Chrysler Goes Back to the Well
By Alexander Taylor
Bankruptcy looms in January without fresh Government aid
Chrysler for the second time this year is bumper to bumper with bankruptcy. Last June the company teetered for two weeks before its 400 lenders agreed to ease financing terms so that it could obtain $1.5 billion in federally guaranteed loans. Now Chrysler is asking for $400 million in new Government-backed loans. Without them, the company may not be able to survive the month of January.
The immediate cause of Chrysler's latest crisis was the reluctance of its dealers, whose lots are already packed with unsold cars, to order any more. This has forced the company to cancel plans to build some 15,000 cars in December. The dealers' decision means that Chrysler will have $100 million less than expected in the bank on New Year's Day. With January and February traditionally bad months in the car business, it was also apparent the company might soon be facing a negative net worth. That kind of financial slippage could block further Government aid.
Chrysler's problems, though, have been building for months. High interest rates, an initial shortage of low-cost models and the unwillingness of customers to buy cars from a company that seemed about to go out of business have cut in half projected sales of the stylish, economical K-car. Even the once popular sub-compact Dodge Omnis and Plymouth Horizons are selling poorly, and dealers now have more than a 120-day supply, twice the desired amount. As the auto industry last week prepared for its annual holiday shutdown, only three of Chrysler's six assembly plants were operating. The company, which had once vowed that it would earn a profit in the fourth quarter, will probably lose more than $200 million between October and December. That would push its losses for 1980 to an astonishing $1.7 billion, breaking the current record for the highest yearly loss in U.S. corporate history, set by Chrysler in 1979 with $1.1 billion.
During the past two weeks, Chrysler Chairman Lee Iacocca conceived and put together the latest rescue plan with the precision of a Swiss clockmaker piecing together a masterwork. Iacocca boldly asked every one of Chrysler's associates for another substantial financial concession to keep the company alive. The elements of the newest rescue package:
> The auto workers' union members are requested to accept a two-year freeze on all cost of living increases and a slight reduction in fringe benefits. This would mean that a Chrysler worker would earn $17.31 an hour in 1981, rather than $20.45, and $17.52 an hour in 1982, rather than $22.11. The concessions would be worth approximately $600 million to the company. Iacocca last week bluntly told the United Auto Workers, "It's freeze time, boys. Chrysler's got good jobs available at $17.30 an hour. We don't have them at $20."
>Companies that supply parts to Chrysler are being asked to delay collection of this month's bills until January and to cut prices 5% during the first 90 days of 1981. This would reduce Chrysler's operating costs in that period by $90 million.
> Chrysler Corp.'s 175 lenders were asked to convert $572 million in loans to preferred stock in the company. That amount represents about half the firm's outstanding debt.
> Chrysler itself will cut operating expenditures by reducing its white-collar payroll by another 2,200 people, to 21,800. The company will also scrap plans to enlarge its front-wheel-drive production capacity for 1984. Iacocca said that these measures alone would cut costs next year by $575 million.
The goal of the plan, which will reduce Chrysler's overhead by nearly $700 million and increase its assets by $1 billion, is to convince the Government's Loan Guarantee Board that the company is worth the risk of extending another $400 million in loans. The firm has already received $800 million in Government-backed loans.
The initial reaction of Chrysler's partners was one of shock. The U.A.W. had thought that the $462.5 million in wage and benefit cuts it agreed to last winter was supposed to be sufficient. Said one union official: "We bought $1.5 billion in guaranteed loans with our first concessions, not just $800 million." The banks are unhappy about exchanging a loan, which would have at least theoretical value in a bankruptcy proceeding, for stock that would be worthless in case the company fails.
Chrysler's 20,000 suppliers are the most complicated problem. One steel company told Iacocca, in his words, to "drop dead." Said the president of another longtime supplier: "A lot of us will not go along. There is not 5% of profit for us left in Chrysler business."
Chrysler's requests for help may lead to similar calls from other automakers. Ford is now considering asking the auto workers' union for its own wage reductions. Ford has already lost about $1.2 billion this year, and it would like to renegotiate wages to keep its costs and final sales prices competitive.
One reason Iacocca decided to take the gamble of going once more to the well at this time was that he was uncertain about the possibility of getting additional assistance after Jan. 20, when the Reagan Administration takes power in Washington. Reagan opposed the original Chrysler bailout package, and after Inauguration Day his aides will sit on the board that will determine federal aid. G. William Miller, the outgoing Treasury Secretary, last week held meetings of the Loan Guarantee Board and said he thinks it is "in the national interest" to keep Chrysler alive. The board was expected to consider the company's aid request officially this week.
Even if the plan is accepted by all the parties involved, the ultimate survival of Chrysler will depend on selling the slow-moving K-cars in a recession-battered market. Without an upturn in car sales, no special deal will be able to keep the nation's 17th largest out of bankruptcy court.
--By Alexander Taylor Reported by Gisela Bolte/ Washington and Barrett Seaman/Detroit
With reporting by Gisela Bolte, Barrett Seaman
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