Members of Michigan’s congressional delegation and those of other nearby states are marshaling bipartisan support for federal incentives to bolster the auto industry following the COVID-19 production shutdown.
Restarting assembly lines with proper safety protocols in place remains the top priority for the automakers. But once the industry restarts, recovery may require additional support to ensure a strong supply base and demand, according to a letter by Michigan Reps. Debbie Dingell, Fred Upton and seven other legislators that was addressed to House leaders Tuesday. They are asking other members of Congress to sign on.
“The projected economic fallout for the industry is grave,” reads the letter that was first reported by the Washington Post. “Many businesses in the industry face a cash crunch even as they prepare to ramp back up. Liquidity is challenging, particularly for suppliers, and it will be necessary to support demand for some time to ensure a meaningful recovery. In some regards, challenges the industry face exceed those of the 2008 financial meltdown.”
While “mismanagement” led to the billion-dollar bankruptcy bailouts in 2008 at General Motors and Chrysler, Dingell said, COVID-19 is an external force wreaking havoc on the entire auto ecosystem.
“Some of those in the ecosystem are in more dire consequences at the moment than the OEMs [original equipment manufacturers] are,” the Dearborn Democrat told The Detroit News. “It’s not every man for himself. The ecosystem is trying to work together and protect each other. The OEMs are facing significant financial challenges. Suppliers are looking at bankruptcy. Some workers are desperate to go back to work, and others are scared to death to get back to work.”
Ford Motor Co. recorded a $2 billion net loss in the first three months of the year. Likewise, Fiat Chrysler Automobiles NV had a net loss of $1.84 billion. And while General Motors Co. eked out a $294 million net profit, its operating profit saw a $1.4 billion impact from the pandemic.
Those results came after less than two weeks of suspended production. Assembly lines will remain at a standstill for at least six-and-a-half weeks in the second quarter as GM and Fiat Chrysler eye May 18 to begin resuming production. Ford projects it will record a net loss of $5 billion in the second quarter.
The companies have cut costs, including deferring 20% of salaried workers’ pay at GM and Fiat Chrysler, and taken out billions in private loans. Collectively, they have added $45 billion to their balance sheets. Fiat Chrysler cut more than $1 billion in planned capital expenditures this year, but it burned $5 billion in cash during the first quarter. Ford is decreasing its capital spending in 2020 by nearly 10%, though it is spending more than $2 billion a week in cash after closing its plants.
Opening those factories is the priority, but companies also are signaling that customers need a push, said Jessica Caldwell, executive director of insights at Edmunds.com Inc. GM increased its incentive spending by 10% year-over-year during the first quarter and Fiat Chrysler by 12%, according to Cox Automotive Inc. Ford’s incentive spending, which is the lowest of the three, actually declined by 1%, though its sales fell more than its crosstown rivals.
“Even luxury automakers are offering incentives,” Caldwell said. “It speaks to this pandemic. It’s so far-reaching, affecting every region of the globe. Every person has been affected. There’s a lot of wary, weary people in the market.”
Auto-specific carve-outs failed to appear in the previous three COVID-19 federal relief packages. Lawmakers, however, have said the automakers could apply for relief via a $500 billion fund for loans to distressed companies. GM and Ford did not apply. Fiat Chrysler declined to comment on the matter.
The Motor & Equipment Manufacturing Association is working to ease suppliers’ abilities to take out short-term loans through the Main Street Lending Program offered through the Federal Reserve and U.S. Treasury Department. The program offers $600 billion in financing to companies with up to 10,000 employees and $2.5 billion in annual revenue. Many suppliers need the money to purchase raw materials, said Ann Wilson, the association’s senior vice president of government affairs.
“The supplier industry is close to running into a crisis,” she said. “Automakers have not produced a vehicle in this country for over a month. No money is coming into the supply base because they’re not selling parts to the vehicles.”
And when cash will start flowing again depends on how quickly the companies ramp up production, Wilson said. Demand is a big influence on that, the automakers said as they reported earnings.
Discussions on how to aid the industry are in the early stages, said Josh Paciorek, spokesman for Rep. Upton, R-St. Joseph.
“Right now the lawmakers are looking for assurances that an appropriate response will be included in future relief packages so that American workers in the automotive industry can help drive a robust recovery,” Paciorek said in an email.
As a result, federal assistance to support the industry that represents more than 3% of the national economic activity and employs roughly 10 million people still could be weeks away. But dealerships say the need is now.
“If you’re not able to get an SBA loan, you’re up the creek,” Brian Tellier, general manager of the Jefferson Chevrolet dealership in Detroit, said of the federal Small Business Association loan on which he still is waiting. Sales at the dealership are down about 85%, despite offering online sales.
“If the auto companies lobby for monies for another bailout, I hope they include subsidies for the dealerships, as well. One of the basic expenses is floorplans, right? They’re cars on the lot that you can’t sell or at least sell but not at a rate that is very feasible. If the dealer can’t get access to SBA, it’s a pretty dire scenario.”
Suppliers and automakers aren’t looking for handouts, Dingell said, though they appear to have different priorities when it comes to relief.
Ford Executive Chairman Bill Ford Jr. has said he does not think the Blue Oval will need a loan from the government. When asked about government support, Fiat Chrysler CEO Mike Manley on Tuesday during an earnings call emphasized the need for leniency in implementing carbon-emission regulations, particularly in Europe. GM CEO Mary Barra on Wednesday advocated for incentives for car buyers.
“I think anything that stimulates demand in these early days that’s simple and goes directly to the customer that was purchasing the vehicles, I think that’s going to be helpful to get people back into the market because we look a little more broadly, and this is something we’ve said all along,” Barra said during an earnings call. “Programs kind of like a cash for clunkers, but for older vehicles — we know that every new model year, there’s improvements made from a fuel economy and emissions perspective.”
But something similar to the $3 billion program created in 2009 during the financial crisis that gave money to car owners to encourage them to trade in old, less fuel-efficient vehicles may not be an option.
“The words ‘cash for clunkers’ need to disappear from our purview, because we’re not going to be trading in clunkers to create demand,” Dingell said. “We want to have a strong used car market in this country. First-time buyers often rely on that transportation … to get to work.”
The industry will examine demand and the needs for stimulus, said John Bozella, CEO of the Alliance for Automotive Innovation, which lobbies for carmakers in Washington, D.C. The alliance also is evaluating proposals looking at alleviating liability associated with companies recalling their employees to work.
“There has to be an appropriate balance for worker health and safety and liability in a situation such as this,” Bozella said. “What we are looking to do is to ensure we have the proper balance.”
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