Auto bailout may still be cheaper than bankruptcy

    FINANCING a bankruptcy by General Motors or Chrysler would cost at least twice as much as the automakers say they need in US government bailout loans, Chrysler and a restructuring expert said. 
    Chrysler, which said yesterday it hired the Jones Day law firm to review bankruptcy as an option it later rejected, would need $20 billion for bankruptcy financing — triple its $7 billion loan request — according to a company report to Congress. 
    A GM bankruptcy would cost $40 billion to $50 billion to finance, Edward Altman, a professor at New York University’s Stern School, told Congress yesterday. GM seeks $18 billion in bailout loans. 
    “Unfortunately, this traditional loan, even for $18 billion, is inadequate and is destined to fail in the current environment and will likely be followed by additional requests for more rescue funds or a bankruptcy petition,” said Altman. 
    He urged the government to push banks that received other bailout aid to provide needed bankruptcy loans for carmakers. 
    GM chief executive officer Rick Wagoner had the opposite view of bankruptcy, telling Congress that his company wasn’t pursuing that option to solve its cash crisis because it would scare away buyers and further siphon off revenue, forcing liquidation. Even a government-backed bankruptcy would be too difficult and risky, GM lead director George Fisher has said. 
    Tony Cervone, a GM spokesman, had no additional comment. GM did hire Weil, Gotshal & Manges, a New York law firm, to advise it on bankruptcy matters, a person familiar with the matter said, asking not to be named. Law firm spokesman Mike Ford didn’t respond to a message seeking comment on the hiring. 
    Chrysler expressed doubts that banks would fund any so-called debtor-in-possession loans for restructuring, arguing such costs would have to be borne by the government. 
    “Given the current adverse credit markets, we would not expect DIP financing of such size would be provided by Chrysler’s existing lenders or by any other private source, accordingly the DIP financing would have to be provided by the US government,” Chrysler said in documentation for its loan request. 
    Without the DIP funding, Chrysler would need to liquidate, closing 29 factories, firing 53,000 workers and cutting off $7 billion in payments to suppliers, the company said this week. 
    Chrysler hired Washington-based Jones Day and other outside advisers after Congress suggested last month that the industry further study if bankruptcy might be a better alternative than out-of-court restructuring, Chrysler said in a statement. 
    “The results of this evaluation determined the impact to the overall domestic automotive industry would be devastating,” the automaker said. 
    Getting $12 billion in government loans and a $6 billion line of credit is part of a GM plan to return to profit by 2011, Fisher said. — Bloomberg

Source: The Economic Times dated 8th Dec 2008

US auto slowdown to hit IT cos here

    THE slowdown in the US automobile industry is likely to impact the growth of select Indian IT companies. Some Indian companies such as Satyam Computer Services, TCS, Wipro and Infosys could be hit by delayed payments and a freeze in contracts as their major customers in the auto sector face threat of bankruptcy, according to analysts. 
    The top three US automakers — General Motors (GM), Ford Motor and Chrysler — are seeking a bailout from the US government. And, even if they succeed in getting the bailout, their IT expenditure could drop more than $1.5 billion a year, said analysts. Future contracts could come with demands for price cuts, which the IT majors will be pressurised to agree to. 
    “To cut costs, auto companies would shrink in size to trim their operations. Some of them will shut down a few plants. This means reduction in operational IT spends,” Gartner VP advisory service manufacturing group Thilo Koslowski told ET. The companies are also likely to axe expenditure on new IT initiatives often referred as discretionary spends. 
    Edelweiss Capital’s IT analyst Viju George said: “In case of a bailout, the US auto companies would cut their discretionary spend to stay afloat. As of now, about a third of their IT spends are of discretionary nature. This portion could get impacted going ahead.” 
    Analysts say the magnitude of the impact would be known in next 2-3 months, once auto players have a relook at their IT budgets. 
    Though the IT budgets of these auto companies are as small as 1-2% of their total revenue, in absolute terms, it is a sizeable amount given their huge toplines. GM ended 2007 with $181 billion in revenue. Ford and Chrysler reported sales of $172 billion and $58.6 billion, respectively. IT spends are likely to fall by at least half a per cent over the next years for each of these companies, said Mr Koslowski. This would mean the overall IT expenditure of the three US auto giants would fall by $1.5 billion. 
    Among the top-five Indian IT exporters, Satyam is likely to take the biggest hit as it provides IT services to GM and Ford. “Satyam is likely to be affected the most as it earns 5-6% of its revenue from the automobile sector,” said Mr George. According to him, impact on Wipro will be muted as its exposure to the auto sector is modest. GM is Wipro’s clients too. 
According to industry observers, exposure of TCS to the US auto sector is limited only to Chrysler and is likely to be less affected. “Infosys would get impacted as a good portion of incremental deals won by Infosys in the past 7-8 quarters are in manufacturing vertical,” said Religare Capital markets IT analyst Anurag Purohit. A senior official of the IT giant said clients had frozen talks on the new contracts that are currently on the anvil. Officials of Infosys, TCS, Wipro and Satyam were not available to respond to ET queries on this. 
    Gartner’s Koslowski said US auto clients, who earlier used to ask for a 3-5% price cut every year, are bound to pressurise their IT vendors for more at lesser costs. “They (IT companies) will have to be more flexible while approaching the auto companies,” he said. 

Source: The Economic Times dated 8th Dec 2008

Nov auto sales in US shrink to worst since ’82

    US AUTO sales plunged 37% in November to their worst level in more than 26 years, dashing expectations that this dismal year for vehicle demand had found a bottom, and adding more ammunition to the Detroit automakers’ case for a congressional lifeline. 
    “Our industry is in a much more severe situation than the rest of the economy,” said Mike DiGiovanni, General Motors Corp.’s executive director of global market and industry analysis. “We cannot continue at these levels or else the entire industry is going to go down.” 
    US auto sales in November fell to 746,789, according to Autodata Corp. On a seasonally adjusted basis, automakers reported an annual sales rate of 10.2 million units, the lowest level since October 1982. 
    Automakers and analysts blamed the crumbling US economy, less access to vehicle financing, and a wait-and-see approach among American consumers more preoccupied with the value of their homes and the fate of their jobs than the lure of a new car. 
    “Consumers (are) not showing up at the dealerships _ regardless of the deals they’re being offered and regardless of how low the gas prices go,” said Jesse Toprak, executive director of industry analysis for the automotive Web site Edmunds.com. 
    Every major automaker reported a year-over-year sales decline of more than 30% when they released their results Tuesday. The Detroit carmakers were among the worst hit, with GM’s US sales falling 41% and Chrysler LLC’s dropping 47%. 
    Their overseas rivals posted abysmal results as well. Toyota’s sales tumbled 34%, while Nissan’s dropped 42% and Honda’s fell 32%. The dreary reports came the same day the Detroit Three sent reports to Congress detailing why they are worthy of billions of dollars in emergency loans. 
    GM said it needs $4 billion this month and a total of $12 billion by late March to keep operating, while Chrysler is asking for $7 billion by year’s end. Ford Motor Co. wants a $9 billion standby line of credit, though it has said it has enough cash to get through 2009 and may not have to touch the government’s money. 
    Few analysts expected November’s sales numbers to be quite so low, predicting lower gas prices and higher incentive spending by automakers eager to make deals put a floor under sales. Incentive spending rose 15.2% from last November, according to Edmunds, while gas prices have plunged by more than half from their hall-time highs this summer.

Source: The Economic Times dted 4th Dec 2008