Canada Rides to the Rescue After Southern Republicans Fail to Act

Found at Report On Business

GREG KEENAN , KAREN HOWLETT , SHAWN MCCARTHY and BARRIE MCKENNA

From Saturday's Globe and Mail

Barrie McKenna:
December 12, 2008 at 9:00 PM EST

TORONTO/OTTAWA/WASHINGTON — U.S. and Canadian governments say they will ride to the rescue of the beleaguered Detroit auto makers, hoping to head off a catastrophic collapse of Chrysler LLC or General Motors Corp. that would cascade throughout the North American economy.

Ottawa and Ontario will provide an estimated $3.4-billion to the Canadian units of the Detroit Three, while U.S. President George W. Bush will throw a $14-billion (U.S.) lifeline to their parent companies.

Federal Industry Minister Tony Clement called a hastily arranged news conference Friday night to announce the Canadian aid package.

“The seriousness of the situation dictates that we be here this evening,” Mr. Clement said.

The dire situation auto makers face was underlined Friday when GM announced massive cuts in production in January. Honda Motor Co. Ltd. also said it will trim output, but by a smaller amount than GM.

Mr. Clement would not provide a specific figure, but he said the amount of money in the Canadian bailout represents this country's one-fifth share of the Detroit Three's North American vehicle production and on Canada maintaining that percentage.

“Clearly, this amount of money is meant to be, as the U.S. is finding out, a way to keep the doors open for the domestic auto sector while they continue their long-term planning,” he said.

However, he stressed that the support package would reflect the interests of taxpayers and is contingent upon the auto makers working with their unions and parts suppliers on a long-term solution for the sector. It's also conditional on a U.S. deal coming together.

“This is an existential moment for the auto industry,” Mr. Clement added. “Is this industry going to exist in any capacity two years from now, five years from now?” Prime Minister Stephen Harper and Ontario Premier Dalton McGuinty ironed out the details of the Canadian plan during a one-hour meeting Friday afternoon in Mr. Harper's office in traffic-choked downtown Ottawa.

Ontario will contribute a portion of the funding, one source said.

A senior Ottawa source noted the U.S. government must change the $700-billion (U.S.) Troubled Assets Relief Program to make it apply to auto makers. Ottawa expects the Americans to take several days to finalize a deal.

Just hours after Senate Republicans killed a $14-billion (U.S.) bailout late Thursday, Mr. Bush made it clear he considers GM, Chrysler and Ford Motor Co. too big and too vital to the economy, to be allowed to fail.

“The current weakened state of the economy is such that it could not withstand a body blow like a disorderly bankruptcy in the auto industry,” White House spokeswoman Dana Perino said.

Chrysler and GM are in the most serious straits, warning that they could run out of sufficient cash to operate their businesses by the end of this month or early in January.

A bankruptcy by one or both of them would create an auto industry cataclysm, likely taking down the healthiest Detroit company – Ford – and sending hundreds of suppliers into bankruptcy as well.

One think tank estimated 3 million jobs in the United States alone would be vaporized. About 110,000 Canadians, mainly in Ontario, work for the Canadian units of the Detroit Three and for parts companies. Mr. McGuinty has expressed concerns that the sector is facing further job losses because, as he said, no amount of aid to the companies can make up for the fact that Americans are buying fewer cars.

The Detroit companies have warned that protection under Chapter 11 of the U.S. bankruptcy code can't be a solution for them because consumers won't buy vehicles from companies they think are bankrupt. The auto makers argue that they would be forced to liquidate their operations.

Canadian dealers said Friday that some consumers are already balking.

Parts suppliers are also getting skittish, with some starting to demand that Chrysler and GM pay them in cash immediately, instead of waiting for the usual 45- to 60-day payment period.

The move by the Bush administration came after the Senate rejected a compromise bridge loan package that would carry the industry through to the new administration of Barack Obama in January.

Mr. Bush is exploring several options, including tapping cash from the $700-billion TARP fund – which was originally designed to bail out banks – something he had previously insisted he would not do.

He is just 40 days from handing over the keys to the White House to Mr. Obama while the country grapples with its worst economic crisis since the Great Depression.

Mr. Obama, backed by a larger Democratic majority in the Senate, will likely have the votes to push through a more expansive rescue package when he takes office.

But time isn't on the side of the auto makers. The precarious state of the Detroit Three, particularly Chrysler and GM, means they will almost certainly need a substantial amount of cash well before Mr. Obama's inauguration.

Friday's GM and Honda production cuts offered fresh evidence of how the credit crisis has frozen auto sales and affected all companies.

All GM passenger car plants in North America will be shut in January, as will some plants that make sport utility vehicles.

A Chrysler plant in Windsor, Ont., that makes minivans will also close for the entire month and one of the company's passenger-car factories in Brampton, Ont., will shut for the first two weeks of the new year.

One government source said Canadian parts suppliers and dealers will get some help when the official agreement is announced.

Mr. Clement said the government will also insist that the auto makers use the aid to keep paying their parts suppliers.

Different parts of the sector have asked for different types of assistance and the needs of parts makers are distinct from those of the three vehicle manufacturers.

For parts makers, Ottawa is likely to expand the ability of Export Development Corp. to insure accounts receivable, which is a major headache for suppliers in an economy where credit and financing are tight.