engines, which use gasoline
turbocharged direct-injection technology for up to 20 percent better
fuel economy, up to 15 percent fewer CO2 emissions and superior driving
performance versus larger-displacement engines. We are doubling
capacity for four-cylinder engines here to meet the consumer trend
toward more efficient powertrains and vehicles. We also are doubling
the number of offerings and volume of our hybrids in the next year
alone, and we have a plan for delivering new electric vehicles and
plug-in vehicles.
Ford is taking advantage of our scale and global product strengths.
We are delivering a balanced portfolio of small, medium and large cars,
utilities and trucks, with a sharp focus on the Ford Blue Oval brand
across the globe. Going forward, this balanced portfolio will provide
the flexibility to adapt more easily to changes in our environment and
to begin to grow profitably as the global economy rebounds.
Our new products will be assembled in plants featuring lean
manufacturing techniques, and, in nearly all facilities, flexible body
shops will make them competitive with the best in the business. A
number of our powertrains will be built in plants that can flex among
the I4, V6, V8, or diesel engines. As we make these changes, we are
fixing the fundamentals of the business, including a further
significant reduction in structural costs next year. We also will
continue the ongoing consolidation of our dealer and supplier network.
Our plans call for reducing our supplier network by more than 60
percent and thereby improving supplier capacity utilization and
financial viability.
We have continued to improve quality with four consecutive years of
marked progress. This is another area where much of the recent
commentary has not yet caught up with reality. Most recently, Ford,
Lincoln, and Mercury vehicles collectively reduced what we call
``things gone wrong''--a metric used to assess quality--by 7.7 percent
compared with last year. That puts Ford's quality on par with Honda and
Toyota.
We achieved a leading number of top safety picks from the U.S.
Insurance Institute of Highway Safety, with the 2009 Ford Flex and the
2009 Lincoln MKS recently earning top honors. This builds on Ford's
achievement of having the most U.S. government five-star safety ratings
in the automobile industry.
The speed and breadth of our product-led transformation is
demonstrated by significant actions taking place just this week.
Tomorrow at the Los Angeles Auto Show, we unveil two all-
new hybrids, the Ford Fusion Hybrid and the Mercury Milan
Hybrid. Both beat the Toyota Camry Hybrid in fuel efficiency by
at least five miles per gallon. The conventional versions of
these new vehicles also beat the Camry in fuel economy.
These vehicles are from the same Fusion family that is
being recognized on the cover of one of the Nation's most
prestigious consumer magazines for outstanding reliability and
quality--quality that respected third parties now agree is on
par with Honda and Toyota.
Also today, Ford is submitting our application to the
Department of Energy for direct loans authorized by Congress
last year in section 136 of the Energy Independence and
Security Act of 2007. We appreciate Congress' support for these
loans, as they will provide access to lower-cost capital for
retooling plants for more fuel-efficient vehicles. While no
company has yet received funding through this program, we
believe it will be important in the long term in deploying
advanced technologies.
On Friday, we end large SUV production at our Michigan
Truck Plant and begin converting the facility to build fuel-
efficient small vehicles. It is one of three large truck plants
that we are converting to small vehicle production in the next
two years.
Financing Our Plan. To fund our transformation, we have taken many
steps to protect Ford's liquidity position, including:
Raising $23 billion of available liquidity through an
enterprise-wide secured credit facility, going to the capital
markets at the right time in 2006 to secure that financing.
Selling Aston Martin, Jaguar, and Land Rover so that we
could have an absolute laser focus on growing the Ford brand.
Selling other businesses such as Hertz to aid our liquidity
and to focus on our core business.
Similarly, Ford Credit, our captive finance company, has
consolidated abroad to preserve capital to support U.S. consumers and
our Ford dealers here. Our Ford Credit team is optimistic that recent
announcements from the Administration will help unfreeze the term
securitization markets with the same success we have seen lately in
asset-backed commercial paper markets.
The consolidation efforts alone have not been sufficient to
overcome the financial market disruption which has significantly
diminished our access to traditional funding sources.
Unsecured financing has declined dramatically during the past 12
months and impaired our ability to fully support dealer and consumer
needs, or to achieve our growth objectives. Such funding is either non-
existent or available today only at uneconomic terms.
Securitization markets, our primary funding source, have likewise
been frozen. The asset-backed commercial paper and public term
securitization markets also have declined significantly, greatly
impairing the company's ability to support dealer and consumer
financing needs. Accordingly, many of our low-volume financing products
have been eliminated or curtailed as we wait for the credit and
financial markets return to some state of normalcy.
Our Ford Credit team is optimistic that government assistance in
the form of a purchase program for future term securitizations will
allow us to continue financing consumers and dealers. The CPFF has been
successful in this regard for providing liquidity to our asset-backed
commercial paper program.
In addition, it is important that the FDIC approve Ford Credit's
industrial loan bank application as another way for us to be able to
offer automobile financing to credit-strapped consumers. First filed in
June 2006 and refiled in February after an 18-month FDIC-imposed
moratorium, Ford Credit's application for an industrial loan bank is
still pending further review by the FDIC. We believe that the
application and business plan meet the statutory requirements for
approval in every material respect. During this extended period, Ford
Credit has operated and will continue to operate at a significant
competitive funding disadvantage to its competitors. Both domestic
(GMAC) and foreign competitors (Toyota and BMW) benefit from FDIC-
insured industrial banks and access to stable, low cost FDIC-insured
deposits.
Financial Results and Economic Climate
The bottom line of all of our efforts is that we are now
competitive with the best in the world--and it has shown in our
financial results. In each quarter of 2007, we delivered year-over-year
improvements, excluding special items, and on the same basis posted a
$100 million profit globally in the first quarter of this year. We
appeared to be well on our way to returning to sustainable
profitability next year.
As this year has progressed, however, our companies, dealers,
suppliers and customers have faced an unprecedented economic crisis and
a severe credit crunch. I know that the Committee is all too familiar
with the circumstances of our economy, but just a few statistics put
the situation we face in sharp focus.
While the domestic auto industry has made mistakes in the past, the
current problems have been exacerbated by one of the worst economies in
nearly three decades. The mix of the housing crisis, credit crunch,
wildly fluctuating gas prices and major spikes in commodity prices has
lead to an unprecedented reversal in the business environment that is
driving not just the U.S. but markets around the world into a
synchronized economic downturn.
Spending by consumers fell at an annual rate of more than 3 percent
in the third quarter (as compared to the second quarter). According to
the early November 2008 reading of consumer confidence from the
University of Michigan Survey of Consumers, this is the first time in
the 50-year history of that survey that consumers were unanimous in
their view that the economy is in recession. Consumers' assessment of
their economic and financial conditions is the worst since the early
1980s, when the U.S. economy encountered two consecutive recessions.
The unemployment rate of 6.5 percent is well above the low point of 4.4
percent in March 2007 and likely will rise significantly in coming
months. Job losses are over 1.1 million in the first 10 months of this
year, and further reductions in employment are expected.
The auto sector is highly reliant on well-functioning credit
markets--from manufacturers and suppliers to dealers and consumers. Our
industry is one of the first to suffer from bad economic conditions--
indeed, spending on new vehicles historically represents about 4
percent of GDP and therefore will predictably be closely tied to those
conditions. The early evidence of weak economic growth began to set in
during the first half of this year, with consumers facing a weaker job
market at the same time that rising food and energy prices were taking
up an increasing share of their disposable incomes. As the financial
crisis persisted, both credit availability and consumers' weakened
confidence contributed to a drastic decline in vehicle sales. There has
been a broad-based tightening of origination and underwriting standards
for automotive financing, spreading beyond the sub-prime arena to
affect many prime borrowers as well. The Federal Reserve Senior Loan
Officers' survey shows that banks' willingness to extend consumer
installment loans has only been weaker at one time in the past 30
years, and that was in June of 1980. More than 60 percent of banks have
tightened standards for consumer credit in the most recent survey.
During the last 6 months, light vehicle sales fell at a 45 percent
annualized rate, the worst slide since mid-1980. In October, the
annualized sales rate for the U.S. industry was only 10.5 million
units--compared to over 16 million units just last year. This means the
industry has lost over 5 million vehicle sales--the equivalent of two
companies the size of Ford in North America--in a single year.
October was the worst auto sales month the U.S. industry has seen
in 25 years, and we expect it will not be the weakest result we see
over this economic cycle. Total industry volumes in 2009 are expected
to be weaker than in 2008 on a full-year basis, with significant
pressure in the first half of next year.
This is not just a case of the domestic auto industry failing to
anticipate changing economic conditions. Very few in any industry, of
course, predicted the kind of economic headwinds we face today.
Certainly our foreign competitors have not been immune from the
downdraft. Toyota, Honda, and Nissan each reported a decline in sales
of more than 23 percent in October. Importantly for Ford, we have held
or slightly increased our market share in the midst of this declining
market. But importantly, despite our best efforts, our industry's
ability to weather this storm has been directly affected by the
external financing environment.
The decline in the overall market has been the result of two
problems--economic uncertainty that discourages Americans from making
major purchases, and a lack of available credit so even some people who
want to buy a car are unable to secure credit.
This unprecedented pressure on our industry, which is the result of
a financial crisis that was not of our industry's making, is coming
just at the time when our efforts to restructure Ford have finally
begun to bear fruit. The real challenge for this Nation is to find a
way to allow our successful restructuring efforts to continue despite
these challenging times. To do otherwise would be a disservice to the
millions of employees at our plants, suppliers, dealers, and customers
who are depending upon our success as well as to the American public.
As quickly as these changes have been occurring, of course, we at
Ford have been taking fast and decisive action to deal with them. We
reduced our production levels dramatically in the face of a shrinking
industry demand. In the third quarter alone, we reduced North American
production by 219,000 units from the 637,000 vehicles we produced in
the third quarter of 2007. Our fourth quarter plans call for production
decreases in excess of 210,000 units from the fourth quarter of last
year, leaving the company with a full year reduction of over 600,000
units in 2008. We are firmly committed to managing production carefully
rather than simply producing units we know the market cannot absorb.
We have announced plans to further reduce employment and cut
benefits and compensation at all levels. We have eliminated merit
raises and bonuses in 2009, and we continue not to pay any dividends to
our shareholders.
Even as we take these steps, however, we continue to protect our
investment in the fuel-efficient new vehicles that we believe will
secure our future. Operating under our ``One Ford'' principle, we
intend to deliver more vehicles worldwide from fewer core platforms,
further reduce costs and allow for the increased use of common parts
and systems. The result will be a lineup of highly acclaimed, smaller
vehicles in global segments (sub-compact, compact, and mid-size
vehicles, and commercial vans) beginning in mid-2009. About 40 percent
of Ford's entries in these segments will be shared between Ford North
America, Ford Europe, and Ford Asia Pacific by 2010, with 100 percent
alignment achieved by 2013. And, as I mentioned earlier, we are
committed to deliver every new product with the best or among the best
fuel economy in its segment, driven by the most extensive powertrain
upgrades ever for Ford.
The Bridge to Transformation
What I have outlined so far is the dramatic transformation taking
place at Ford and the intense economic headwinds we now face as we
attempt to continue and complete that transformation. The question
remains whether we as a company and collectively as an industry will
have time given the unprecedented short-term economic conditions to
complete our transformation for the long term.
Speaking only for Ford, we are hopeful that we have enough
liquidity based on current planning assumptions and planned cash
improvement actions, but we also know that we live in tumultuous
economic times in which rapid and unexpected change seems to be the
norm rather than the exception. While we are cautiously confident, we
must also be prudent, and prudence at this point requires that we
prepare ourselves for the prospect of deteriorating economic conditions
in 2009.
We also know that at least one of our competitors has reported
that, absent the ability to secure additional funding, its estimated
liquidity will fall significantly short of the minimum required to
operate its business in the first two quarters of next year unless
conditions rapidly improve--which we don't expect.
If any one of the domestic companies should fail, we believe there
is a strong chance that the entire industry would face severe
disruption. Ours is in some significant ways an industry that is
uniquely interdependent--particularly with respect to our supply base,
with more than 90 percent commonality among our suppliers. Should one
of the other domestic companies declare bankruptcy, the effect on
Ford's production operations would be felt within days--if not hours.
Suppliers could not get financing and would stop shipments to
customers. Without parts for the just-in-time inventory system, Ford
plants would not be able to produce vehicles.
Our dealer networks also have substantial overlap. Approximately
400 of our dealers also have a GM or Chrysler franchise at their
dealership, and we estimate that as many as 25 percent of our top 1,500
dealers also own GM or Chrysler franchises. The failure of one of the
companies would clearly have a great impact on our dealers with
exposure to that company.
In short, a collapse of one of our competitors here would have a
ripple effect across all auto makers, suppliers, and dealers--a loss of
nearly 3 million jobs in the first year, according to an estimate by
the Center for Automotive Research.
In the face of incredibly fragile economic conditions and the
interdependence of our industry, we believe it is appropriate at this
time to join our competitors in asking for your support to protect
against an uncertain economic future that threatens all of the progress
we have made to accomplish a goal that serves the interests of this
Nation--creating a strong and viable American automotive industry. I
know we can achieve this goal because we at Ford are implementing the
transformational changes that are required to achieve it--as long as we
can survive the present economic turmoil.
Our request today is to gain access to an industry bridge loan that
would provide all of us with an available tool to navigate through this
difficult economic and financial crisis. We would suggest that the
loans be structured in a revolving format so that the exposure to the
taxpayer would be limited--and, if used, we would repay with interest.
The Public Interest
It should come as no surprise that we who are testifying before you
today believe the domestic automotive industry should be supported and
preserved as it transforms to meet the new challenges of meeting
changing consumer demands and environmental imperatives in a difficult
economic environment. The question before you, however, is one of the
public interest--is the public interest better served by offering aid
to the industry at this time or by letting market and regulatory forces
work to whatever future they might bring?
I respectfully submit that the public interest is clear--this
industry merits your support. I have already detailed at length the
ways in which our iconic American Ford Motor Company is transforming
itself for the future, and I know my colleagues from General Motors and
Chrysler are equally confident of presenting a compelling vision of the
future. We all believe that future is worth supporting.
But perhaps the most compelling reason for you to support our
industry comes upon consideration of the consequences that would be
visited on our already fragile economy if this industry should
collapse.
At the end of 2007, Chrysler, Ford, and General Motors directly
employed about 240,000 American workers and indirectly supported more
than 4.5 million other workers in the U.S. The Detroit Three are among
the Nation's largest purchasers of U.S.-manufactured steel, aluminum,
iron, copper, plastics, rubber, electronics, and computer chips. Last
year, they provided health care to nearly 2 million Americans and paid
pension benefits to 775,000 retirees or their survivors.
One recent study estimated that in the event the Detroit Three were
to cease operations in 2009, employment loss would be nearly 3.0
million jobs, personal income would be reduced by over $150 billion,
and the loss to the government in tax revenue would be more than $60
billion--in the first year alone. Even a 50 percent reduction in our
operations would result in devastating losses to the economy, according
to this study.
Many more statistics are available. Each would demonstrate that the
collapse of the U.S. automotive industry would be a calamity for the
entire economy. This is not a claim that any individual company is
``too big to fail,'' although of course that sort of claim seems to
have been at work in some recent--and far more costly--actions taken in
other sectors in response to the economic crisis. Rather, ours is a
claim that a large swath of the industry rises and falls together, and
that the industry collectively is too big and too important to fail.
The linkages we have through our suppliers, dealers, workers and
customers mean that there are very few isolated events in our industry.
I would therefore urge you as you consider our request not to think of
individual companies but rather of the industry--and the economy--as a
whole.
Of course, more than mere economics are at play. It would not be
overstating the case to observe that our Nation's ability to engage in
heavy manufacturing is very much at stake and is a matter of national
security. No less an authority than former NATO Commander General
Wesley Clark eloquently made that point in a column in last Sunday's
New York Times that I commend to the Committee:
More challenges lie ahead for our military, and to meet them we
need a strong industrial base. For years the military has
sought better sources of electric power in its vehicles--
necessary to allow troops to monitor their radios with diesel
engines off, to support increasingly high-powered
communications technology, and eventually to support electric
propulsion and innovative armaments like directed-energy
weapons. In sum, this greater use of electricity will increase
combat power while reducing our footprint. Much research and
development spending has gone into these programs over the
years, but nothing on the manufacturing scale we really need.
Now, though, as Detroit moves to plug-in hybrids and electric-
drive technology, the scale problem can be remedied. Auto
makers are developing innovative electric motors, many with
permanent magnet technology, that will have immediate military
use. And only the auto industry, with its vast purchasing
power, is able to establish a domestic advanced battery
industry. Likewise, domestic fuel cell production--which will
undoubtedly have many critical military applications--depends
on a vibrant car industry.
Our industry is proud of the role we have played through the years
in meeting our national security needs, and we believe that role will
continue to be critical in the years to come.
Conclusion
We live in difficult and challenging times, and have discovered in
recent weeks and months that both old solutions and new must be re-
examined and adjusted to meet rapidly changing conditions.
At Ford Motor Company, we remain committed to constant examination
and response as we face new challenges. With each of those challenges,
however, I become more convinced than ever that we have the right plan
to transform Ford and that our best days are ahead of us. The reality
is that Ford already is well on our way to realizing a complete
transformation of our company--building a new Ford that has a very
bright future.
With your help, we will together ensure that bright future for Ford
and the entire American auto industry. With your help, we will create a
safeguard to deal with the current unprecedented economic uncertainty,
while all of us at Ford continue to deliver on our plan. And, as we
continue to be an important part of communities across America, we look
forward to working with you to be part of the solution on the road to
economic recovery. Thank you.
______
PREPARED STATEMENT OF ROBERT NARDELLI
Chairman and Chief Executive Officer,
Chrysler LLC
November 18, 2008
Mr. Chairman, Members of the Committee, I appreciate this
opportunity to address the current economic and financial crisis, the
impact it is having on the automotive industry, and the need for
immediate action.
During the 15 months I've been part of Chrysler, and since we've
emerged as the first privately held American auto company in 50 years,
I've been proud to work with a team of dedicated men and women
determined to restore this 83-year old, iconic American brand to its
rightful place in the automotive industry.
We are asking for assistance for one reason: to address the
devastating automotive industry recession caused by our Nations'
financial meltdown, and the current lack of consumer credit, which has
resulted in the critical lack of liquidity within our industry.
With credit markets frozen, our customers--average working
Americans--do not have access to competitive financing to purchase or
lease vehicles. Our dealers do not have access to market competitive
funding to place wholesale orders for new vehicles, resulting in the
constriction of cash inflows to auto manufacturers. At the same time,
Chrysler has billions of dollars in cash payment obligations every
month to pay wages, to pay suppliers, to fund health care and pensions,
all in the range of $4 to $5 billion per month.
This crisis has already driven U.S. sales to a 25-year low. In 2008
alone, our volume domestically has dropped from 17 million units to 11
million--a 38 percent decline. That volume drop is more than the total
U.S. sales of Ford and Chrysler combined.
Therefore without immediate bridge financing support, Chrysler's
liquidity could fall below the level necessary to sustain operations in
the ordinary course. This would put at risk health care coverage for
retirees, which is part of Chrysler's nearly $20 billion total health
care obligation, $2 billion in annual pension payments to our retirees
and surviving spouses, approximately $7 billion in current payables,
$35 billion in future annual supplier business, and 56,600 direct
Chrysler employees earning $6 billion in wages.
Independent research firms have quantified the fallout of a
domestic auto maker bankruptcy to the overall economy, and the impact
is devastating: 2.3-3 million in lost jobs, $275-$400 billion in lost
wages, and $100-$150 billion in lost government revenue.
But this is not a good option for Chrysler, and more importantly,
for the auto industry or the broader economy--for the following
reasons:
1. We believe that retail sales would be impacted materially as a
result of declining consumer confidence, and we will be forced
to heavily discount existing inventory to move our product.
2. Given our common supplier base--at Chrysler, 96 of our top 100
suppliers are common to Ford and GM--the bankruptcy of any one
domestic auto maker would place enormous pressure on the supply
chain and, consequently, that company's competitors.
3. Our factories would likely be idled for a significant period of
time while we renegotiate contracts with each of our thousands
of individual suppliers.
4. Restructuring and reorganization costs and expenses will be
materially higher in connection with a Chapter 11 process:
supplier and dealer support and marketing costs will increase,
general economic dislocation will follow and significant fees
and expenses will be paid to an army of bankruptcy
professionals.
5. The overall amount and cost of financing the restructuring will
be significantly higher in a Chapter 11 process than the
working capital bridge we are requesting here today.
6. And finally, we cannot be confident that we will able to
successfully emerge from bankruptcy.
That's why as an industry we are requesting a $25 billion working
capital bridge to survive this liquidity crisis. However, both our
private equity owner and I believe that while the immediate bridge
financing is critical, the long-term solution to the industry's
problems and challenges requires industry consolidation and cost
rationalization to eliminate excess industry capacity and redundant
costs.
I would expect Congress to insist that the American taxpayer be
protected. We are willing to provide full financial transparency, and
welcome the government as a stakeholder--including as an equity holder.
We are fully prepared to comply with the current conditions and
policies already put in place as mandated by the government, under the
recently enacted Emergency Economic Stabilization Act.
Our private equity owner, Cerberus Capital Management, L.P., has
made it clear that it will forgo any benefit from the upside that
would, in part, be created from any government assistance that Chrysler
LLC may obtain. The principal of Cerberus Capital has stated that he
will enter into legally binding agreements requiring the contribution
to the government of the General Partner's future profits interest
related to Chrysler LLC which he might receive if any are ever earned.
Immediately on the separating from Daimler in August 2007, and
being new to the automotive industry, I recognized the need to question
and sometimes challenge the status quo, and seek significant
opportunities to improve performance throughout the business. We began
an aggressive restructuring and transformation of our business as an
independent American auto company.
During the first 60 days, we approved more than 400 line item
design changes, representing an investment of half a billion dollars in
improvements to our products' reliability, durability, fit and finish,
and consumer appeal. We offered our customers a lifetime powertrain
warranty to build their confidence. Due to a focused product quality
improvement effort during the past year, we've seen our warranty claim
rates drop by 29 percent and the improvement trend continues.
We made tough decisions to reduce operating costs and adjusted
production schedules immediately. We prioritized every product
investment with a strong emphasis on improving energy security and
environmental sustainability by introducing advanced powertrain
technologies, while at the same time we discontinued four vehicle
models. We also identified over $1 billion in non-earning assets to
sell and we're more than 75 percent toward achieving that goal.
Since 2007, Chrysler has reduced 1.2 million units of capacity,
which represents over 30 percent of our previous installed capacity,
and which resulted in the elimination 12 production shifts. Over the
past 10 months alone, we've reduced our fixed costs by $2.2 billion,
and unfortunately, by the end of the year, we will have furloughed over
32,000 employees. That is the most gut-wrenching part of this job, to
see the effect on the lives of good men and women who lose their jobs
through no fault of their own, but because of the actions the Company
is forced to take in these difficult times.
We have increased our manufacturing productivity to equal Toyota as
America's most productive auto maker in terms of hours of assembly per
vehicle, and our recently negotiated labor agreement was an important
step in making our cost structure more competitive with transplants by
2010.
To further enhance our product portfolio, support growth and
improve our cost structure, we continue to aggressively pursue
strategic alliances and partnerships with other companies. I believe
more restructuring and consolidation is required for the industry to be
viable in the long-run. We would welcome the opportunity to have an
open discussion with the new Administration and Congress on a
collaborative approach to restructuring that would ensure any
Government resources invested in the industry are used efficiently and
help achieve important national public policy objectives.
It is equally important that the lack of liquidity to provide loans
and leases to customers and financing to dealers is addressed
immediately. It is imperative that our affiliated financial companies
receive access to competitive liquidity and financing capacity. They
must in order to provide credit to our customers--average working
Americans--and support wholesale orders from our dealers.
Historically, over 90 percent of all new vehicles were purchased or
leased with financing assistance, and the lack of readily available
financing has simply frozen sales. A perfect example of this consumer
credit crisis is that 20 percent of our revenue disappeared overnight
when our finance company was unable to offer leases. These sales
literally vanished.
At Chrysler, 75 percent of our dealers rely on Chrysler Financial
to finance their business, and 50 percent of all customers finance
their vehicle purchases through the Chrysler Financial. Normally, these
loans and leases are securitized and sold in the secondary market to
generate fresh liquidity and financing capacity.
Today, there is virtually no secondary market, and therefore, no
way to raise capital. Money is not available for dealers to finance
their wholesale orders, invest in their facilities, and hire and train
employees. Competitive loans for the average working American--our
customers--are virtually nonexistent. This has directly and
dramatically depressed vehicle sales, putting at risk not only auto
manufacturers but also the widespread network of suppliers, vendors. In
Chrysler's case, 3,200 entrepreneurs, small businesses owners called
dealers, and the approximately 140,000 people they employ in every
State across the country. The National Automobile Dealers Association
estimates more than 700 of them will go out of business by year end. If
we don't secure a bridge loan, all 13,600 dealers are at risk.
There are 4.5 million people depending on this industry, and
without assistance, nearly three million of them could lose their jobs
in the next 12 months, according to a research memorandum published
November 4, 2008, by the Center for Automotive Research. Failing to act
now will hurt many American families and undermine our country's
economic recovery, far outweighing the costs related to supporting an
industry that touches every district in every state of the Nation.
The crippling of the industry would have severe and debilitating
ramifications for the industrial base of the United States, would
undermine our Nation's ability to respond to military challenges and
would threaten our national security. Chrysler has long contributed to
our national defense. Our Jeep was an indispensable part of our
Nation's efforts in World War II and Korea.
Immediate financial assistance will serve the country and the
economy directly in two key ways. First, the lifeblood of the U.S.
economy will continue to flow. The industry will be able to continue to
pay at its current levels $22 billion in annual wages to our employees,
$13 billion in annual pensions to our retirees and surviving spouses,
and meet our current commitment of $102 billion in healthcare costs to
employees. We will continue to pay $156 billion annually to our
suppliers and work to keep them strong by providing significant
additional financial relief for distressed suppliers fighting to stay
in business.
Second, America's auto companies are investing in innovation.
Capital investment in new technologies, improved operations, and future
product will be able to continue, including a combined $12 billion in
annual spending for research and development. As an industry, we are
moving full speed ahead to make the transition to advanced propulsion
vehicles that will help support national energy security and
environmental sustainability goals.
Chrysler plans to emerge from the current downturn as a lean, agile
company. We are, and will continue to be the quintessential American
car company. Currently, 73 percent of our sales are in the U.S., 61
percent of our vehicles are produced in the United States, 74 percent
of employees work in the U.S., 78 percent of our materials are
purchased in the U.S. and 62 percent of our dealers are based in the
U.S.
Today, Chrysler has a very strong pipeline, with a product
renaissance for 2010. In September we revealed our ENVI electric
vehicle program, and announced that we will begin producing one of
these electric-drive models for North American consumers in 2010. This
underscores our commitment to deliver environmentally friendly, fuel-
efficient vehicles to customers, and to meet this social responsibility
faster and more broadly than any other manufacturer.
Today we are asking you to help us bridge a chasm created by an
unprecedented financial meltdown. We are also asking you to consider
investing in a company that will deliver real results for the American
taxpayer.
I recognize that this is not an insignificant amount of money.
However, we believe this request is the least costly alternative
considering the options we face. with less impact on human capital, and
would provide stimulus, as opposed to further depress the economy.
Thank you very much.
______
PREPARED STATEMENT OF G. RICHARD WAGONER, JR.
Chairman and Chief Executive Officer,
General Motors
November 18, 2008
Good afternoon, Mr. Chairman. I'm Rick Wagoner, Chairman and Chief
Executive Officer of General Motors. Thank you for the opportunity to
speak today about the future of America's domestic auto industry.
I'd like to acknowledge for the Committee the audiences that I
represent: General Motors directly employs approximately 96,000 people
in the United States. We have 6,500 dealers across the country, who
employ another 340,000. Last year, we purchased more than $30 billion
of goods and services from more than 2,000 suppliers in 46 States. Our
pension program covers nearly 475,000 retirees and spouses, and our
health benefits extend to about one million Americans. We have about
one million registered stockholders. And 70 million of our vehicles are
registered to U.S. citizens--22 million of them purchased in the last 5
years.
As recent news coverage has made abundantly clear, many people have
a picture of GM that has not kept pace with our progress. In fact, GM
has made tremendous progress transforming our business in recent years.
Since 2005, we've reduced our annual structural costs in North America
by 23 percent, or $9 billion--and expect to reduce them an additional
$3-4 billion by 2011. We negotiated a landmark labor agreement with the
UAW last year that will enable us to virtually erase our competitive
gap. And we've addressed pension and retiree health care costs in the
U.S., on which we spent $103 billion over the last 15 years. As a
result of these and other actions, we are now matching--or besting--
foreign auto makers in terms of productivity, quality, and fuel
economy. By 2010, we'll match them on labor costs, as well.
On the product side, we're building vehicles that consumers want to
buy--like Cadillac CTS, Motor Trend magazine's 2008 Car of the Year,
and Chevy Malibu, the 2008 North American Car of the Year. We've also
made huge progress developing advanced propulsion technologies. In
2009, GM will offer 20 models in the U.S. that get at least 30 miles
per gallon highway--twice our nearest competitor--and nine hybrids. We
have more than 3 million flex-fuel vehicles on the road in the U.S.
We've established the world's largest hydrogen fuel-cell test fleet
here in the U.S. And we're running all-out to get the Chevy Volt
extended range electric vehicle to market as soon as possible.
In short, we've moved aggressively in recent years to position GM
for long-term success. and we were well on the road to turning our
North American business around. Last October, following the negotiation
of a new labor agreement with the UAW, our stock price climbed to
$42.64 per-share, based on analysts' views that we had finally overcome
the cost-competitiveness gap with foreign auto makers. Since then, our
industry has been hit hard by the global financial markets crisis, and
the recent plunge in vehicle sales threatens not only GM's ongoing
turnaround, but our very survival.
In response, we have moved quickly to keep our company on track.
Since June, we've taken steps to: reduce our North American
manufacturing capacity; further shift production to cars and
crossovers; sell off parts of the company; suspend dividend payments;
reduce headcount; eliminate raises, discretionary bonuses, and 401(k)
matches for salaried employees; and eliminate health-care coverage for
U.S. salaried retirees after age 65.
These and other actions are designed to improve GM's liquidity by
$20 billion by the end of 2009. They affect every employee, retiree,
dealer, supplier, and investor in our company.
Mr. Chairman, I do not agree with those who say we are not doing
enough to position GM for success. What exposes us to failure now is
not our product lineup, or our business plan, or our long-term
strategy. What exposes us to failure now is the global financial
crisis, which has severely restricted credit availability, and reduced
industry sales to the lowest per-capita level since World War II. Our
industry, which represents America's real economy, needs a bridge to
span the financial chasm that has opened before us. We'll use this
bridge to pay for essential operations, new vehicles and powertrains,
parts from our suppliers, wages and benefits for our workers and
retirees, and taxes for State and local governments that help deliver
essential services to million of Americans. In the process, we'll
continue to reinvent the automobile, and improve the Nation's energy
security, through development of advanced technologies like those in
the Chevy Volt.
And what would it mean if the domestic industry were allowed to
fail? The societal costs would be catastrophic: three million jobs lost
within the first year, U.S. personal income reduced by $150 billion,
and a government tax loss of more than $156 billion over 3 years, not
to mention the broader blow to consumer and business confidence. Such a
level of economic devastation would far exceed the government support
that our industry needs to weather the current crisis. That's why this
is about much more than ``just'' Detroit, it's about saving the U.S.
economy from a catastrophic collapse. In short, helping the auto
industry bridge the current financial crisis will not only prevent
massive economic dislocation now, it will also produce enormous
benefits for our country later. We want to continue the vital role
we've played for America for the past 100 years, but we can't do it
alone. You can help us through this crisis. In return, we will repay
the taxpayer's faith and support many times over, for many years to
come.
Thank you, and I look forward to your questions.
PREPARED STATEMENT OF PETER MORICI
Professor, Robert H. Smith School of Business,
University of Maryland
November 18, 2008
My name is Peter Morici, economist and professor at the University
of Maryland School of Business. Thank you for inviting me to provide
testimony today.
The domestic automobile industry has two major components--the
Detroit Three and the Japanese, Asian, and European transplants that
also assemble and source components in the United States and Canada.
Both contribute importantly to the vitality of our national economy.
Ensuring these companies have the means to compete globally is vitally
important.
The gradual erosion of the market shares of the Detroit Three over
the last several decades stems from higher labor costs--having origins
in wages, benefits, and work rules--poor management decisions, and less
than fully supportive government policies. Although the U.S. government
has been sympathetic to the needs of the industry, the industry has
fallen victim to currency manipulation and other forms of protectionism
in Japan, Korea, India, and China.
The Detroit Three are rapidly running out of cash and face filing
for Chapter 11 reorganization. It would be better to let them go
through that process and reemerge with new labor agreements, reduced
debt and strengthened management that would permit these companies to
produce cars at costs comparable to those enjoyed by their Japanese and
other foreign competitors assembling vehicles in the United States.
Circumstances are dramatically different today than in 1979 when
Chrysler received assistance from the Federal Government. In those
days, the challenge at Chrysler was to become competitive with Ford and
GM, and Lee Iacocca had a clear plan to achieve that objective and
succeeded. Today, the Detroit Three, though improved in productivity
and with lower labor costs thanks to concessions from the United Auto
Workers, are still not as competitive as the Japanese transplants.
Margins in automobile manufacturing are thin and there is no such
thing as being competitive enough. Either a company is competitive or
it is not--either it accomplishes the cost structure enjoyed by Toyota
and Honda, operating in the United States, or it will continually cede
market share and run into financial difficulties.
By assisting the Detroit Three, Congress can delay one or all of
them going through Chapter 11 reorganization but sooner or later one or
all will face reorganization. The communities and suppliers dependent
on these companies would be better off going through that process now
than by delaying it with assistance from the Federal Government.
Without a new labor agreement that brings wages, benefits and work
rules in line with those at the most competitive transplant factories,
and without reduced debt and other liabilities, the Detroit Three will
continue to lag in product innovation and field too few attractive new
vehicles, because their higher costs, debt and other liabilities
require them to spend less on new productive development than they
should. Also, they are inclined to field products with less desirable
content to compensate for higher costs. As consumers find vehicles made
by Japanese and other transplants more attractive, like those imported
from Korea and eventually from China, the Detroit Three will cede
market share of one or a few percentage points each year.
If Chapter 11 is put off, the successors to GM, Ford, and Chrysler
that emerge from a bankruptcy reorganization process will be smaller
and support fewer jobs than if these companies endure this difficult
transition in 2009.
More jobs can be saved among GM, Ford, and Chrysler and their
suppliers if bankruptcy reorganization is endured now than in the
future.
When Americans buy automobiles from the Detroit Three, more is
contributed to the vitality of the U.S. economy than when Americans buy
vehicles assembled here by transplants or imports. These vehicles have
more U.S. content in terms of jobs, engineering, and profits than do
foreign nameplate vehicles.
The Congress could take steps to improve the attractiveness of
making cars and parts in the United States by improving the public
policy environment. This would include finally addressing, directly and
forthrightly, undervalued currencies in Asia--currencies kept cheap by
intervention by foreign monetary authorities in China and elsewhere. In
addition, assertive efforts to develop fuel efficient vehicles could
strengthen the industry and create export strength.
For example, Congress could offer an incentive for car buyers to
trade in their gas guzzlers--the newer and the bigger the clunker, the
more the car buyer would receive under the condition the vehicle is
destroyed. This would raise the price car makers receive from selling
smaller vehicles.
Congress could provide substantial product development assistance
to U.S.-based auto makers and suppliers. The latter includes Toyota,
Nissan, and Honda, as well as the Detroit Three, battery makers and
other suppliers to accelerate the production of innovative, high-
mileage cars.
The condition for assistance would be that beneficiaries do their
R&D and first large production runs in the United States, and share
their patents at reasonable costs with other companies manufacturing in
the United States. The huge U.S. market would help attract producers
from around the world and rejuvenate the U.S. auto supply chain.
______
PREPARED STATEMENT OF ROBERT A. FICANO
Wayne County Executive,
Detroit, Michigan
November 18, 2008
My name is Robert Ficano, and I serve as County Executive for the
tenth largest county in the United States, Wayne County, Michigan.
Southeast Michigan is home to the ``Big Three'' domestic automotive
companies. I appreciate the opportunity to submit testimony for the
Committee's consideration. As the Committee begins to examine the state
of the automotive industry, I would like to bring to mind a quote from
automotive pioneer, Henry Ford, to help set the stage for a
Congressional response to the automobile industry's need for increased
financial assistance: ``Coming together is a beginning. Keeping
together is progress. Working together is success.''
Thank you and congratulations to Members of Congress for working
together to pass the most recent economic stimulus package. The
legislation allows the automotive industry to secure low-interest loans
for retooling plants and moving forward with research and development.
This is one step forward in stabilizing the industry. However, more
direct assistance is necessary--the automobile industry remains in a
perilous economic position, which has a significant, negative impact on
the State of Michigan and, in particular, Wayne County. More direct
financial support and intervention are needed as the auto industry
continues to suffer and millions of jobs are in jeopardy.
Congress correctly perceives this as a national problem with severe
consequences. The automotive industry is the largest sector of our
manufacturing industry in the United States. According to the National
Center for Manufacturing Sciences, government assistance to the
automotive industry for research and development will enable innovation
of infrastructure into all sectors of manufacturing. New products and
technology, frequently cultivated in the automotive sector, have spun
off to other industries such as green technology, alternative energy,
medicine, and aerospace, to name just a few. The assistance from the
Federal government should be viewed as an opportunity to infuse new
growth. Building new infrastructure can also lead to better safety and
security of intellectual property.
Wayne County is home to nearly 2 million residents, as well as
Ford, General Motors, and 17 automotive plants. According to the
Southeast Michigan Council of Governments (SEMCOG), Michigan lost more
than 87,000 automotive manufacturing jobs between 2000 and 2008. The
total job loss, including suppliers and spin off businesses, for the
region was 13 percent or 254,000. As widely reported, unemployment
rates in the region are significantly higher than the national average
since 2001, 8.5 percent compared to 6.1 percent nationally. Over the
past 7 years, nearly 160,000 people have moved out of Southeast
Michigan. The loss of automotive jobs triggers tremendous ripple
effects on business, housing market, and Michigan has experienced a
severe decline in its tax base. SEMCOG has forecasted that the loss of
another 50,000 jobs in the automotive manufacturing sector will have an
immediate and severe impact totaling in an additional loss of 7 percent
or 190,000 jobs.
According to the Center for Automotive Research (CAR), immediate
collapse of the industry would result in nearly 3 million lost jobs. An
estimated 239,341 jobs would be lost at the ``Detroit Three'' and
another 973,696 indirect or supplier jobs and 1.7 million related jobs
also would be lost. Federal assistance is much needed and should be
viewed as an opportunity to stabilize the industry and prevent the
economy from faltering further. According to General Motors, the cost
to local, state, and Federal governments could reach $156.4 billion
over three years in lost taxes, unemployment, and health care
assistance.
Some define this Federal assistance as a bail-out, while it is
really a loan to be paid back. I also urge Congress to view this as I
do--and see it as opportunity to re-structure and grow the industry.
The Federal government previously intervened, with great success, on
behalf of Chrysler in 1980 and, more recently, the airline industry.
The government's investment prevented these companies from going
bankrupt, which would have negatively affected employee pensions,
vehicle sales, suppliers, dealerships, and related industries.
On a final note, I want to mention one underlying problem that
perhaps escaped much scrutiny. I urge Congress to commit once again to
tackling the health care cost and access problems facing our Nation.
Our public leaders across the board must commit to making health care
more affordable. Skyrocketing health care costs are affecting business
and government equally. It is time to reevaluate our national health
care policies before all businesses are forced to seek government
assistance.
We in Wayne County strongly advocate bipartisan Congressional
Leadership and intervention to assist the automobile industry. Attached
to this statement is a letter I sent last week to the President and
President-Elect as well as House and Senate Congressional Leadership.
The collapse of one or more of the ``Big Three'' auto makers could put
millions of jobs across our country at stake. As a Nation, we cannot
allow such a vital systemic part of the American economy to collapse
under the current financial crisis. To successfully survive the global
credit crunch, it is imperative that auto makers receive financial
assistance to remain viable and competitive. Henry Ford stated that
``most people spend more time and energy going around problems than in
trying to solve them.'' On behalf of our people, thank you for your
timely consideration on such an important issue for the citizens of our
Nation, Michigan, and Wayne County.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM RON GETTELFINGER
Q.1. Mr. Gettelfinger, the Big 3 auto makers have all posted
sizable losses over the last few years. GM alone has lost more
than $70 billion since 2004. This record of unprofitability
indicates that if the Big 3 do not make significant changes to
their business model, any Federal investments in the auto
makers might not improve their long-term profitability and
could result in substantial losses for U.S. taxpayers.
What new steps is the UAW willing to take to help return
the Big 3 to profitability? Are you willing to support
additional wage and benefit cuts? Are you willing to support
significant job cuts?
A.1. As indicated in the UAW's testimony, workers and retirees
have already stepped forward and made enormous sacrifices. In
2005 the UAW accepted cuts in wages for active workers and
health care benefits for retirees. In the 2007 contract, the
UAW agreed to slash wages for new workers by 50 percent to
about $14 per hour, and to exclude new workers from the
traditional health care and pension plans. The UAW also allowed
the companies to outsource cleaning work at even lower rates.
Furthermore, under the 2007 contract, beginning January 1,
2010, the liabilities for health care for existing retirees
will be transferred from the companies to an independent VEBA
fund. The changes in the 2005 and 2007 contracts reduced the
companies' liabilities for retiree health care benefits by 50
percent. As a result of the 2005 and 2007 contracts, workers
have not received any base wage increase since 2005 at GM and
Ford, and since 2006 at Chrysler. All of these workers will not
receive any increase through the end of the contract in 2011.
Workers have also accepted reductions in cost of living
adjustments. New local operating agreements at many facilities
have provided dramatic flexibilities and reductions in
classifications, saving the companies billions of dollars.
Reforms in the 2007 contract largely eliminated the jobs banks.
And since 2003 downsizing by the companies has reduced their
workforce by 150,000, resulting in enormous savings for GM,
Ford, and Chrysler.
As a result of all of these changes, the labor cost gap
with the foreign transplant operations will be largely or
completely eliminated when the contracts are fully implemented.
Industry observers have applauded the sacrifices made by
workers and retirees, and described the 2007 contract as being
``transformational.''
The UAW is continuing to negotiate with the domestic auto
companies on an ongoing basis over ways to make their
operations more efficient and competitive. We recognize that
the current crisis may require all stakeholders to make further
sacrifices to ensure the future viability of the companies. We
are prepared to do our part.
As a result, the UAW recently announced that we were
willing to immediately suspend the jobs banks programs, and
that we were willing to defer the contributions owed by the
companies to the retiree health care VEBA fund. Furthermore, as
indicated in our testimony, the UAW is fully prepared to
participate in a process that will require all stakeholders to
participate in a restructuring of the companies outside of
bankruptcy. This can ensure that there is fairness in the
sacrifices, and that the companies will be able to continue as
viable business operations.
Q.2. Mr. Gettelfinger, you contend that the UAW contracts are
not to blame for the problems faced by the Detroit Three. Yet
those contracts contain detailed pledges by GM to build
specific products at specific facilities for a specific term.
Have these product commitments impaired the flexibility of
GM to respond to changing market conditions and will they in
the future?
A.2. No. The product commitment provisions in the contracts
contain an express exemption for situations that ``may arise
that are beyond the control of the Corporation (i.e., market
related volume decline, act of God), and could make compliance
with this commitment impossible.'' Thus, the flexibility of the
companies to respond to the recent drop in auto sales has not
been impaired, since this clearly qualifies as a ``market
related volume decline''. Thus, for example, even though GM had
made a product commitment for the Janesville, Wisconsin,
facility, because of the decline in sales volume GM has
announced the closing of that plant.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM ALAN R. MULALLY
Q.1. Mr. Nardelli makes the case that the domestic auto
companies are so interconnected that if one firm fails, the
remaining two firms would be substantially harmed.
Wouldn't any harm be fully offset by the increase in demand
for your cars that would result from the loss of your
competitor?
A.1. No, for several reasons the sudden failure of one of the
companies would have an incredibly disruptive impact on our
supply base. While the supply base can react to gradual and
managed changes, a dramatic failure would have a very negative
effect.
First, the auto sales volume is depressed to levels not
seen in decades. This is true for domestic and foreign
producers--all of which are scaling back production to try and
keep up with rapidly falling demand. As a result, even if one
company's volumes were to be seamlessly redistributed among the
surviving auto makers, this would not return sales to the
levels needed to negate these bridge loans.
Second, a failure by one company will not allow for a
seamless redistribution of the failing company's sales. Before
a vehicle can be sold, it must first be produced. Just-in-time
production means that there is limited inventory and that parts
must be continually received from suppliers. Because of the
shared supply base, one company's failure will dramatically cut
revenue to its suppliers. Suppliers are already financially
stressed, just like auto makers themselves, and a further fall
in revenue will push many into their own bankruptcy. These
supplier bankruptcies will in turn choke off the supply of
needed parts from the other auto makers they supply--domestic
and foreign alike. Further one company's bankruptcy will send
the entire supplier community to their auto maker customers to
demand immediate or greatly accelerated payments--this will
create a ``run'' on the auto makers and quickly burn their
remaining capital. In short, the limited volume of sales means
that the redistribution of one company's sales would not bring
industry volumes up to the levels needed to remove the need for
these loans and such a process would not be seamless in any
case: there would be a widespread chain of bankruptcies
throughout the industry before even a reallocation of greatly
reduced sales would take place.
Q.2. Wouldn't the same interconnectedness facilitate a merger
between two or three of the American firms?
A.2. The issue of interconnectedness and mergers need to be
considered separately. Mergers should be based on a business
case, not simply a shared supplier base. Interconnectedness is
not a reason for not having consolidation, it means that
changes need to be managed giving time for the suppliers to
reach.
Q.3. Please explain in detail how each of your companies will
use any Federal loans provided by Congress and how the loans
will enable your companies to return to sustainable
profitability? Will you use the proceeds to close unprofitable
production lines, terminate unprofitable dealers, or pay down
debt?
A.3. Ford has been clear and consistent: we do not feel that we
need loans at this time. Our plan for restructuring the
company--which is already in progress--is not predicated on
these loans for its success. Because we began taking the hard
steps toward restructuring already, much progress has been made
and we are realizing the effects. For that reason, we have been
seeking potential assistance is a safeguard against a worsening
economy. In short, we have been doing the things necessary to
restructure the company, not waiting on the incentive of
government loans to take these actions. In our case, loans
would not be a means to continue operating as in the past but
as a backstop in the event that the current severe economic
downturn continues longer or deepens further than currently
foreseen.
Q.4. Earlier this month, Mr. Mulally, you stated that Ford has
``sufficient liquidity to make it through this downturn.''
Why does Ford need government money now?
A.4. Ford does not believe that we need money immediately. As
stated in the previous response, we are merely seeking a
safeguard at this time--not a disbursal. We believe that the
near-term loans are important for the industry because of the
supply base that we share with our domestic competitors.
Without near-term loans to our competitors, they may become
insolvent and would not have the ability to restructure. Our
competitors' collapse would pull down many suppliers we share
with them--and suppliers that the foreign auto makers also use,
though their heavy reliance on imported parts makes them less
exposed to this risk. Ford believes the bridge loans are
important to the industry and that an allocation of additional
capital could be an important backstop against a deepening
economic downturn for Ford.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM ROBERT NARDELLI
Q.1. Mr. Nardelli, you make the case that the domestic auto
companies are so interconnected that if one firm fails, the
remaining two firms would be substantially harmed.
Wouldn't any harm be fully offset by the increase in demand
for your cars that would result from the loss of your
competitor?
A.1. The question assumes the survival of the other two firms.
The fragile state of the economy and the historic low demand in
the automotive marketplace has led to record declines in sales
among all auto makers, and Toyota is forecasting its first
annual operating loss in over 70 years. As such, it should not
be assumed that the other firms would survive, and therefore
benefit from the elimination of a competitor. At Chrysler, 96
of our top 100 suppliers are common to Ford and GM--the
bankruptcy of any one domestic auto maker would place enormous
pressure on an already vulnerable supply chain and,
consequently, that company's competitors.
Q.2. Wouldn't the same interconnectedness facilitate a merger
between two or three of the American firms?
A.2. The domestic U.S. auto industry has excess manufacturing
capacity and lacks a method of creating synergy and efficiency
in R&D and new technology investments. These factors, more than
supplier interconnectedness, highlight the need for further
partnership, restructuring and consolidation for the industry
to be viable in the long-run. Chrysler welcomes the opportunity
to have an open discussion with the new Administration and
Congress on a collaborative approach to restructuring that will
ensure any Government resources invested in the industry are
used efficiently and help achieve important national public
policy objectives.
Q.3. Please explain in detail how Federal funds will be used,
and how will loans enable your company to return to sustainable
profitability. Will you use the proceeds to close unprofitable
production lines, terminate unprofitable dealers, or pay down
debt?
A.3. The bridge loan will allow Chrysler to return to
sustainable profitability by continuing the significant the
restructuring it began in 2007, which has included the
elimination of 32,000 workers, capacity reduction of 30
percent, reduction of $2.4 billion in fixed costs, and sale of
non-earning assets. The loan will also allow Chrysler to
continue to invest in its future product plan (24 major
launches from 2009 through 2012) that features high-quality,
fuel efficient cars and trucks that people want to buy.
From January 1, 2009, through March 31, 2009, Chrysler
anticipates making payments to the following parties:
Summary of Quarter 1, 2009
------------------------------------------------------------------------
Major Expenditures ($Billions)
------------------------------------------------------------------------
Parts suppliers............................................ $8.0
Other vendors.............................................. 1.2
Wages...................................................... 0.9
Healthcare/legacy.......................................... 0.5
Capital expenditures....................................... 0.5
Other expenditures......................................... 0.5
------------------------------------------------------------------------
Total expenditures..................................... $11.6
------------------------------------------------------------------------
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM PETER MORICI
Q.1. Dr. Morici, industry analysts have indicated that each
firm has too many brands, car models, dealerships, factories,
and workers for its market share. In other words, as currently
constituted, the firms' size are not aligned with economic
reality.
How much of each of the brands, models, dealerships,
factories, and workforce need to be reduced to align with the
present economic situation?
A.1. For January through November 2008, market shares for the
Big Six were as follows:
GM (excluding Saab)--21.9 percent;
Ford (excluding Volvo)--14.3;
Chrysler--11.0;
Toyota--16.8;
Honda--10.9;
Nissan--7.2
GM (excluding Saab) has six brands and Toyota four. It is
clear that GM has more brands than it needs. Moreover, Toyota
brands have much clear identities. Toyota is the commodity
brand, Lexus the luxury brand and Scion the youth brand. GM
lacks such clarity for cars, other than Cadillac. Regarding
trucks, it is not clear why GM should sell both Chevy and GMAC
trucks. One truck brand should be adequate. GMAC trucks could
be sold by Chevy dealers.
Ford (excluding Volvo) has three brands of cars. I don't
know that it needs more than two. Mercury adds little extra
value. Ford's real problem, though, is that Lincoln is not
differentiated enough from Ford and Mercury offerings.
Chrysler has two brands of cars, sells trucks under its
Dodge brand, and has Jeep. As Jeep has particular value that
brand should stay. The real question is does Chrysler need both
Dodge and Chrysler cars and minivans? Moreover is Chrysler
viable as a stand alone company or should another company
purchase its Jeep and Minivan franchises?
The fate of Chrysler (or even Jeep and Minivan franchises)
is not easy. Ford does not want either Chrysler or Jeep/
Minivan, and GM is already too big.
Once the issue of brands is resolved, all three companies
could be slimmed down-production workers, dealerships, etc.
However, I would not include engineering in that. I don't have
estimates for what their employee, factory and dealership
numbers should be.
Q.2. Dr. Morici, the world looks to the U.S. on how to conduct
economic policy. The actions we take set precedents that other
countries follow to when they are devising their own economic
policies. When the U.S. is unwilling to take the tough steps
necessary to ensure sustainable, long-term economic growth, we
should not be surprised if other countries follow our example
and resist our calls for economic reform.
If other countries follow the U.S. and begin to actively
bail-out their own domestic industries, what impact would it
have on the competitiveness in the global economy and on long-
term global growth?
A.2. We certainly want to make sure our businesses and workers
compete on a level playing field with foreign entities, and
make appropriate trade and industrial polices to that end.
Each industry and bailout is different and should be judged
on its own merits. In the case of automobiles, the industry has
and continues to inflict harm on itself. The government should
make any assistance to the industry contingent on reforms in
management and labor agreements to ensure that taxpayer money
is not wasted.