Here are a few direct quotes from Chrysler LLC Chairman and CEO Bob Nardelli’s testimony before the House Financial Services Committee on Nov. 19 and the Senate Banking, Housing and Urban Affairs Committee on Nov. 18.
The information here covers bankruptcy, the company’s financial position, recent moves by Chrysler, lessons from past mistakes, alliances and partnerships, along with angles and facts not previously reported.
Financial position
• We’ve built our estimates on the amount of funding we need on an assumed level of auto market sales next year. In our case, about 11.7 million light units, which we have viewed to be quite conservative.
• At the same time, Chrysler has billions of dollars in cash payment obligation to pay wages, pay suppliers, to pay health care, pensions, all in the range of about $4 billion to $5 billion a month.
• Without an immediate bridge financing support, Chrysler’s liquidity could fall below the level necessary to sustain operations.
• With immediate financial assistance, the lifeblood of the U.S. economy will continue to flow and Chrysler will be able to continue to pay its current levels of obligation, $6 billion in annual wages, $2 billion in annual pensions, $20 billion in health care commitments, $35 billion annually to suppliers, and nearly $3 billion annually in capital reinvestment back into our company for new energy efficient and environmentally friendly products.
• In the third quarter we went through $3 billion. But as I said in quarter one and two, we were basically holding our own. We ended the first half at about $9.4 billion, which includes a $2 billion pull-down from our private equity owners, both Cerberus and Daimler at the time.
• And as I said, we become dangerously close to a minimum liquidity level by the end of the year. And that’s why we’re asking for the immediacy of cash infusion.
Bankruptcy would be devastating
• Obviously, as we’re looking at this economic trough, we have looked at all aspects of whether it’s a prepackage, whether it’s prenegotiated, whether it’s bankruptcy, and every aspect of that, I can tell you, is certainly more negative and more costly than this proposal.
• I would say that we have gone through and have outside advisers to help us think through the various aspects should our liquidity become an issue.
• We would be willing and open to any suggestions from this committee or Congress.
• I think as we said in our testimony, bankruptcy would be devastating. I know from Chrysler’s standpoint in working with my colleagues. We’ve looked at all of the various options of pre- negotiation, pre-pack, et cetera. There seem to be some major misunderstandings of what a bankruptcy allows a company to do.
• In our case, for example, if we were to go into bankruptcy or fail, we have over $7 to $8 billion of outstanding payables. Those suppliers, those contractors, those equipment manufacturers basically would be helpless in the recovery of those funds.
• We have about 3,600 entrepreneurs, small business owners we call dealers. They have in excess of over $1 billion of inventory in their lots today. They would basically be totally exposed relative to the risk.
• I think it would turn us upside down faster and deeper than where we are today.
• …one thought is what makes this different from the examples that you gave us is this isn’t about losing a company. This is about losing an industry, an industry that has an overarching effect on literally thousands of small businesses to your point—we call them dealers—literally thousands of suppliers, for example the tanning company that provides the leather for our cars.
Bankruptcy is not a solution
• We believe that retail sales will plummet dramatically. We saw this happen when all options were put on the table when our previous owners announced they were going to do best Chrysler. Sales fell 37 percent.
• Given our common supplier base, the bankruptcy of anyone automotive manufacturer we believe threatens the viability of all automakers.
• Our factories would likely be idle for a significant period of time while we negotiate contracts with literally thousands of suppliers and our primary lenders.
• It would be a more costly solution than what we’re asking for today. The overall cost of financing the restructuring would be significantly higher in a Chapter 11 process than the working capital bridge that we’re asking for and presenting to this committee.
• And to a certain degree, all of these take an extensive amount of time. Certainly in a prenegotiated we’d have to get all the—all the players, all of the suppliers, all of the vendors, all of the labor. And you can imagine that would take an extensive amount of time to be able to renegotiate that.
• And finally, we just can’t be confident that we’ll be able to successfully emerge from bankruptcy.
How much and how we will use the money?
• We are asking for $7 billion.
• We will spend the money to pay suppliers. We will use the money to pay ongoing wages. We’ll use the money to develop a product portfolio that was void based upon the separation (from Daimler) that took place in August of 2007.
• We are willing to provide full financial transparency. We welcome the government as a stakeholder, including an equity holder, and we are fully prepared at Chrysler to comply with all the current conditions and policies under the recently enacted Emergency Economic Stabilization Act.
• Our private equity owner, Cerberus Capital Management LP, has made it clear that they will forego any benefit from the upside that would, in part, be created from any government assistance that Chrysler LLC may obtain.
• If we are granted the opportunity for this cash infusion, fundamentally, we will use it for operating cash flow. One of the things you talk about is a monthly or quarterly report. We do it every week.
• We have a cash call review. We’ve gone back to the old days where the owner-operator signs the check. So they basically know where the funds are going.
• We’ve gotten down to that level of granularity and our CFO basically runs a cash committee meeting once a week. We bring in all the requests. We prioritize those requests and then we make those distributions, and we’re looking at how we can conserve cash in every opportunity.
• So those funds fundamentally would go for ongoing operations. We’ll continue to drive for new product portfolio.
• I would say, in a similar fashion, the only thing that would allow us to advance those is a major breakthrough as we’re trying to do right now with our electric vehicles and what we’re trying to do is put that technology into existing platforms so that we aren’t spending money for new top hats, but we’re able to put our precious few dollars into the technology.
• If that’s successful, obviously, we’re going to continue to go as fast as we can in retrofitting what we have.
• So we are totally open. We want to be totally transparent in this process. And we believe that coming forward and asking for this support would allow Chrysler, and its brands, to be able to continue to be a viable entity and hopefully contribute to the recovery of the auto industry.
What we have done and where we’re headed
• Since August of 2007, when we emerged as the first privately held auto manufacturer in 50 years, we have reduced and taken out 1.2 million units of capacity or 30 percent of our installed base.
• We’ve identified over $1 billion in non-earning assets to sell and we’re more than 75 percent along the way towards achieving that goal.
• This year alone, we have reduced our fixed costs by $2.2 billion and, unfortunately, by the end of the year, we will have furloughed over 32,000 employees; 12,000 of those employees are salaried employees.
• Through the first half, we were meeting and exceeding all of our performance targets. We had generated over $1 billion in EBITDA and we closed the first half with over $11 billion in cash, both restricted and unrestricted.
• We immediately eliminated four vehicle nameplates because what we found is they were designed for Europe and being sold in the U.S.
• …we eliminated several lines already because they were not profitable and weren’t carrying the volume. If you look at the newest products that we just rolled out, the new minivan, the new Challenger, the new Journey, the new truck, the new Liberty, we are making money on a variable cost basis. And we are driving our fixed cost per unit down so that we will be making money across the board.
• We established the first ever customer counsel online. Our chief marketing officer is listening. God knows, we have a long way to go, but I think we have recognized the first and biggest hurdle, that of denial, and we are committed to improve our overall product quality and the service with which we provide our valuable customers.
• We have six or seven cars that are getting over 28 miles per gallon. Our Caliber is getting 30 miles per gallon. We’ll spend probably in excess of $1 billion this year on technology to improve our fuel efficiency on the combustion engine. We spent over $350 million in our efforts to develop a hybrid. We’ll spend almost an equal amount as we announce that—in September, three electric vehicles, one for each brand, Dodge, Chrysler and Jeep®. And one of those vehicles will be in the marketplace in 2010.
• We did select a single technology. Because of our financial situation, we could not afford to develop multiple technologies. We chose the technology that we had the most experience in and that we thought would have the easiest application for the consumer, and that’s electric.
• This year Chrysler is spot on Toyota. I noticed that the comment was made from the committee, but we are spot on Toyota relative to the number of hours. By 2010 our hours, our pay-per-hour will be competitive, so therefore on a vehicle production standpoint, we think we will be U.S. and globally competitive.
• We are adding between $400 to $500 per vehicle on the fit and finish in the interior to move us up in the J.D. Power ratings so that we are more competitive with the transplants so consumers do have a higher reliability, confidence level, and in fact they’ll see the value of the products that we’-re producing.
• Chrysler has a strong pipeline with product renaissance scheduled for 2010.
• So we’re doing everything we can. We aren’t pacing ourselves to the 2020 guidelines. Obviously, it would be in our best interest to produce the most fuel efficient, most environmentally friendly vehicle, assuming the consumer is going to buy that. We’d be foolish not to do it.
Quintessential American car company
• Clearly, Chrysler plans to emerge from the current downturn as a lean, agile company and we are and will continue to be what I’ll call the quintessential American car company.
• Seventy-three percent of our sales are in the U.S., 61 percent of our vehicles are produced in the U.S., 74 percent of our employees work in the U.S., 78 percent of our material is purchased in the U.S., and 62 percent of our dealers are based in the U.S.
Partnerships and alliances
• Chrysler again has been looking for partnerships. We’re looking for alliances. We’re looking for opportunities to make the auto industry, either within the United States or globally, more efficient.
• I don’t think there’s any question that there’s opportunities for more synergies.
• There are opportunities for more sharing, whether good knowledge in 136—for example, to create a national science center where rather than paying each of us a dollar to develop the same technology, we’d pay $1. That technology would then be transferred over to the auto companies. It would make the $25 billion go further. It would be more cost-effective.
• If it became a wholly-owned affiliate, you can get private equity to invest in it and then market that.
• So there are many creative ideas I think to your point that the auto industry could look at, but the immediacy of why we are here today is to give us the chance to get through this, and then to look at those on how the U.S. auto industry can be more formidable, can be more competitive, not only to be profitable here in the U.S., but on a global basis.
We have learned from the mistakes of the past
• So yes, we have made some mistakes in Chrysler, and what we’re trying to do is move expeditiously to remedy those. Our warranty costs as a result of that in the last 15 months has gone down 29 percent by focusing on “customer first” and “quality … period.”
• The mistake Chrysler probably made during that period is that we were responding to the customer who wanted bigger, more expansive, higher horsepower vehicles to go with their second homes, their boats, their trailers, and we chased that consumer demand up.
• Lesson learned for us and we’re moving as fast as we can to make sure our product portfolio is much more balanced, that we have smaller, more fuel-efficient, more efficient cars to blend with those things that we’re doing, in producing hybrids, producing electric vehicles, to make sure that we have the appropriate blend as we go forward.