BUSINESS

A second time around for Chrysler

Renewed loan guarantees give troubled automaker another shot in the arm

Gillian MacKay March 2 1981
BUSINESS

A second time around for Chrysler

Renewed loan guarantees give troubled automaker another shot in the arm

Gillian MacKay March 2 1981

A second time around for Chrysler

BUSINESS

Renewed loan guarantees give troubled automaker another shot in the arm

Gillian MacKay

February has been a month of feasting at the public trough for two of Canada’s largest and hungriest corporate invalids. Three weeks ago, Massey-Ferguson Ltd. gobbled up $200 million in federal and provincial backing for a preferred share issue, and last week Chrysler Canada Ltd. downed $150 million in federal loan guarantees.

It was Chrysler’s second trip to the trough in less than a year. Last May, Ottawa agreed to guarantee $200 million in loans based on a commitment of $1 billion in investment over five years. But Chrysler’s recovery schedule was dashed in the fall when a renewed round of high interest rates decimated new car sales. In December, the company was back on the doorstep of the U.S. Loan Guarantee Board, asking ahead of schedule for $400 million in loan guarantees. (Congress has authorized a total of $1.5 billion in phased-in aid to Chrysler Corp., of which $800 million was taken in 1980.) In return, Chrysler agreed to slash its spending plans and sought concessions from lenders, suppliers and workers.

The result will be a much smaller company than was envisioned last year, although Ontario Minister of Industry and Tourism Larry Grossman says those plans were never realistic. (Ontario’s part in the rescue was to put up half the cost of a $20-million auto parts plant, which will revert to the government if Chrysler fails.) Says Grossman: “The game was to start by getting big money for a big company. Then the cutbacks start—and there will always be the excuse that they are needed to protect the loans. What they will end up with is big money for a small company.”

Canada is sharing in the cutbacks (although no more so than the United States) and has managed, for the time being at least, to hold on to car production. Initially, Chrysler wanted to renege on its commitment to build a smaller version of its new K-car in Canada in 1983. Faced with strong opposition from Ottawa and the United Auto Workers, Chrysler agreed to keep the car, but production has been cut to 100,000 units (half of the original projection) and delayed one year until 1984. Employment by 1985 is now forecast at 12,300, compared with 15,900 under the former plan, and investment over five

years is $681 million, compared with $1 billion. In its turn, Ottawa has lowered its support to $150 million from the original $200 million and has delayed the guarantees by an additional year until 1983.

Although free-enterprisers object to bailouts both for Chrysler and Massey, the risks are considerably different in each case. Unlike the Massey guarantees, which take effect immediately and can be triggered by Massey’s failure to pay a monthly dividend, Chrysler gets nothing until 1983. By then, Chrysler will probably have proven itself or gone under. The Chrysler guarantees are also secured by a first mortgage on the Fillette Road plant in Windsor, whereas the Massey guarantees are unsecured.

The immediate outlook for Chrysler is not inspiring. The U.S. Loan Guarantee Board predicts a $250-million loss for 1981. Chrysler estimates its 1980 loss at $1.8 billion, topping Ford’s announcement last week of a $1.5-billion loss, the largest in American corporate history. Noted Detroit auto analyst Arvid Jouppi admits he is in the minority in predicting that Chrysler will show a profit in April (though not for the year as a whole). Jouppi also forecasts an

eight-per-cent decline in imports in 1981 and a 12-per-cent increase in sales of domestic cars in the United States and Canada. Says Jouppi: “We won’t be beating the imports back to the sea, but finally we have a product to throw at them.” The hoped-for pickup in sales, however, has been negligible so far, and Robert White, director of the United Auto Workers, warns that “unless interest rates and unemployment fall, Chrysler’s problem will accelerate.” Chrysler has gained two or three percentage points in market share since December, when it began to offer rebates, but similar programs announced by Ford Motor Co. and General Motors Corp. last week will eliminate that advantage. In addition, because of Chrysler’s austerity campaign, it will have no new spring models to pit against

those of General Motors and Ford, which last week began production in St. Thomas of sporty two-seater versions of the successful Escort and Lynx subcompacts.

If Chrysler’s present plan founders, it will have difficulty selling governments on a new one. Industry, Trade and Commerce Minister Herb Gray admits he signed last week’s agreement with “reluctance,” and the Reagan administration is likely to take a harder line than Carter officials did in an election year. With the Canadian guarantees in place, the U.S. Loan Guarantee Board is expected to approve the $400 million this week. It is hoped that Chrysler will make this meal last longer than the previous one.