U.S. Auto Bailout: Bridge to Bankruptcy or Road to Salvation

R.Sagitha, Research AnalystEconomic Research and Analytics

Automotive & TransportationMarch 25, 2009

2

Focus Points

U.S. Automotive Industry

How We Got Here

Factors contributed to the Crisis

Possible Way Ahead for Detroit Three

Restructure Plans

Road Ahead

Current State of the Market

Economic Importance

How can they become more viable?

Bailout Plan

Key Global Trends

3

U.S. Automotive Industry – Economic Importance

Economic Contribution of the U.S. Auto Industry

• GDP Contribution by the U.S. Auto Industry has been nearly 4 percent every year

• At the end of 2008, the U.S. auto industry employed 850,000 workers in manufacturing, and 1.8 million workers in auto dealerships

• 775,000 retirees depend on automakers pensions and benefits

• Auto exports is one of the major exports amounting to $ 87.1 billion

• Imports accounts for nearly 25 percent of the domestic units sales

• Investment: $200 billion since 1990

• Annual Research and Development Investment is estimated $20 billion

• U.S. Manufacturers face stiff competition from Non-American Companies (Japan, Germany, and Korea) and imports

0

200

400

600

800

1000

1200

1400

2000 2001 2002 2003 2004 2005 2006 2007 2008

Employment (Thousands)

Employment in the U.S. Automotive Industry, 2000 – 2008

0

2

4

6

8

10

12

14

16

18

20

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Millio

n U

nit

s

Vehicle Sales Vehicle Production

Vehicle Production and Sales, 1980 – 2007

Components of GDP (U.S.), 2007

7%

20%

40%

15%

18%

Durable goods

Nondurable goods

Services

Gross private domestic investment

Government

Personal

consumption

The auto industry accounts for about half of

durable goods, or almost 4 percent of GDP.

US GDP totaled $13.8 trillion in 2007.

4

U.S. Automotive Industry – Current State of the Market

23%

17%

15%11%

11%

7%

5%2%2%

2%2% 3%General Motors

Toyota, Scion, Lexus

Ford Group

Chrysler

Honda

Nissan, Infiniti

Hyundai Group

Volkswagen, Audi

BMW

Mazda

Mercedes

Others

Automotive Industry Outlook: U.S Light Vehicle

Sales – by VMs (North America), 2008

4.0% 4.3%

13.9% 14.8%

4.5% 4.7%

14.8%15.8%

3.2%3.4%

6.5%6.9%

26.9% 25.0%

15.1% 14.1%

6.0% 6.1%

4.5%4.2%

0%

25%

50%

75%

100%Sports, Van & Others

Pickup / Truck

SUV

MPV

Super Luxury

High Luxury

Low Luxury

Large

High Medium

Low Medium

Small

Basic

2008 2010 Source: Frost & Sullivan

Automotive Industry Outlook: U.S Light Vehicle

Sales – by Segment (North America), 2008

• Freezing of credit markets and loss of consumer confidence resulted in a decline in sales

• About 46% of sales in the U.S. constituted SUVs and Pickups in 2007, expected to fall below 39% by 2010

• Small cars are gaining more market share with an increase from 12% in 2007 to about 15% in 2010

• The Detroit Three VMs are expected to lose market share with falling sales

• VMs with a strong presence in basic and small vehicle segments such as Hyundai, Nissan and Honda are expected to

witness market share growth

5

Lack of Trust in Financial Institutions

Tightening Credit Markets

Banks Slow Down Lending

Slower Growth

Financial InstitutionsLosses

Lack of Lending forSmall Business

Lack of RetailCredit

Consumer Sentiment Collapses, Spending Declines

Economy Slows Down/Contracts

Sub-Prime Mortgage Defaults

$Lack of Capitalfor Companies

Suspension of Interbank Lending

$

$

$

$

Job Losses

Genesis: From Financial Sector to Real Sector

6

• Auto sector turnover contributes between 3 – 4% of the

total GDP of U.S.; more than 6% of EU-15 GDP

• China, India, Russia and Indonesia are expected to have

GDP growth rates of more than 6 percent through 2008

– 2010

• Automotive Industry deeply impacted by the credit

crunch – Two-thirds of Europe’s cars are sold on credit

and all players use debt financing for their working

capital

• Production overcapacity affecting the global automotive

market – Global sales in 2007- 63 million units;

production capacity in 2007 - 80 million units

• Slowdown in Auto Sales has systematically affected all

global VMs

• Many VMs and suppliers affected financially

• Industry profitability hit by falling sales in 2008 –huge

losses for major OEMs; Brazil, Russia India and China hit

by the global slowdown, with India expected to lead the

way in the recovery

Key Trends in the Global Automotive Market

0%

3%

6%

9%

12%

2006 2007 E 2008 F 2009 F 2010 F

Japan USA Euro Area Brazil

Russia Turkey China Indonesia

Thailand IndiaSource: World Bank, Frost & Sullivan

Analysis

Growth Drivers: Developing Markets

USA to begin recovery

in 2009 while Euro

Area continues to fall

Growth Rate

Automotive Industry Outlook: GDP Growth Rates (World), 2008

7

USA: - $13.4 billion to General Motors and $4 billion to Chrysler

Germany: - €1.5bn aside for the boost for the car market, loan guarantees for OpelFrance:

- Renault and PSA offered initial credit guarantees of €6 bn

- Auto suppliers offered €600 million loans

India:

- PSU banks to provide a line of credit to NBFCs for buying commercial vehicles

Automotive stimulus packages of governments approaches $40–50 billion

Brazil:- Increase credit availability by making available 8 billion reais ($3.2 Billion) in credit for automakers

Russia:- Increase import duties on foreign-made cars and used car imports, to increase local production and stimulate growth

China:- RMB 10bn over a 3 year period to help automakers upgrade and develop alternative energy vehicles

8

Possible Way Ahead For Detroit Three - Bailout Plan

History of Bailout in U.S. Auto industry The difference between history and present bailout

� Chrysler was provided with bail out in 1979

� U.S. Government provided a loan of $1.5 billion to rescue Chrysler

� Other non-automotive bailout loans were provided to Penn central Railroad, Lockheed, Franklin National Bank amongst the few

� Too many companies too be provided with bailout by the U.S. government unlike the history of bailout for Chrysler

� Important industries like banking and financial institutions are involved in the global economic crisis

Bailout Demand from Automakers

� A loan of $17.4 billion provided to GM and Chrysler

� An additional amount of $9.1 billion has been requested by GM and Chrysler

� $7.5 billion bailout was provided to GMAC and Chrysler Financial

Restructuring plans by automakers

� $17.4 billion loan sanctioned up for review of restructuring plans by automakers on 17th

February

� Restructuring plans included laying off workers, wage cuts, and investment in Hybrids amongst the few

9

Possible Way Ahead For Detroit Three– Features of Restructuring Plans

Highlights of Restructuring Plans by GM

� Models and Channels – GM to focus on brands like Chevrolet, Cadillac, Buick and GMC

� Nameplates – GM to reduce vehicle nameplates by 25%

� Dealers – Re-shaping of GM dealer network in main markets

� Labor Cost – Tentative agreements between GM and UAW for job and pay cuts

• Alternative Fuels – Sale of GM’s alternative fuel models will be increased to 65%

• Hybrid & Plug-in vehicle – Cars and Trucks to be manufactured in 2009

Competitive Product Mix & Cost StructureCompetitive Product Mix & Cost Structure

Adherence to emission norms & fuel economyAdherence to emission norms & fuel economy

• North American Business – Significant plant closing in North America

• Breakeven Volume – GM has reduced its breakeven to 11.5-12.0 million units

Rationalization of costs, finances, competence Rationalization of costs, finances, competence

10

Possible Way Ahead For Detroit Three– Features of Restructuring Plans

Highlights of Restructuring Plans by Chrysler

� Potential Partnerships – Chrysler has analyzed potential partnership with GM or Nissan or Fiat

� Nameplates – Chrysler to reduce vehicle nameplates by 25%

� Dealers – Chrysler’s Genesis program to trim models and consolidate dealers

� UAW/VEBA – Tentative agreement with UAW for wage cuts according to U.S. transplants

50 percent reduction in Chrysler’s VEBA

Competitive Product Mix & Cost StructureCompetitive Product Mix & Cost Structure

• Powertrain Technologies – Chrysler's alliance with Fiat to leverage power train technologies

Adherence to emission norms & fuel economyAdherence to emission norms & fuel economy

• Fixed Cost – Reduction of Fixed Costs by 27%

• Unit Capacity – Reduced Unit Capacity by 35 percent

• Suppliers – A request of 3 percent price reduction from suppliers

Rationalization of costs, finances, competence Rationalization of costs, finances, competence

11

Bailout Plan - Impact Assessment

If Detroit Three does not Survive

• Massive stimulus package to revive the economy

• Employment levels expected to be positive in the long

term but job loss is inevitable in the short run

• Social Security to lower the burden of the government

• Implementation of emission norms in compliance with

U.S. standards. U.S. auto industry is expected to be a

leader in green automotive technology

• Industrial production is expected to increase with the

investment of Detroit Three

• Budget deficit as of percent of GDP would be 12.6

percent

• By 2013 (End of Obama’s first term) budget deficit is

expected to be 3 percent of the GDP as a goal under the

Obama administration

If Detroit Survives

• A loss of 3 million jobs throughout the U.S. - 973,969

workers employed in the suppliers industry and 108,000

jobs at stake in North American auto retailing industry

• Termination of Detroit Three operation will reduce U.S.

personal income by more than $150 billion

• Two million people rely on auto industry’s healthcare

benefits - U.S. Government will be liable for 65% tax credit

for health care costs

• 775,000 retirees collect auto industry pensions

• Insolvency of auto industry will cause additional burden

on the Pension Benefit Guarantee Corporation (PBGC)

• Loss of other dependant industries like steel, aluminum,

computer chips

In either of the cases the us auto industry is expected to be dissolved, and the job losses will exist, whether sustained

overnight or over a longer period. The impact is expected to be prolonged over a longer period in a structured

bankruptcy.

12

Variable Dissolution Survive

Employment3 million jobs lost. 1 million in Detroit Three, 100,000 in ancillary industries in a phased manner with organized dissolution.

Job losses would be much lower, and will have a less catastrophic impact on the economy

No Impact Fiscal Deficit

Marginal impact on deficit since the sums already allocated/to be allocated are substantial, and this entire aid is small in comparison

Impact Overseas

This is expected to discourage European and Asian Governments from supporting their domestic automotive industry

This is expected to lead to European governments providing support to their domestic industries to even out the competitive landscape

ManufacturingA collapse of the American automobile manufacturers will lead to revenue loss and cope with the loss of key clients

Revitalize American manufacturing since auto manufacturers will have to restructure and reposition themselves and consequently their suppliers too

Overall Economy

Will have a cascading impact as job losses rise and employment drops. Consumption is expected to drop and recession prolonged

Will help revitalize the American economy as automobile industry acts as a catalyst to restructure American manufacturing. Economy will recover faster and emerge stronger

Any form of dissolution, whether organized or chaotic of the American Automobile industry is expected to prolong recession and have a catastrophic impact on employment and consumption.

Possible Way Ahead For Detroit Three - Economic Impact Assessment

13

U.S. auto Industry to witness restructuring of strategic operations between 2009-2011

Conditions Specific to Detroit Three

• The Detroit 3 players will have to undergo fundamental transformation to meet the changing consumer preferences. This may lead to rationalization of the brand portfolio currently marketed by American automotive companies

• Renegotiation with UAW regarding upgrading plants, and lower social security contribution

• Phase out specific brands and manage distribution channels better

• GM alone plans to eliminate 1,800 of its dealerships from 2008 to 2012

• Bond holders need not be repaid fully. Total debt burden of Detroit Three is almost $80 billion.

• Bankruptcy might lead to consumers not purchasing cars

Overall Auto Market Conditions

• Being one of the largest employers, it is almost certain the Obama administration would give some form of assistance to the auto industry

• Better inventory management, discontinuous on unprofitable businesses to result in restructuring of overall market operations.

• Federal assistance (TARP) 0f $5 billion has been provided to auto suppliers. As restructuring plans, suppliers and dealers would lose business

• A U.S. bill has been introduced to provide vouchers to consumers through 2011 if they turn in aging vehicles in favor of more energy-efficient transportation options

• Fluctuating fuel prices continue to impact the sale of gas guzzlers and big cars

• Workforce reduction, declining personal disposable income will impact on automobile sales

Possible Way Ahead For Detroit Three – Road Ahead

14

Possible Way Ahead For Detroit Three – How Can They Become Viable?

Restructuring

• Rationalize/ consolidate dealerships

• Restructuring and retooling of all operations to become lean, sustain, and competitive at lower sales

volumes

• Sale or discontinuation of unprofitable and non-core businesses to generate cash for operations

• Consolidation of brands to strengthen market image and to cut costs

• Better inventory management on the input and output sides

Factors Factors Focus Areas Focus Areas

Products

Technology

• Develop flexible-architecture global platforms – for lower development costs, higher

economies of scale, and easier mid-cycle upgrades

• Rationalize/ consolidate platforms, brands, and nameplates -Parts sharing across platforms and models

• Longer product cycles to reduce development cost and capital investments without sacrificing

product freshness, through flexible platforms

• Strategic platform co-development with competitors to spread development and engineering costs

• Parts sharing across platforms and models to reduce per-unit costs

• Focus on value-segment products and slow down development of vehicles in other segments

• Rapid technology evolution – critical investments must be maintained for next-generation technologies

• Develop customer-value and fuel-efficiency technologies

• Strategic technology co-development with suppliers and competitors to spread costs

15

All industries undergo period of trouble, and emerge stronger, healthier and more vibrant from it. American Automobile industry, especially the big 3 players are expected to emerge stronger from this current crisis, and become global leaders

Best Case Scenario

• Little loss of market share because of low oil prices making SUVs competitive

• Avoid a Chapter 11 bankruptcy and successfully negotiate with bondholders

• Recover quickly from the current crisis and support economic and industry growth

Worst Case Scenario

• Substantial loss of market share

• Undergo a Chapter 11 filing to negotiate with bondholders and UAW

• After a few rough years, American Auto manufacturers emerge stronger via investments in research and development and new product launches.

U.S. Automotive Industry – Bridge to Bankruptcy or Road to Salvation?

16

Next Steps

� Obtain a Frost & Sullivan Strategic Approach document for a Growth Partnership Service or Consulting Service to support you and your team to accelerate the growth of your company. (myfrost@frost.com) 1-877-GoFrost (1-877-463-7678)

� Join us at Frost & Sullivan’s GIL 2009: North America - Growth, Innovation and Leadership: A Frost & Sullivan Global Congress on Corporate Growth, September 13th – 16th, 2009, Hyatt Scottsdale Resort & Spa at Gainey Ranch, Scottsdale, AZ. (http://www.frost.com/gil)

� Register for the our next Chairman’s Series on Growth:

The CEO's Growth Team™: Research & Development Driving Growth and Innovation (April 7th) (http://www.frost.com/growth)

� Register for a complimentary Frost & Sullivan’s Growth Opportunity Newsletter and keep abreast of innovative growth opportunities in your industry (www.frost.com/news)

17

Your Feedback is Important to Us

Growth Forecasts?

Competitive Structure?

Emerging Trends?

Strategic Recommendations?

Other?

Please inform us by taking our survey.

What would you like to see from Frost & Sullivan?

18

For Additional Information

• To leave a comment, ask the analyst a question, or receive the free audio segment that accompanies this presentation, please contact Stephanie Ochoa, Social Media Manager at (210) 247-2421, via email, analystbriefings@frost.com.

• Follow Frost & Sullivan on-line at:• http://twitter.com/Frost_Sullivan• http://www.facebook.com/people/Frost-Sullivan/1131686497