Tim O'Brien | Jul 15, 2008

Which of the big three in the US – Ford, GM or Chrysler – will end up in bankruptcy? Will more than one, or all three, bite the dust? These are the questions being asked in Wall Street as sales stagnate, losses deepen, and values collapse for the giant American auto-makers in the world’s largest car market.

GM, riding a galloping downward spiral, and with a share value that has now fallen below US$10 a share, may be the first to fall. According to the London Economist, “Shares in General Motors, America’s biggest auto-maker, fell below $10, valuing the giant firm at little more than $5.6 billion. The last time GM’s share price was this low, the Cadillac Eldorado had yet to grow fins and Volkswagen’s beetle was a funny-looking novelty on American roads. That was 1954.” (July 3rd 2008, The Economist)

Fasten the seat-belts brothers and sisters because that’s not all the Economist had to say. “Things are just as gloomy elsewhere in Detroit,” it said. “Ford has abandoned all hope of returning to profit, as promised, in 2009 and appears to be bracing itself for a loss in 2008 even bigger than last year’s $2.7 billion. And on June 26th Chrysler was led to deny rumours that it was preparing to file for bankruptcy, after drawing down a $2 billion credit line from its owners, Cerberus Capital Management, a private-equity firm, and Daimler.” (ibid.)

For GM, once the unassailable colossus of the US automotive industry, the vultures are circling. The unthinkable – bankruptcy - is now considered a genuine prospect. In 2006, even while grappling with massive pension fund liabilities and plant closures, GM was valued at US$20 billion. Since then, just eighteen months later, its value has been halved, then halved again.

2008-hummer-h2-rear-view

The AIM Online Newsletter (AIM 10/07) reports Merrill Lynch analyst, John Murphy, as commenting last week that the GM Group needed to raise US$15 billion if it was to “remain solvent” and that “bankruptcy is not impossible”.

Merrill Lynch predicts GM shares to continue to stay on the slippery slope – reaching an unthinkable US$7 in the immediate outlook.

There is also a growing expectation that Rick Wagoner is about to lose his head and to be replaced by finance chief Fritz Henderson within the year. Bob Lutz – widely regarded as being responsible for steering a new era of design and product quality improvement at GM - is also considered likely to follow Wagoner out the door.

At this level, heads roll like bowling balls when there’s talk of bankruptcy in the air and a monumental ‘stuff up’ on the ground.

While GM has around US$24 billion in cash reserves, it is reportedly haemorrhaging US$3 billion a quarter. In response to the crisis, GM is slashing thousands of jobs, with white-collar workers also in the firing line, and, as was reported last month, is looking for buyers for some of its key brands – Hummer, facing a collapse of sales, being amongst them.

With a 20 percent slump in US vehicle sales thanks to the economic aftershocks of the subprime crisis, tighter credit, collapsing consumer confidence, and a vehicle market expected to deteriorate further in the unrelenting wake of rising fuel prices, GM, Ford and Chrysler have woken up in the middle of a perfect storm.

FESTIÑ05/08/08 Ñ Chrysler rolls out the new Challenger at the Brampton Assembly Plant, April 8, 2008.

While external factors are now driving the fortunes of the market, it is astonishing that the big auto makers spent so long asleep at the wheel, ignoring the signs in the market and so manifestly failed to pick the inevitable shift in consumer sentiment away from SUVs. The trend was well-advanced, but obscured by healthy profit margins on individual sales, before the current banking melt-down and new ‘fuel shock’ hit the US economy.

Which of the ‘big three’ US auto makers will survive, if any?

Citigroup analyst, Itay Michaeli, said that GM has to “weather the current downturn with considerably less backup liquidity than smaller rival Ford Motor Co (F.N).” (Reuters 02/07) Michaeli predicts that recovery in the US auto market will not begin until 2010 or 2011, compounding the difficulties for GM as well as for Ford and Chrysler.

Others are even more pessimistic. Merrill Lynch is describing the situation as “shaping up to be a more severe downturn than even the most bearish industry observers expected”.

At issue for ‘the big three’ is that the shift in consumer preference is likely to be permanent: few expect the American consumer to return to buying gargantuan SUVs. A shift to smaller cars compounds GM, Ford and Chrysler woes: in the first instance neither has an adequate range of appealing, fuel efficient cars, nor will they have new models until 2009 at the earliest; and secondly, compounding the cash crisis, smaller cars are less-profitable for both the manufacturers and for car dealers.

Ford, despite being first to get the serious wobbles, is regarded as being best-placed to weather the storm. Deutsche Bank’s Rod Lache believes that Ford is the most 'fixable' of the three US automakers”.

FORD-HEADQUARTERS

Ford (and also GM for that matter) is also seen as being able to benefit from its “well-run foreign operations, which are benefiting from growing demand in China, Russia and Brazil”. (Merrill Lynch)

So, Ford over the line – just - and, for GM, growing gloom and a pessimistic ‘watching brief’ but some debate as to its future.

For Chrysler, however, the situation is perhaps bleakest. Sales of its Chrysler, Dodge and Jeep marques plunged by 25 percent in the year to May 2008, and, with limited resources to invest, Chrysler has no chance of having a suitable smaller car on offer until 2010.

Of the big three, Chrysler is the most truck-dependent. Its biggest launch for 2008 is a revamped Dodge Ram. Analysts, including Merrill Lynch’s John Murphy, believe that Chrysler has little way out of the its current difficulties and is likely to be broken up or sold. “It may not be long before the Big Three become the Not-So-Big Two,” John Murphy said.

Of course, when giants fall, the ground trembles. Only time will tell if the shock waves will reach us here.