By David Bailey - Analysis
DETROIT (Reuters) - The U.S. auto industry has a dire need for taxpayer-backed loans because the deepening credit crisis has shut the cash-starved industry out of the capital markets.
The $25 billion loan package, a little-noticed provision in last year’s energy bill, is targeted at helping pay the estimated $100 billion cost of meeting stepped up fuel economy standards over the next 12 years.
But with the deepening financial crisis, and the risk of an even steeper decline in U.S. auto sales, the proposed funding package now before Congress could hold the key.
While the loan program has not been sold as a must-have to prevent a failure by U.S. automakers, the situation is dire, said Tim Leuliette, chief executive of Dura Automotive Systems Inc, which exited bankruptcy earlier this year.
“I don’t think these have been postured as either give it or else, but let’s not get to the point where we are in that box,” he told Reuters Autos Summit. “Let’s do this before we are at the edge of the door and provide some stability here.”
Buzz Hargrove, the former president of the Canadian Auto Workers union, said bluntly that the U.S.-based automakers cannot survive in their current state.
Ford Motor Co (F.N) CEO Alan Mulally and General Motors Corp(GM.N) President and Chief Operating Officer Fritz Henderson said both automakers would roll on with extensive restructurings with or without the loan program.
Most auto executives at Reuters Autos Summit here this week expected U.S. auto sales to come in at around 14 million vehicles in 2008, with little expectation for a recovery next year and the risk for a continued downturn.
Hyundai Motor Co (005380.KS) North American sales chief Dave Zuchowski told Reuters the first one-third of September had sales tracking below a 10 million annualized rate, the worst he’d seen for quite a while.
Most executives expect Congress to approve the funding mechanism for the loan program before members recess within weeks to return to their home districts to run in the November election. If Congress doesn‘t, a loan program is uncertain.
The tab for taxpayers could be up to $7.5 billion to support the loan program.
On Wednesday, U.S. Senate leader Harry Reid, a Democrat, threw his support behind funding the program and the Ford and Chrysler chief executives told reporters they were “encouraged” by a meeting with House Speaker Nancy Pelosi.
The 2007 U.S. energy law that mandated a 40 percent improvement in vehicle fuel economy by 2020 included the low-interest loans to subsidize part of the massive cost of retooling auto plants and adopting new technologies.
The window is tight for completing a funding plan before Congress adjourns, and it is unclear how motivated Congress will be once the election is decided, auto executives say.
Both presidential candidates have been supportive of the loan program. Michigan and Ohio are key auto industry states and potential swing votes that could decide the election.
“There is not a candidate running for dog catcher or president who is not going to walk through Michigan and Ohio and say ‘This has to happen’,” Leuliette said. “Once the election is over, that could turn into ‘It could happen.'”
Automakers backed off a push in recent weeks to see the loan program doubled to $50 billion, with the broad expectation that more low-interest loans could be prepared next year.
The fallout from the bankruptcy of Lehman Brothers Holdings Inc LEH.N, the rescue of American International Group (AIG.N) by the Federal Reserve and the potential for a deeper finance sector crisis also might make finding more money difficult.
“This might be their last best shot and, if I were them I would be concerned this is their last trip to the well,” said John Mendel, executive vice president of Honda Motor Co’s (7267.T) U.S. sales operations.
The United Auto Workers union also has been lobbying heavily for the loan funding, UAW President Ron Gettelfinger said, describing it as “a win-win for everybody.”
Gettelfinger also said the loan program should apply to nonunion transplant automakers as well and said a $50 billion package was still in reach for the battered industry.
“I think if somebody is going to manufacture here and they are going to invest here and it’s along the lines that would be established in the regulations, yes, I think it should apply to any manufacturer,” he said.
Honda and Toyota said they would not oppose the loans, but had no need for the low-rate funding.
“You’re not going to get in a bread line if you don’t need it,” Mendel said.
For summit blog: summitnotebook.reuters.com/