If credit remains locked up and auto sales continue to slump, the federal government's $25 billion loan package for the auto industry could...
DETROIT — If credit remains locked up and auto sales continue to slump, the federal government’s $25 billion loan package for the auto industry could be a huge help in keeping Detroit’s downtrodden automakers afloat, according to lawmakers and industry analysts.
Chrysler, Ford and General Motors, which are expected to report their 11th straight month of sales declines today, are losing billions and facing huge debts already as they try to remake their lineups from predominantly trucks and sport-utility vehicles to smaller, more fuel-efficient vehicles.
The loan legislation, approved by Congress on Saturday, was passed to help the battered industry retool factories and develop technology to meet new government fuel-efficiency standards of at least 35 miles per gallon by 2020, a 40 percent increase.
With the bulk of the money apparently going to the Detroit Three, it could come in the nick of time for cash-strapped automakers who might otherwise have trouble borrowing more to cover their bills.
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Government red tape, namely regulations written by the Energy Department, could delay the loans by up to 18 months. Congress specified that the agency produce preliminary rules within 60 days, and lawmakers who support the industry hope the funding arrives by spring.
“The longer it takes, the less valuable and useful it is,” said Sen. Carl Levin, D-Mich. “It may vary from company to company depending on their individual circumstances.”
Levin says it’s important to get the money to automakers within six months, because that’s the time they’re retooling factories for a big rollout of fuel-efficient 2010 models. General Motors and Ford each have announced new small cars for 2010, and GM and Chrysler have committed to rechargeable electric cars in the same year.
No one knows for sure how long it will take to get the money, but analysts and politicians are figuring on mid- to late 2009. That might be just in time for the Detroit Three if sales continue to drop, credit remains too tight for them to further tap conventional markets and they start to run low on cash.
“I think the timing is fortuitous,” said David Healy, an analyst with Burnham Securities who says Ford, and particularly GM, might have trouble paying bills late next year without the loans, if conditions don’t improve.
Auto executives have said the government loans will speed up bringing new technology to market, but they have pledged to make more fuel-efficient models regardless of whether the loans arrive. The loans, however, could help them avoid making the choice between pursuing multiple fuel-efficiency technologies or further cuts, including more job losses, Chrysler CEO Bob Nardelli said last week.
Money is supposed to be available to the entire industry, but a clause in the legislation gives priority to “those facilities that are oldest or have been in existence for at least 20 years.”
Chrysler, Ford and GM, all of which have factories far older than that, look like they have the inside track to get the bulk of the loans.
Rep. Joe Knollenberg, R-Mich., said he expected the Detroit automakers will “get a large share” of the funding, but it was not clear how the money will be divided among car companies and parts suppliers.
It’s unlikely that Japanese automakers, the Detroit Three’s main competitors, will seek any money, said David Cole, chairman of the Center for Automotive Research in Ann Arbor.
Toyota, Honda, Nissan and other foreign-based automakers did not lobby for the loans.
The Detroit automakers, however, are in dire need.
Ford already has $25 billion in long-term debt, while GM has about $32 billion. Both are losing billions. Chrysler, now a private company that does not have to report its debts, has seen the steepest U.S. sales drop of any automaker, down 24 percent through August.
In addition to covering losses and paying restructuring costs, all three are burning cash to retool plants, develop new gas engines and engineer new electric cars.
“You’re swimming a river that’s getting deeper and faster and wider,” said Cole, who believes the market will eventually recover and automakers will again make money. “The pot of gold on the other side is getting bigger.”
Automakers hope to receive the loans at government interest rates of about 5 percent, which would save them about $100 million a year for every $1 billion they receive. The auto manufacturers have poor bond ratings and would otherwise qualify only for double-digit interest rates.
The loans were authorized in last year’s energy bill but not funded then.
Companies would need to build vehicles that are at least 25 percent more efficient than “vehicles with similar attributes” to qualify for the funding. Automakers have not said which projects they would seek funding for because the regulations have not yet been written.