Are automakers also too big to fail?

A sharp drop in demand is driving the industry to pursue a bailout.

Rebecca Cook/Reuters/file
Closing: GM worker Dan Jenks stands by a Michigan plant slated to close at the end of '09.
David Zalubowski/AP/file
Inventory: Some dealers appear to be selling vehicles at cost or below cost for fear they will depreciate more in value. Despite such moves, hundreds of dealers are expected to cease operations.

Now, the Detroit automakers have their hands out.

In a financial scenario that probably sounds all too familiar to Uncle Sam, the auto industry is declaring itself too important – with hundreds of thousands of workers – for the government to allow it to fail.

Ford, Chrysler, and General Motors have recorded years of losses and are now hit with a significant downturn in consumer spending. The industry is seeking billions of dollars in low-cost government loans or some form of federal guarantee or bailout – with the possibility that some of the money could be used for a merger. Business groups and governors are approaching the US Treasury on the industry's behalf.

"The companies are desperate. They need help," says Rebecca Lindland, director of the autos group at IHS Global Insight, an economic consulting firm in Lexington, Mass. "For the country this is our version of 'Joe the mechanic,' and if Joe loses his job, the ripple effect is tremendous."

Behind the crisis is a sharp drop in sales. The break-even point for Detroit is annual sales of 16.2 million vehicles, says Art Spinella, president of CNW Marketing Research in Bandon, Ore. Sales are now about 14.8 million, he says.

"It's fairly easy to lose billions when your average wholesale price is $27,000," Mr. Spinella. "It's amazing some of the manufacturers are still around even now."

Although the auto industry is not nearly as important as in the 1950s, when a GM president is reported to have said, “... what was good for our country was good for General Motors and vice versa,” the industry still has a long reach on Main Street. The US auto companies directly employ 355,000 workers, and another 4.5 million Americans are indirectly supported by the industry, according to a letter sent to US Treasury Secretary Henry Paulson by six governors on Friday. Total auto employment amounts to 3.3 percent of the US civilian workforce and more than 36 percent of the US manufacturing workforce. [Editor’s note: The original version of this paragraph gave the wrong time frame for the GM president’s quote. It also had an inaccurate version of the quote.]

"If the auto companies ask for help, the federal government should give that help and give it quickly," says Elizabeth Boyd, press secretary to Michigan Gov. Jennifer Granholm, one of the authors of the letter that asked for "immediate action."

The industry needs help on several fronts, Ms. Lindland of IHS Global Insight says. First, the companies need to find a way to shore up their captive finance companies, such as Ford Motor Credit. These financing arms are now rated well below investment grade and would pay more than 18 percent for new borrowings for themselves. Last Thursday, GMAC said it was trying to convert to a bank so it would be eligible for some of the $700 billion in bailout funds that Congress passed to address the financial and credit crisis.

Second, the companies need some form of liquidity financing. GM, for example, is burning through $1 billion per month, says Lindland: "If you have $20 billion, that's not a lot of money." The major financial strains are at GM and Chrysler and to a lesser extent Ford, she says. GM has been in talks to acquire Chrysler.

Third, the companies are still waiting for $25 billion in aid that was passed by Congress earlier this year. This money is earmarked to help the companies retool their factories to produce fuel-efficient vehicles. Ms. Boyd says she has seen reports that it could take 18 months to get it to the industry.

"Right now, our goal is to make sure the $25 billion gets to the industry as soon as possible," says Emily Lawrimore, a spokeswoman for the US Commerce Department, which is responsible for the program.

That funding is "one piece of the problem," says Bruce Belzowski of the University of Michigan Transportation Research Institute in Ann Arbor. "There is no question the companies are behind in the need to produce more fuel-efficient vehicles," Mr. Belzowski says. "But it does not address opening credit to consumers."

For most Americans, their contact with the auto industry is at their local dealership, where dealers are bracing for tough times ahead. The US will lose some 700 dealers this year, the National Automobile Dealers Association (NADA) estimates. During the economic downturn of 1990-92, the industry lost 600 dealers per year.

"[Even] in a typical growth year, you might lose 75 to 100," says Paul Taylor, chief economist for NADA. "Because financial problems are cumulative, the numbers will be larger next year."

In Toms River, N.J., Buick-Pontiac-GMC auto dealer Jim Curley says that despite tight controls and a well-run business, "it is virtually impossible to turn a profit, even with a strong service-and-parts business."

Dealers are in a panic to move vehicles, causing them to sell at cost or below cost for fear the vehicle will depreciate more in value, he says.

But it isn't a totally bleak picture in the showroom, Mr. Curley says. If a potential buyer has good credit, financing is available. "For zero percent financing deals, you better be creditworthy and be able to prove that score," he says.

Even though some major banks have dropped out of providing auto loans, it's still possible to find lenders, Curley says. For example, TD Bank, a Canadian bank, is aggressively seeking the retail auto business, he says.

While the dealers selling Detroit brands are expected to shrink, by next year 260 new Mahindra dealerships are expected to be up and running. The Indian company currently sells tractors for gentlemen-farmers, says Mr. Taylor of NADA. But by next year, it will be exporting SUVs powered by "eco-diesels." "Their timing looks reasonable," Taylor says.

Unfortunately, the exact timing of the downturn for Detroit is not good. January and February are dead months in terms of car sales, says Spinella of CNW Marketing Research. He doesn't expect demand to pick up until the second half of next year at the earliest.

"All the Detroit brands are in dire straits," he says. "Who knows who has enough cash reserves."

You've read  of  free articles. Subscribe to continue.
QR Code to Are automakers also too big to fail?
Read this article in
QR Code to Subscription page
Start your subscription today