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Big trouble for Big Three automakers

Shares of General Motors are trading at prices last seen in the 1950s.

By Staff writer of The Christian Science Monitor / July 2, 2008

Tough time: High gas prices are contributing to slump in car sales.

melanie stetson freeman – staff

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America's automobile industry may be facing the biggest turnaround challenge in its history, a problem punctuated Tuesday as the carmakers released monthly sales results.

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Times were tough enough in Detroit before gasoline hit $4 per gallon, but in the past two months the outlook has taken a turn for the worse.

Shares of General Motors are trading at prices last seen in the 1950s, their value cut in half in just eight weeks. Ford and Chrysler are in even worse shape, analysts say.

The sobering implication: The Big Three may have to become the Big Two, and even survivors will have a tough road ahead.

Bankruptcy is not a near-term threat, but the three carmakers are fast burning through cash reserves. And while government assistance – or perhaps an energy policy that supports new automotive technologies – could become a lifeline, it can't substitute for the hard work of transforming product lines.

"The rate of cash usage is alarming," says Gregg Lemos Stein, an auto analyst at Standard & Poor's in New York, which has put all three carmakers on "credit watch" to review the default risk on their debts. "They've never been lower than this," he adds, referring to S&P's current B rating on their debt.

The current debt ratings place the Detroit automakers in what's known as "junk bond" status, below the typical quality range known as investment grade. The good news: Bankruptcy or default isn't an imminent risk, Mr. Lemos Stein says, because the companies headed into this crisis with cash on hand.

But the credit watch, in place as of June 20, means that analysts are concerned about a deteriorating outlook.

"We believe all three companies currently have ample liquidity for at least the rest of 2008 as measured by cash balances, available bank facilities, and … unencumbered assets" that could be sold, S&P analysts said in their recent report.

The cash-flow problem could reach "undesirable" levels by the second half of next year, they said.

The Big Three have been under growing pressure for years. And in the early 1980s, they faced a similar crisis in which surging gasoline prices prompted a consumer shift toward smaller vehicles, even as a recession hammered sales.

In that era, the federal government bailed out Chrysler with a low-interest loan, and the company recovered by opening a large market for minivans as a family vehicle.

Now, the companies again face a recessionary sales climate, and a consumer shift away from large sport utility vehicles and pickups. Only now, the Big Three are much smaller than they used to be, as a share of the US market.

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