News: No need for wage cuts, CAW says

J. Sturgeon | Financial Post | 03. 06. 2009

Auditors of General Motors Corp. say North America's largest automaker may be forced to seek bankruptcy protection as it fights for financial survival, raising the odds that workers in Canada will be compelled to accept reduced wages and substantial clawbacks to legacy benefits.

If the Canadian Auto Workers union does not agree to concessions, it could spell the end of GM manufacturing in Canada, experts say.

The auditors' warning, filed in GM's annual report last week but acknowledged by the company yesterday, also raised concern among federal and provincial lawmakers over the "sustainability" of the U. S. automaker -- and the billions in Canadian taxpayer-backed loans being extended to it.

Part of GM's path toward returning to profitability lies in labour-cost reductions both in Canada and the United States. Union officials for the CAW began yesterday the unenviable task of renegotiating a collective bargaining agreement for the roughly 10,000 workers the automaker employs here.

"The auto workers are in a desperate situation going in," said Dennis DesRosiers, a senior Canadian auto analyst and president of DesRosiers Automotive Consultants Inc. in Richmond Hill.

CAW officials said they have reviewed a tentative agreement that union workers in the United States have reached with the company and plan to amend the Canadian union's terms to maintain the same level of investment and production that GM dedicates to Canada now, which is about 20% of North American operations.

GM's mounting losses, a negative net worth and massive cash-burn rate may mean the Canadian union will have to absorb heavy concessions in the coming days just to keep the automaker in Canada, Mr. DesRosiers said.

"[The CAW would] be fortunate to get a term sheet that says, 'Here's what it is going to take for us to stay in Canada, take it or leave it.' "

Ken Lewenza, the CAW president, told reporters in Toronto yesterday the terms reached between GM and the United Auto Workers, the U. S. union, did not cut wages or "core" benefits. There is no reason why the CAW could not draft a similar agreement, he said. "We believe we can maintain our existing wage and benefits package."

New bargaining agreements with workers in Canada and the United States may be for naught, though, if North American lawmakers lose faith in GM's ability to revive its fortunes. Yesterday, the grim auditor assessment created fresh uncertainty among lawmakers whether taxpayer money should go toward a company that may well fail anyway.

Ontario's minister responsible for the auto sector acknowledged there is the possibility that money from the province may not be forthcoming.

"If it is not a viable company, we will not make a deal," said Michael Bryant, Ontario's Economic Development Minister, which is partnering with Ottawa in providing potential financial aid to the Detroit automakers. "If it is a company that doesn't have a profitable future, haven't addressed their legacy costs, don't have a business plan that makes sense to us, we will not make that investment -- because it would be a bad investment."

Speaking from Washington where he is consulting with U. S. officials, Jim Flaherty, the federal Minister of Finance, reiterated in a television interview that "viable" plans must be demonstrated by GM and Chrysler if loan support is to remain in place. That includes potential wage concessions and benefit clawbacks, the Minister said.

"There are the costs of labour, the overall costs of benefit packages -- are they competitive between the Detroit Three and the other automobile companies in Canada?" Mr. Flaherty said. "Those are some of the variables that need to be looked at in order to come to some sensible determination on the sustain-ability of these enterprises."

GM reported a US$30.9-billion loss in its 2008 annual report, which also contained an auditor assessment that stated "substantial doubt" existed that the automaker could make good on certain looming debt payments, forcing it into bankruptcy protection.

GM said yesterday it has received waivers from its lenders to have loan recalls deferred.

A spokesperson for GM told The Wall Street Journal GM's main concern at present was attaining the lender waivers, which will buy more time for the company to restructure.

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GM loosening consumer credit as bailout funds flow

By Jamie Sturgeon | Financial Post | Dec. 30, 2008

General Motors Corp.'s lending arm, GMAC Financial Services LLC, said Tuesday it has immediately loosened consumer access to credit in the U.S. after Washington bought US$5-billion worth of preferred equity in the company.

The U.S. Treasury waded further into the waters in which the American automotive industry is treading late Monday, using cash originally set aside to aid failing banks to buy the 8%-dividend paying stake in GMAC "as part of a broader program to assist the domestic automotive industry in becoming financially viable."

"The actions of the federal government to support GMAC are having an immediate and meaningful effect on our ability to provide credit to automotive customers," said Bill Muir, president of GMAC, in a statement. "We will continue to employ responsible credit standards, but will be able to relax constraints we put in place a few months ago due to the credit crisis."

General Motors Crop. said in a conference call it would begin offering 0% financing up to 60 months on certain 2008 and 2009 models in an attempt to turn plummeting U.S. sales around. The company also signalled it could resume leasing.

"It is something we are looking at," said Mark LaNeve, chief executive of North American sales.

The implications for Canada, where governments have already extended $4-billion in taxpayer-backed loans to GM and Chrysler, are uncertain.

"This is a positive situation, but I don't know how positive it is," said Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. in Richmond Hill, Ont. "U.S. consumers aren't buying, fixing GMAC should help them come back to the marketplace."

It is another sign though that Washington is unwilling to let GM, Chrysler LLC or Ford Motor Co. fail.

Treasury officials said money for the equity purchase in GMAC has come from a new, separate fund within its Troubled Asset Relief Program dedicated wholly to the auto industry.

More than US$17-billion has already been made available to the Detroit Three from TARP funds as they restructure, a move that received proportionate backing for their Canadian operations from Ottawa and the province of Ontario on Dec. 20.

Most analysts say it likely isn't enough to see the companies through their restructuring as market conditions continue to slump, meaning more capital will be needed from Washington, and in turn, Ottawa.

Still, Himanshu Patel, auto analyst at J.P. Morgan said the GMAC bailout reduces the chances of a bankruptcy filing at GM.

"While an eventual GM Chapter 11 cannot be entirely dismissed if various stakeholders fail to meet required concessions, federal aid to GMAC suggests the government is probably now so entangled ... a Chapter 7 liquidation seems highly unlikely," he wrote in a note to clients.

Financial difficulties at GMAC as well as Chrysler Financial have directly hit GM and Chrysler sales, Michael J. Jackson, chief executive of AutoNation Inc., told the Wall Street Journal.

GMAC, which engaged in pushing riskier adjustable-rate mortgages that fueled the U.S. subprime housing boom, has restricted credit and raised lending standards in recent months as its own finances have deteriorated.

The lender, which was approved by the U.S. Federal Reserve last week to become a bank-holding company therefore qualifying for TARP, is the traditional source for many GM buyers.

GM of Canada sales were down 23% in November. Sales were off more than 40% year-over-year in the U.S.

"Consumer credit is the jet fuel of the auto business," Mr. Jackson said in a recent interview. "The majority of consumers can't buy a car without getting a loan."

The U.S. Treasury said it would also give an additional US$1-billion to GM to allowing it to participate in an equity offering by GMAC as it tries to raise more capital. The loan adds to the US$9.4-billion the U.S. Treasury is lending GM, the largest automaker in North America.

Feature: No jolly season for Ontario manufacturing workers

By Jamie Sturgeon | Financial Post | 11. 28. 08

Scores of manufacturing workers in Ontario won't be pried from family gatherings because of work this holiday season but not for a reason they're likely happy about.

In what may well be remembered as the Christmas Ontario's factories went silent, manufacturers from cars to steel are shutting down operations to clear bulging inventories and save cash, forcing an unpaid vacation upon thousands of their employees.

Thursday, Hamilton's rusting steelworks were caught in a mounting economic downdraft that has already resulted in a series of unusually prolonged production freezes at auto-manufacturing plants in the province.

ArcelorMittel, the biggest steel producer in the world, said it will be shuttering its Dofasco plant for a two-week period beginning Dec. 21 in an effort to slash $1-billion in company-wide spending.

Some 5,000 workers will go without pay during that time.

The stoppage is also designed to alleviate rising inventory levels, said company spokesman Larry Meyer.

Steadily falling demand across the economy has hit virtually every manufacturer regardless of industry. Steel, a building block in countless products, is no exception.

"It's not a surprise," said Wayne Fraser, president of the United Steelworkers Canada. Production has be slowing for months at Canadian smelters, he said, adding that member workers are braced for similar announcements from others.

"Companies are preparing for the worst. We have to be patient and hope this thing turns around."

Limited Christmas shutdowns are normal for Ontario's auto assembly factories, but this year is different.

U.S. auto sales have plunged 12 straight months through October to lows not seen since 1991 as consumers defer spending. And Canadian plants, which ship almost every vehicle they produce to the United States, are cranking down output far more than in previous years.

General Motors Corp., the largest vehicle producer in Canada and the U.S., is extending the typical Christmas shutdown of its Oshawa, Ont. car plant and the CAMI Automotive Inc. plant it shares with Suzuki Motor well into January.

The automaker is also idling its Oshawa pickup plant, which makes the Chevrolet Silverado and GMC Sierra trucks, for four weeks starting Dec.15, said company spokesperson Patty Faith.

"We don't typically take [inventory adjustments] in December," Ms. Faith said. "Of course, nothing about this year is typical."

GM's U.S. sales last month plunged 45% while Chrysler LLC's dropped 35% and Ford's fell 30%. All three automakers are readying "viability" plans due to Congress by Dec. 2 as part of their bid to win US$25-billion in emergency aid.

The companies are also asking the Canadian and Ontario governments for financial help.

Ford's assembly plant in Oakville, Ont. will be idled four weeks starting Dec.15 to adjust inventory, said company official Lauren More. Ford's St. Thomas, Ont. factory will suspend production for four weeks starting Dec. 8, she said.

Privately-held Chrysler confirmed only that its Brampton, Ont. factory would be shut down next week.

Tighter credit markets are serving to exacerbate the downturn, as companies are forced to stockpile cash for common functions they would normally be able to borrow for, like payroll, said Michael Gregory, a senior economist at BMO Capital Markets.

As a result, temporary production halts in industries traditionally unaccustomed to using the tactic are beginning to look long and hard at the option.

"Manufacturers across the board are looking at ways to pare back," he said.

"Will this become more of a norm going forward? Well, that will depend on what happens in the U.S. economy."

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News: Auto bailout tip of iceberg: JP Morgan

By Jamie Sturgeon Financial Post 11.25.08

The tens of billions of U.S. taxpayer dollars being asked for by Detroit could be the tip of the iceberg, analysts at JP Morgan said Tuesday.

With Congress preparing to hand struggling automakers General Motors Corp., Ford Motor Co. and Chrysler LLC US$25-billion in loans, JP Morgan analysts said any emergency cash would just be a lifeline until Barack Obama's administration takes over in January.

Mr. Obama's economic team would be put to work quickly, tasked with crafting a second, more comprehensive bailout package involving concessions from creditors and labour in what would amount to a sweeping restructuring of the Big Three.

Structural costs would be a primary target under any Washington-brokered overhaul, JP Morgan said, with concession from creditors and the United Auto Workers "inevitable."

The so-called "shared sacrifice scenario" would take months to negotiate, analysts said, likely equating to further injections of operating capital for Detroit.

What all of this means for Canada, which has already shed more than 10,700 auto-manufacturing jobs this year, is uncertain.

Ottawa, too, is mulling a co-ordinated effort to prop up the North American industry, as GM, Ford and Chrysler's Canadian operations pine for up to $6.5-billion in loan guarantees here.

What is certain is that a significant turnaround is of paramount importance. Reeling from a maelstrom of economic headwinds, Canadian auto manufacturers are expected to collectively lose $1.7-billion this year, according to a report by the Conference Board of Canada, also published Tuesday. The loss will be the third in as many years.

Moreover, as demand crashes in the United States, where 90% of Canadian automotive production heads to, 2009 is shaping up to be equally as bleak. New vehicle sales are expected to fall to their lowest point since 1992, leading to another loss of more than $1-billion.

The decline in the Canadian dollar will provide little support, the Ottawa-based independent research association said, adding it expects the loonie to recover to US85¢.

"At this level, the dollar dampens prospects for vehicle exporters, who are being forced to contend with competitive headwinds from low-cost foreign suppliers and more competitive U.S. labour settlements."

Another certainty is that the lines of communication between the federal Conservatives and the Canadian Auto Workers union are quiet for the time being.

Industry Minister Tony Clement said on Monday any restructuring effort would require concessions from the union, but has yet to begin in earnest any dialog with CAW officials.

"He's not talked to me. I've sent him a letter asking for a meeting," said Ken Lewenza, CAW president. "He has not followed up in terms of talking to us about what role the labour movement can play. And until I hear from [the Minister], I prefer to continue to do what we've been doing, and that's building cars."

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Blog bite: U.S. fund boss offers to value toxic assets — for free

A news bite from the FP Posted, the running blog on the Financial Post Web site. I found the item particularly interesting because up until then, no one had really address how all those bad assets would be valued (Left, Bill Gross, fund manager of massive Calif.-based Pimco):

By J. Sturgeon, FP, 09.25.2008

One of the more contentious issues delaying the passage of the U.S. Treasury Department's colossal US$700-billion bailout package is that no one in Washington is quite sure how much a distressed asset is worth, nor how to go about ascribing a value either.

Given the 'depths of the crisis,' stamping a value on the sour debt-backed securities and other distressed investments held by financial institutions across the United States is paramount in moving the assets onto the government's balance sheet.

But at what cost, and to whom? Paying the same firms that helped create the crisis to now measure their own carnage is not an option.

Enter William Gross, the manager of the largest bond mutual fund in the U.S., who has offered to sort through the toxic assets — for free.

“We have a large and brilliant staff that can analyze and has analyzed subprime mortgages that can help the Treasury out,” Mr. Gross, the co-chief investment officer for the Pacific Investment Management Company, said in an interview with the New York Times on Wednesday.

He added: “And I’d even be willing to say that if the Treasury wanted to use our help, it would come, you know, free and clear.”

There is a sense that a private-sector appointment for the job will create an inescapable conflict of interest, particularly in the case of Mr. Gross, who has considerable influence in the bond market.

Yet with the current liquidity crisis touching virtually every sector, any firm in a position to advise the Treasury on its rescue plan would have potential conflicts of interest, Mr. Gross, who's funds began moving heavily into government bonds at the onset of the crisis last summer, told the Times.

“There’s fewer of them here than anywhere else,” he said. “Simply because we saw the crisis coming and we don’t have much of this paper.”

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