1 Case 4: Automotive Industry Bail-out Versus Cash for Clunkers (Scrappage Scheme) October 23, 2009 Lara Clark Ann Dienhart Brad Utecht Summary This case study compares two recent government interventions to stabilize the United States automotive industry: the automotive industry bail-out and the cash for clunkers program. The automotive industry in the Unites States has been seeing reduced sales over the last three decades. The influx of foreign competitors and declining economy in the U.S. has brought the Big Three auto companies (Ford, Chrysler and General Motors (GM)) to the brink of bankruptcy and collapse. These companies were unable to adapt to their reduced market share through expensive contract claims and legislative protection against termination of excess dealers. The most prominent reason that the Big Three continued to see reduced sales was due to lack of rejuvenation of their products and not following the trends of consumers’ needs for smaller, more fuel efficient vehicles. In mid-December 2008, the U.S. government continued their bail-out schemes used on the banking industry to save GM, Chrysler and GMAC from collapse as those companies worked towards bankruptcy protection through Chapter 11 proceedings. The bail-out of these three companies resulted in a total of 73.35 billion dollars with the addition of policies forcing the companies to create restructuring plans for their management infrastructure (US Treasury 2009). Cash for clunkers was a $3 billion rebate program sponsored by the federal government which paid car owners money to trade-in in their old, gas-guzzling cars for a rebate check towards a new car. Car owners who traded in their clunkers received a rebate check for $3,500 or $4,500. 700,000 cars were bought as a result of the program in less than 30 days which represented 10.6 percent increase in car sales (USDOT Press Release 2009).2 Requirements for “clunkers”: The vehicle must, • Have been manufactured less than 25 years before the date you trade it in and, in the case of a category 3 vehicle, must also have been manufactured not later than model year 2001, • Have a "new" combined city/highway fuel economy of 18 miles per gallon or less, • Be in drivable condition, • Be continuously insured and registered to the same owner for the full year preceding the trade-in (U.S. Treasury 2009). Annotated List of Actors U.S. Automakers, the Big Three: primarily GM, Chrysler and GMAC Foreign Automakers U.S. Federal Government headed by Presidents Bush and Obama U.S. Economy downturn Automotive industry unions and employees, and employees in related industries (e.g. automotive parts manufacturing employees, car dealership employees) Taxpayers Car-owners eligible for Cash for Clunkers program Timeline September 29, 2008: The House of Representatives rejects the $700 billion TARP rescue bill by a 228-205 vote. September 29, 2008: The Dow falls 777.68 points to mark its largest one-day point loss in history. The decline is spurred by the House of Representative's rejection of the $700 billion rescue plan. October 1, 2008: The Senate passes an amended proposed bailout bill, putting pressure on the House to do the same. October 3, 2008: The House votes in favor of bailout (at this time for the banking industry). President Bush applauds the government for “acting boldly” to prevent a Wall Street crisis from continuing. November 14, 2008: Bush pushes for a speedy release of loans to the automakers in the amount of $25 billion. Some controversy arises with the Democrats saying “$700 billion3 rescue package was never intended to help automakers and shouldn't be now.” –Dana Perino December 19, 2008: $17.4 billion in loans will be distributed to GM and Chrysler in exchange for concessions from carmakers and their workers. January 2009: Cash for Clunkers bill is proposed to stimulate the economy and help the environment through getting gas-guzzling vehicles off the road. February 17, 2009: GM and Chrysler request further funds in the order of $5 billion. March 30, 2009: President Obama insists for true change in the management of GM, and requires CEO, Rick Wagoner to resign. Also Obama reveals he has other plans to save the auto industry. April 30, 2009: Chrysler announces it will file for bankruptcy protection after failed proceedings for hedge funds to write-off debts. June 1, 2009: GM enters bankruptcy protection through Chapter 11 proceedings. The U.S. government agreed to provide the company up to $30.1 billion more in exchange for 60 percent stake in the company when it emerges from bankruptcy. July 1, 2009: Cash for Clunkers (CARS) was formally passed into legislation; the following 24 days were devoted to standardizing the rules of the program by the Department of Transportation. Any trade-ins from this date on would be eligible for the program. July 10, 2009: GM emerges from bankruptcy and has begun operations as a newly structured company. July 24, 2009: The green light was given on the CARS program and dealerships across America immediately started promotions and making deals. After a week the funds were depleted and Congress promptly passed an additional $2 billion dollars towards the program due to its wide-spread success. Total program funding: $3 billion. August 25, 2009: The final deadline for car dealerships to submit the proper CARS paperwork for all eligible sales. CARS Program ends. Part 1: Automotive Industry Bail-outs 1.1. Historic Scene Before the U.S. Auto Industry Bail-outs in 2008 The automotive industry has been experiencing reduced profits for many decades. Chrysler was saved from bankruptcy in the 1980s with a bailout of approximately 1.5 billion dollars. Chrysler was forced to ask Uncle Sam for assistance due to the oil embargos in the late 1970s. Even at this time, all of the Big Three companies were losing sales to foreign companies who were offering cheaper, more fuel efficient vehicles. The bailout of Chrysler did save the company from imminent death, but without any federal guidelines concerning re-structuring of the company, this bailout only gave the company a 9 year band-aid solution (Ritholtz 2008). Without policy change for Chrysler, Ritholtz argues that the company should have been allowed to fail, bringing the opportunity for another company to buy the remaining assets. With a new set of management in charge, a refurbished Chrysler may not have needed a second bailout
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