Q&A: US carmakers bail-out

US car executives say urgent government aid is vital

What is the next move for the carmakers?

General Motors and Chrysler have warned that they will run out of cash by the end of the year, with their survival under severe threat in the absence of a bail-out package. Ford has said it can survive, but may need funds later.

GM has maintained that it would be very difficult for a company of its size and complexity to start reorganising under Chapter 11 bankruptcy protection. However, they might consider this option more closely now.

In the meantime, the carmakers will probably push further for state aid, even if their chances of getting any immediate Federal help seem limited.

One last-ditch possibility is that President Bush will agree to release funds from the $700bn bail-out of Wall Street to aid the carmakers, a move which would not require congressional approval.

President-elect Barack Obama, who takes office on 20 January, has said the US auto industry should not be allowed to collapse.

Is a collapse imminent?

If the carmakers are able to put together Chapter 11 bankruptcy plans, not many things will change initially. They will be given time to renegotiate labour contracts and reorganise their businesses.

But suppliers and those holding stocks and bonds in the car companies could suffer.

However, GM fears that people will stop buying its cars while the company is reorganising, which will further undermine its business model.

The worst scenario would be for the car companies to run out of money and simply fail.

The shock will ripple through the automakers' supply chain, hitting various businesses, from dashboard makers to steel mills to car dealers.

This could generate the loss of up to 2.5 million US jobs, in addition to the 2 million jobs that have already disappeared this year.

Why was the bail-out rejected?

The plan, which had passed the House of Representatives, stumbled in the Senate after Republican senators demanded that the powerful United Auto Workers union agree to swift wage cuts as a pre-condition for state aid. The unions rejected the proposal.

The Democrats had needed Republican help to back the bill in the Senate, as their majority in the upper chamber was fragile.

No other actions by the Congress on the car crisis are expected before the end of this year.

The newly elected Congress, which has bigger Democratic majorities, may consider action when it takes office in early January.

Why has the situation deteriorated sharply?

The Big Three claim that the global financial crisis has left them in dire straits.

The credit crunch means prospective buyers are hard to find, as it is harder for consumers to get loans while others are cutting back on big-ticket purchases to save money.

As a result, GM sales have fallen by more than 40%. Ford and Chrysler sales have fallen by a third.

Meanwhile, the financial crisis means it is also harder for the firms themselves to get credit and repay their loans.

But haven't they just restructured their businesses to save money?

Yes, they have. But the changes have coincided with a bad time for the global economy.

For example, to cut costs GM has closed factories and cut thousands of jobs, and at one time was considering a merger with Chrysler.

But the companies are all battling some continuing problems.

What problems?

First, they are burdened by what are known as "legacy costs". All three are paying for the healthcare and pension costs of hundreds of thousands of former workers, undertaken when the companies employed many more people.

Last year, GM and the other car companies agreed a deal with the United Auto Workers union to take $50bn of these costs off its books, but that doesn't kick in until 2010.

These historic costs, all linked to their past successes, are burdens their newer rivals do not have to bear.

The Big Three also appeared to have missed a trick in the 1980s and 1990s and failed to take note of the threat posed by foreign rivals like Japan's Toyota.

While these Asian firms made great inroads into the US market with smaller, more fuel-efficient cars, the American firms responded by ramping up production of bigger vehicles like SUVs and pick-up trucks.

Initially, these "gas guzzlers" proved to be popular, and they were very profitable for the companies, but in the long run they lost ground to smaller, more efficient vehicles as fuel prices surged.

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