25 Dollars-billion loan just the first step for rebuilding carmakers

When a senator at a recent hearing asked General Motors Corp. Chairman Rick Wagoner whether she should wait for the price of the Chevrolet Volt to go down before buying one, Wagoner had a ready answer: “The good news is we’re going to subsidize your purchase.”

So will the American taxpayer.

With the approval of $25 billion in low-interest loans Saturday, the U.S. auto industry has won the help it urgently needs to rework its vehicles.

But the loans are one of several government aids — from research funds to consumer tax credits — that automakers will increasingly rely on to build the technology they need to survive.

The industry and its supporters say rising fuel economy standards, the drive to reduce consumption of foreign oil and increasing efforts by foreign countries to boost their industries will require ever closer ties between Detroit and Washington.

“For them to do what they need to do, we’re going to have to have a major government commitment,” said Sen. Carl Levin, D-Mich. “We have to change the way we look at industry in America.”

The $25 billion in direct federal loans, the largest federal aid ever offered to the U.S. auto industry, won final approval from Congress after a three-month industry blitz that included visits by top executives and some peeks at future technology, such as Chrysler LLC’s electric-vehicle concepts that were revealed publicly this week.

Industry officials say the loans will help them retool factories to build more efficient models, such as the Chevrolet Volt. Wall Street firms have estimated that the loans could also sharply reduce the cash needs of GM in 2009, and at Chrysler to a lesser degree. Michigan lawmakers have pledged to seek an additional $25 billion after the elections, citing the industry’s financial woes.

“This is an important first step to providing access to capital for important investments in the future at a time when the capital markets are distressed,” Ford Motor Co. officials said in a statement.

No rules yet

Detroit automakers will burn through billons of dollars in cash this year because of a downturn expected to last through 2010.

Under the loan program, automakers and suppliers could borrow at interest rates close to what the U.S. Treasury does — roughly 5% — rather than the 15% they would have to pay on financial markets. On a loan of $1 billion, that’s a savings of $100 million.

While lawmakers added requirements to the loans to speed the process of handing out funds, the U.S. Department of Energy warned this week the process could take up to 18 months after the bill is signed, which Michigan representatives have vowed to correct.

Perhaps no other vehicle symbolizes Washington’s role in the auto industry better than the Volt, the extended-range electric vehicle that GM plans to launch in 2010.

While the rules for the loans have yet to be written, GM’s $336 million cost to retool the Poletown plant where the Volt is to be built seems to meet all possible criteria for a low-interest federal loan.

Better mileage

The law will require models to get 25% better fuel economy than their direct competitors in order to qualify — a bar that GM and other automakers said would be tough for many new vehicles to clear.

The law also says preference for the loans should be given to older plants and those at least 20 years old, even if they’re closed. GM’s new engine plant in Flint announced this week would likely not qualify, but other Flint-area plants might.

Detroit’s automakers’ first forays into hybrid vehicles were spurred by the Partnership for a New Generation of Vehicles, a 1990s program that spent $1.3 billion on research.

The U.S. Department of Energy spent $213 million in fiscal 2007 on basic vehicle research, and both of the Volt’s possible battery suppliers have received small research grants funded in part by the DOE.

Research spending

And while Congress passed the auto industry’s loans, it was still struggling to approve a tax credit of up to $7,500 for plug-in hybrid vehicles — which the Volt and its expected $40,000 price tag would qualify for — and $300 million for advanced battery research.

The government’s research spending pales in comparison to the $16 billion that GM, Ford and Chrysler will spend developing new products this year despite their weak balance sheets.

But the automakers tend to focus their spending on immediate needs, such as new models, rather than basic science that could lead to breakthroughs several years from now.

Automakers and the UAW contend the United States has been falling behind other countries in vehicle and battery research. Germany has pledged to spend 1.1 billion euros ($1.6 billion) over the next 10 years on advanced vehicle technologies, while Japan announced last year it would spend $215 million on battery research.

“If there’s going to be this technology in the United States, there’s got to be some public funding,” said Sen. Debbie Stabenow, D-Mich.

The industry’s prospects for additional aid appear brighter regardless of who’s in the White House come January. But the helping hand also may come with additional requirements, and should the industry fall short in its energy-saving plans, Washington will have little sympathy.

“We certainly look forward to working with Congress on continuing this effort … to drive technology forward, and just as importantly, to have the capacity in this country to produce and deploy those kinds of technologies,” said John Bozella, Chrysler’s chief lobbyist.