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U.S. Senate committee testimony by Bob Nardelli

Tuesday, Nov 18, 2008 at 3:01 pm in Company News, Messages From Our Leaders

United States Senate Committee on Banking, Housing and Urban Affairs Committee Hearing

Examining the State of the Domestic Automobile Industry

November 18, 2008

Robert Nardelli

Chairman & CEO

Chrysler LLC

(Written Submission)

Mr. Chairman, members of the Committee, I appreciate this opportunity to address the current economic and financial crisis, the impact it is having on the automotive industry, and the need for immediate action.

During the 15 months I’ve been part of Chrysler, and since we’ve emerged as the first privately held American auto company in 50 years, I’ve been proud to work with a team of dedicated men and women determined to restore this 83-year old, iconic American brand to its rightful place in the automotive industry.

We are asking for assistance for one reason: to address the devastating automotive industry recession caused by our nation’s financial meltdown, and the current lack of consumer credit, which has resulted in the critical lack of liquidity within our industry.

With credit markets frozen, our customers – average working Americans – do not have access to competitive financing to purchase or lease vehicles…our dealers do not have access to market competitive funding to place wholesale orders for new vehicles…resulting in the constriction of cash inflows to auto manufacturers. At the same time, Chrysler has billions of dollars in cash payment obligations every month to pay wages, to pay suppliers, to fund health care and pensions, all in the range of $4 to $5 billion per month.

This crisis has already driven U.S. sales to a 25-year low. In 2008 alone, our volume domestically has dropped from 17 million units to 11 million – a 38 percent decline. That volume drop is more than the total U.S. sales of Ford and Chrysler combined.

Therefore without immediate bridge financing support, Chrysler’s liquidity could fall below the level necessary to sustain operations in the ordinary course. This would put at risk health care coverage for retirees, which is part of Chrysler’s nearly $20 billion total health care obligation, $2 billion in annual pension payments to our retirees and surviving spouses, approximately $7 billion in current payables, $35 billion in future annual supplier business, and 56,600 direct Chrysler employees earning $6 billion in wages.

Independent research firms have quantified the fallout of a domestic auto maker bankruptcy to the overall economy, and the impact is devastating: 2.3 – 3 million in lost jobs, $275-$400 billion in lost wages, and $100-$150 billion in lost government revenue.

But this is not a good option for Chrysler, and more importantly, for the auto industry or the broader economy – for the following reasons:

1. We believe that retail sales would be impacted materially as a result of declining consumer confidence, and we will be forced to heavily discount existing inventory to move our product.

2. Given our common supplier base - at Chrysler, 96 of our top 100 suppliers are common to Ford and GM - the bankruptcy of any one domestic automaker would place enormous pressure on the supply chain and, consequently, that company’s competitors.

3. Our factories would likely be idled for a significant period of time while we renegotiate contracts with each of our thousands of individual suppliers.

4. Restructuring and reorganization costs and expenses will be materially higher in connection with a Chapter 11 process: supplier and dealer support and marketing costs will increase, general economic dislocation will follow and significant fees and expenses will be paid to an army of bankruptcy professionals.

5. The overall amount and cost of financing the restructuring will be significantly higher in a Chapter 11 process than the working capital bridge we are requesting here today.

6. And finally, we cannot be confident that we will able to successfully emerge from bankruptcy.

That’s why as an industry we are requesting a $25 billion working capital bridge to survive this liquidity crisis. However, both our private equity owner and I believe that while the immediate bridge financing is critical, the long-term solution to the industry’s problems and challenges requires industry consolidation and cost rationalization to eliminate excess industry capacity and redundant costs.

I would expect Congress to insist that the American taxpayer be protected. We are willing to provide full financial transparency, and welcome the government as a stakeholder – including as an equity holder. We are fully prepared to comply with the current conditions and policies already put in place as mandated by the government, under the recently enacted Emergency Economic Stabilization Act.

Our private equity owner, Cerberus Capital Management, L.P., has made it clear that it will forgo any benefit from the upside that would, in part, be created from any government assistance that Chrysler LLC may obtain. The principal of Cerberus Capital has stated that he will enter into legally binding agreements requiring the contribution to the government of the General Partner’s future profits interest related to Chrysler LLC which he might receive if any are ever earned.

Immediately on the separating from Daimler in August 2007, and being new to the automotive industry, I recognized the need to question and sometimes challenge the status quo, and seek significant opportunities to improve performance throughout the business. We began an aggressive restructuring and transformation of our business as an independent American auto company.

During the first 60 days, we approved more than 400 line item design changes, representing an investment of half a billion dollars in improvements to our products’ reliability, durability, fit and finish, and consumer appeal. We offered our customers a lifetime powertrain warranty to build their confidence. Due to a focused product quality improvement effort during the past year, we’ve seen our warranty claim rates drop by 29 percent and the improvement trend continues.

We made tough decisions to reduce operating costs and adjusted production schedules immediately. We prioritized every product investment with a strong emphasis on improving energy security and environmental sustainability by introducing advanced powertrain technologies, while at the same time we discontinued four vehicle models. We also identified over $1 billion in non-earning assets to sell and we’re more than 75 percent toward achieving that goal.

Since 2007, Chrysler has reduced 1.2 million units of capacity, which represents over 30 percent of our previous installed capacity, and which resulted in the elimination 12 production shifts. Over the past 10 months alone, we’ve reduced our fixed costs by $2.2 billion, and unfortunately, by the end of the year, we will have furloughed over 32,000 employees. That is the most gut-wrenching part of this job, to see the effect on the lives of good men and women who lose their jobs through no fault of their own, but because of the actions the Company is forced to take in these difficult times.

We have increased our manufacturing productivity to equal Toyota as America’s most productive automaker in terms of hours of assembly per vehicle, and our recently negotiated labor agreement was an important step in making our cost structure more competitive with transplants by 2010.

To further enhance our product portfolio, support growth and improve our cost structure, we continue to aggressively pursue strategic alliances and partnerships with other companies. I believe more restructuring and consolidation is required for the industry to be viable in the long-run. We would welcome the opportunity to have an open discussion with the new Administration and Congress on a collaborative approach to restructuring that would ensure any Government resources invested in the industry are used efficiently and help achieve important national public policy objectives.

It is equally important that the lack of liquidity to provide loans and leases to customers and financing to dealers is addressed immediately. It is imperative that our affiliated financial companies receive access to competitive liquidity and financing capacity. They must in order to provide credit to our customers - average working Americans - and support wholesale orders from our dealers.

Historically, over 90 percent of all new vehicles were purchased or leased with financing assistance, and the lack of readily available financing has simply frozen sales. A perfect example of this consumer credit crisis is that 20 percent of our revenue disappeared overnight when our finance company was unable to offer leases. These sales literally vanished.

At Chrysler, 75 percent of our dealers rely on Chrysler Financial to finance their business, and 50 percent of all customers finance their vehicle purchases through the Chrysler Financial. Normally, these loans and leases are securitized and sold in the secondary market to generate fresh liquidity and financing capacity.

Today, there is virtually no secondary market, and therefore, no way to raise capital. Money is not available for dealers to finance their wholesale orders, invest in their facilities, and hire and train employees. Competitive loans for the average working American – our customers – are virtually nonexistent. This has directly and dramatically depressed vehicle sales, putting at risk not only auto manufacturers but also the widespread network of suppliers, vendors. In Chrysler’s case, 3,200 entrepreneurs…small businesses owners called dealers, and the approximately 140,000 people they employ in every state across the country. The National Automobile Dealers Association estimates more than 700 of them will go out of business by year end. If we don’t secure a bridge loan, all 13,600 dealers are at risk.

There are 4.5 million people depending on this industry, and without assistance, nearly three million of them could lose their jobs in the next 12 months, according to a research memorandum published November 4, 2008, by the Center for Automotive Research. Failing to act now will hurt many American families and undermine our country’s economic recovery, far outweighing the costs related to supporting an industry that touches every district in every state of the nation.

The crippling of the industry would have severe and debilitating ramifications for the industrial base of the United States, would undermine our nation’s ability to respond to military challenges and would threaten our national security. Chrysler has long contributed to our national defense. Our Jeep® was an indispensable part of our nation’s efforts in World War II and Korea.

Immediate financial assistance will serve the country and the economy directly in two key ways. First, the lifeblood of the U.S. economy will continue to flow. The industry will be able to continue to pay at its current levels $22 billion in annual wages to our employees, $13 billion in annual pensions to our retirees and surviving spouses, and meet our current commitment of $102 billion in healthcare costs to employees. We will continue to pay $156 billion annually to our suppliers and work to keep them strong by providing significant additional financial relief for distressed suppliers fighting to stay in business.

Second, America’s auto companies are investing in innovation. Capital investment in new technologies, improved operations, and future product will be able to continue, including a combined $12 billion in annual spending for research and development. As an industry, we are moving full speed ahead to make the transition to advanced propulsion vehicles that will help support national energy security and environmental sustainability goals.

Chrysler plans to emerge from the current downturn as a lean, agile company. We are, and will continue to be the quintessential American car company. Currently, 73 percent of our sales are in the U.S., 61 percent of our vehicles are produced in the United States, 74 percent of employees work in the U.S., 78 percent of our materials are purchased in the U.S. and 62 percent of our dealers are based in the U.S.

Today, Chrysler has a very strong pipeline, with a product renaissance for 2010. In September we revealed our ENVI electric vehicle program, and announced that we will begin producing one of these electric-drive models for North American consumers in 2010. This underscores our commitment to deliver environmentally friendly, fuel-efficient vehicles to customers, and to meet this social responsibility faster and more broadly than any other manufacturer.

Today we are asking you to help us bridge a chasm created by an unprecedented financial meltdown. We are also asking you to consider investing in a company that will deliver real results for the American taxpayer.

I recognize that this is not an insignificant amount of money. However, we believe this request is the least costly alternative considering the options we face… with less impact on human capital, and would provide stimulus, as opposed to further depress the economy.

Thank you very much.

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Discussion Starter #2
UAW President Ron Gettelfinger's prepared testimony

November 18, 2008

UAW President Ron Gettelfinger's prepared testimony

The Free Press obtained a copy of UAW President Ron Gettelfinger's testimony to be delivered to the U.S. Senate Committee on Banking, Housing and Urban Affairs.


Mr. Chairman, my name is Ron Gettelfinger. I am President of the International Union, United Automobile, Aerospace & Agricultural Implement Workers of America (UAW). The UAW represents 1 million active and retired workers, most of whom work or receive retirement benefits from the Detroit-based auto companies or auto parts suppliers around the country. We appreciate the opportunity to testify today on the state of the domestic automobile industry.

The UAW strongly supports legislation to amend the Emergency Economic Stabilization Act (EESA) to clarify that the Treasury Department should use the existing financial rescue program to quickly provide a $25 billion emergency bridge loan to GM, Ford and Chrysler to enable these companies to weather the current credit and economic crises that have had such a devastating impact on our entire country. This bridge loan would be paid from the funds that Congress has already provided under the financial rescue program; there would not be any new federal funds. As with other rescue efforts under this program, the bridge loan to the automakers would be conditioned on stringent limits relating to executive compensation, as well as provisions granting the federal government an equity stake in the auto companies in order to protect the investment by taxpayers.

The UAW believes that the Treasury Department already has the authority under existing law to make the bridge loan to the auto companies. But because there is disagreement on this point, we believe Congress should act quickly to approve legislation to make it clear that the Treasury Department should act now to provide this urgently needed relief.

The Detroit-based Auto Companies Are Facing a Crisis

The situation now facing GM, Ford and Chrysler is extremely dire. Because of the credit and financial crises that have engulfed our nation, overall vehicle sales have plummeted to the lowest level in 25 years. In October, sales were at an annualized level of 10.8 million vehicles, far below the normal level of 16-18 million vehicles.

There is no great mystery as to why this enormous decline in sales has occurred. Buying a vehicle is the second biggest purchase that families make. Because of the overall credit crunch, most families cannot get credit on reasonable terms to finance the purchase of a vehicle. And because of the general economic uncertainty, many families are simply deferring any major expenditures.

The net result is that all auto companies, not just the Detroit-based automakers, have seen a sharp drop in their sales. This means that the revenues received by the companies have declined drastically. As a result, GM, Ford and Chrysler are burning through their cash reserves at an unprecedented rate. As the recent earnings reports indicate, this scenario is not sustainable. If the government does not act to provide immediate assistance, GM, Ford and Chrysler could be forced to liquidate.

The UAW wants to underscore that this would not be a painless, “prepackaged” bankruptcy reorganization as some columnists have suggested. Consumers will not purchase vehicles from a company that has filed for bankruptcy. And bankrupt auto companies would not be able to obtain “debtor-in-possession” financing to enable them to continue operations. Thus, the stark reality is that these companies would be forced into a Chapter 7 liquidation, with their operations ceasing entirely and their assets sold for pennies on dollar.

Devastating Consequences if the Detroit-Based Auto Companies Collapse

If the Detroit-based auto companies are forced into liquidation, the consequences would be truly devastating, not only for UAW members, but also for millions of other workers and retirees across this nation, and for the entire economy of the United States. In addition to the hundreds of thousands of workers who would directly lose their jobs at the Detroit-based auto companies, according to the Center for Automotive Research a total of almost 3 million workers would see their jobs eliminated. This includes persons who work for auto dealers, suppliers of components and materials, and thousands of other businesses that depend on the auto industry. In addition, because the auto manufacturers depend on many of the same suppliers, a disruption in the supply chain would have serious negative consequences for the remaining auto manufacturers.

The liquidation of the Detroit-based auto companies would also have devastating consequences for millions of retirees. The retirees from these companies and their spouses and dependents – about one million persons – could suffer sharp reductions in their pension benefits. And they would face the loss of their health insurance coverage – an especially devastating blow to the roughly 40 percent who are younger than 65 and thus not yet eligible for Medicare. In addition, if the automakers’ pension plans are terminated, the Pension Benefit Guarantee Corporation (PBGC) would be saddled with unprecedented liabilities. To prevent the collapse of the PBGC, which would jeopardize the retirement security of millions of workers and retirees, the federal government would have to provide a huge bailout for the pension guarantee program. Furthermore, under existing law, the federal government would be liable for a 65% tax credit to cover the health care costs of pre-Medicare auto retirees costing about $3 billion per year.

The liquidation of the Detroit-based auto companies would have serious negative repercussions for the entire U.S. economy. Almost 4 percent of our nation’s GDP is related to the auto industry, and almost 10 percent of our industrial production by value. The collapse of the auto sector would severely aggravate the current economic downturn, sending production and consumer spending into a deeper tailspin while unemployment spirals higher. Federal, state and local government revenues would shrink even further, forcing harmful cuts in a wide range of social services at precisely the time they are most urgently needed.

The UAW submits that it would be far better for the auto industry and its workers and retirees, and for the nation as a whole, for the federal government to take prompt action now to prevent the imminent collapse of the Detroit-based auto companies. The human toll will be far less. And the ultimate cost to the government will be far cheaper.

Myths About the Auto Industry

A number of objections have been raised by various commentators against this type of government assistance to the Detroit-based auto companies. These objections are largely based on myths about the auto industry that do not stand up on closer scrutiny.

A). The Current Problems Facings the Detroit-based
Companies Are Not Due to “Overly Rich Union Contracts”

Some commentators have asserted that “overly rich contracts” negotiated by the UAW are to blame for the companies’ current situation, and suggested that workers and retirees should be required to take deep cuts in their wages and benefits. This totally ignores the recent history in the auto industry and the facts regarding wages and benefits at the Detroit-based companies.

The truth is that in 2005 the UAW agreed to reopen the contracts mid-term, and accepted cuts in workers’ wages and in health care benefits for retirees. Then, in the general 2007 collective bargaining negotiations, the UAW agreed to what industry analysts have called a “transformational” contract that fundamentally altered labor costs for the Detroit-based auto companies. This contract slashed wages for new hires by 50%. Furthermore, new hires will not be covered by the traditional retiree health care and defined benefit pension plans. In addition, this contract stipulated that beginning January 1, 2010 the liability for health care benefits for existing retirees would be transferred from the companies to an independent fund (a Voluntary Employee Beneficiary Association, or VEBA). This agreement has subsequently been approved by federal courts, which have appointed a majority of the trustees who will be independent of the UAW and responsible for managing the VEBA. Taken together, the changes made by the 2005 and 2007 contracts reduced the companies' retiree health care liabilities by fifty percent.

As a result of all these painful concessions, the gap in labor costs that had previously existed between the Detroit-based auto companies and the foreign transplant operations will be largely or completely eliminated by the end of the contracts. Indeed, one industry analyst has indicated that labor costs for the Detroit-based auto companies will actually be lower than those for Toyota’s U.S. operations. Thus, the truth is the UAW and our active and retired members have already stepped up to the plate and made the hard changes that were necessary to make our companies competitive in terms of their labor costs.

It is also important to note that union negotiated work rules cannot be blamed for the current problems facing the Detroit-based companies. According to the Harbour Report, the industry benchmark for productivity, union-represented workers are actually more efficient than their counterparts at non-union auto plants. And union-made vehicles built by the Detroit-based auto companies are wining quality awards from Consumer Reports, J.D. Power, and other industry analysts.

The current plight of GM, Ford and Chrysler is simply not attributable to “overly rich union contracts.” Instead, it is the result of the larger credit and economic crises that have engulfed our nation, and the unprecedented drop in auto sales that has affected all automakers.

Because the recent contracts negotiated by the UAW are now competitive with the rest of auto industry in the U.S., we do not believe there is any justification for conditioning assistance to the Detroit-based auto companies on further deep cuts in wages and benefits for active and retired workers. We would also note that in the cases where the Treasury Department has acted to rescue financial institutions, it has only imposed restrictions on executive compensation. It has never mandated cuts in wages or benefits for rank-and-file workers and retirees. Thus, there is no basis for singling out the auto industry for different treatment.

B). The Current Crisis Cannot Be
Blamed on the Detroit-based Companies
Producing Gas Guzzling Vehicles

Some pundits also have asserted that the Detroit-based auto companies are to blame for their current predicament because they insisted on producing gas guzzling vehicles, rather than more fuel efficient vehicles that consumers wanted. According to this point of view, GM, Ford and Chrysler simply were not producing vehicles that consumers wanted to buy.

Unfortunately, this argument ignores the fact that the current credit and economic crises have resulted in a sharp drop in sales by all auto manufacturers, including the Japanese companies. The immediate problem is not just that consumers aren’t buying the vehicles produced by the Detroit-based auto companies. The problem is they aren’t buying vehicles from any company!

It is true that earlier this year the sharp spike in gas prices resulted in a sudden shift in the product mix demanded by consumers, with sales of more fuel efficient vehicles increasing, and sales of pickups, minivans and other larger vehicles dropping. This shift in product mix hit the Detroit-based companies the hardest, because their product mix was more oriented towards these larger vehicles. But it also caught Toyota and Nissan by surprise. Because these companies had been aggressively expanding production of larger vehicles, they also experienced significant dislocations.

The Detroit-based auto companies have been investing massive amounts of money to change their product mix and to provide consumers with a wide range of more fuel efficient vehicles. They are aggressively moving ahead with advanced fuel saving technologies. For example, GM plans to introduce the Volt plug in hybrid in 2010.

The landmark energy legislation that was enacted by Congress in 2007, with the support of the UAW and the auto companies, will require substantial improvements in fuel economy until the entire fleet of autos and light trucks sold in the U.S. by all companies achieves at least 35 mpg by 2020. In addition, the Advanced Technology Vehicles Manufacturing Incentive Program (ATVMIP), which was authorized by this legislation and subsequently funded by Congress in the fall of this year, will provide assistance to all automakers – the Detroit-based companies and the foreign transplants – to retool facilities in this country to produce the advanced, fuel efficient vehicles of the future and their key components. This will help to accelerate the introduction of these more fuel efficient vehicles, while ensuring that they are produced by American workers.

Some commentators have questioned why this advanced vehicle retooling program doesn’t provide sufficient assistance for the auto companies. The answer is the ATVMIP is part of a long term energy policy that will provide assistance to the auto companies and parts suppliers over a ten year period, tied specifically to the production of very high mileage vehicles. This program was not designed to address the type of immediate cash flow crisis that the Detroit-based auto companies are now facing as a result of the sudden drop in overall auto sales. Even if the ATVMIP is implemented quickly – which is by no means clear – at most it will only provide modest assistance to the Detroit based auto companies in the coming years.

Other observers have questioned whether the ATVMIP could simply be expanded to allow the Detroit-based auto companies immediate access to the entire $25 billion that was authorized and appropriated for this program. The UAW believes this would not make sense because it would undermine the fuel economy objectives of this program. Furthermore, there simply are not enough retooling projects in the short term – for advanced vehicles or more conventional ones – to make this approach feasible.

Some commentators and groups have suggested that any new assistance to the Detroit-based auto companies should be conditioned on even greater improvements in fuel economy. We recognize that President-elect Obama campaigned on a platform that included increases in fuel economy and the production of plug in hybrids, as well as assistance to the auto industry to ensure that the vehicles of the future are produced in this country. The UAW is looking forward to working with the Obama administration and the next Congress to help achieve these objectives.

But we firmly believe it would be an enormous mistake to rush to include these important new initiatives in the current emergency bridge loan for the Detroit-based companies. To begin with, we do not believe there is adequate time to develop thoughtful proposals that are workable and effective. In addition, given the desperate situation facing the Detroit-based auto companies, and the devastating consequences their collapse would have for millions of workers and retirees and the entire U.S. economy, the UAW does not believe it is appropriate to hold emergency assistance hostage to broader fuel economy/environmental initiatives.

The Detroit-based companies need an immediate bridge loan from the Treasury Department in order to have sufficient cash to be able to continue their operations. These companies will not be able to continue on the path to producing the greener vehicles of the future if they are forced to liquidate in the coming months.


The UAW appreciates the opportunity to testify before this Committee on the state of the domestic auto industry. We strongly urge Congress to act this week to approve legislation that will provide immediate assistance to GM, Ford and Chrysler to enable them to continue in business, and to avoid the devastating consequences that a collapse of these companies would have for millions of workers and retirees across our country. Thank you.

LINK: UAW President Ron Gettelfinger's prepared testimony | | Detroit Free Press
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