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The end of Detroit?

October 10th, 2008 · No Comments

We thought, perhaps one of the big three will falter, but all three?? Surely the bankruptcy of one of them must help the other two? However, after greatly being hobbled already by the now somewhat relenting energy crisis, now comes the recession. It’s what you call a double whammy..

We researched (in a previous career in the academe) Toyota’s production model in considerable detail in the 1990s. One remark has always stayed with us. They were so open about their methods. For years, executives from Detroit were toured around to see for themselves.

Once, a high ranking Toyota official was asked about this. His reply was that the US car manufacturers would never catch up. How’s that for confidence? The Toyota man had a point though. The nucleus of the Toyota advantage is what is known as ‘tacit collective knowledge’, or ‘production routines’. These, like ‘culture’ are terribly hard to grasp, let alone copy.

Having said that, the US car manufacturers actually did a half decent job at that. It was not enough though, although even Toyota is faltering in today’s market circumstances, but it won’t fall over (it is profitable and sits on mountains of cash). That cannot be said of the US big three (from Bloomberg):

GM, Ford May Face Bankruptcy on Slowdown, S&P Says (Update3)
By Jeff Green and Marco Bertacche

  • Oct. 10 (Bloomberg) — General Motors Corp., Ford Motor Co. and Chrysler LLC may be forced into bankruptcy by slowing economies and dwindling U.S. auto sales, Standard & Poor’s analyst Robert Schulz said today.
  • “Macro factors could overwhelm them at some point” even with the three biggest U.S. automakers committed to turnarounds, Schulz said in a Bloomberg Television interview. S&P said yesterday it may cut GM and Ford debt deeper into junk on forecasts for 2009 auto demand falling to the lowest since 1992.
  • GM, Ford and Chrysler are under pressure as the worsening global credit crisis makes it harder for buyers to get loans and dealers to finance their operations. U.S. industrywide sales tumbled 27 percent in September, the most in 17 years.
  • GM fell 17 cents, or 3.6 percent, to $4.59 at 9:52 a.m. in New York Stock Exchange composite trading, while Ford added 7 cents to $2.15. GM slumped to a 58-year low yesterday and Ford closed at its lowest since 1982. Chrysler is closely held.
  • With all three companies working to boost cash, any bankruptcy filing would be a last resort, not a “strategic” decision, said Schulz, who is based in New York.
  • “We don’t see that as something they would choose,” he said. Schulz said the “trigger” for a forced restructuring under bankruptcy protection would be based on the automakers’ ability to preserve liquidity as sales decline.
  • Operating Cash. Operating-cash needs at GM, Ford and Chrysler are “substantial, so if it looked like they were going to be pushing toward that number because of these operating losses and cash usage, that’s sort of the point where they’d have to consider” bankruptcy, Schulz said.
  • S&P said yesterday that its debt ratings for GM and Ford, already at six steps below investment grade at B-, may be lowered again because the automakers face a “serious challenge” in 2009.
  • GM shares will fall further, Barclays Capital analyst Brian Johnson said in a report today, reducing his stock price for the Detroit-based automaker to $4.
  • With auto sales stalled in the U.S. and beginning to contract in the rest of the world, we believe GM’s cash needs are increasing,” wrote Johnson, who is based in Chicago. “Moreover, the downside risk of greater decline in worldwide auto sales driving greater cash needs is increasing.”
  • GM and Dearborn, Michigan-based Ford lost a combined $24.1 billion last quarter. GM last posted an annual profit in 2004, while Ford hasn’t had a full-year profit since 2005.
  • `Not an Option’ “Bankruptcy is not an option GM is considering,” spokeswoman Renee Rashid-Merem said yesterday. “It would not be in the interests of our employees, stockholders, suppliers or customers.”
  • The automaker said it still expects to add $15 billion in liquidity by the end of next year, including speeding up plans to cut $10 billion in costs.
  • Ford said yesterday it is reviewing its liquidity and will give an update when third-quarter results are released. The second-largest U.S. automaker borrowed $23.4 billion in 2006 so it could absorb the cost of shutting factories and cutting jobs while it develops new models.
  • The automakers won Congress’s approval last month for funding for a $25 billion loan package to help develop more fuel-efficient vehicles. The funds will be spread primarily among Ford, GM and Auburn Hills, Michigan-based Chrysler, though other automakers, such as Volkswagen AG, have said they will seek a portion.
  • Worsening Market. Regulators are writing the rules for that borrowing even as auto-market conditions worsen. Industry researcher J.D. Power & Associates estimated yesterday that U.S. industrywide sales will fall to 13.6 million this year and 13.2 million in 2009. Last year’s total was 16.1 million.
  • Industrywide sales of 13 million autos next year would mean shrinkage in the overall U.S. vehicle fleet, said Erich Merkle, an analyst for consulting firm Crowe Horwath LLP in Oak Brook, Illinois.
  • “We are going to find people where they may have had three cars and now have two, and two cars now have one, and a lot of that is just because of the economic environment,” Merkle said. “They may not have the ability to buy a new car and even if they do, they may not be able to get financing for that car.”
  • Global demand in 2009 may be even worse, with “an outright collapse” now possible, according to J.D. Power, which is based in Westlake Village, California.
  • GM’s 8.375 percent note due July 2033 fell 3.5 cents to 24.5 cents on the dollar yesterday, yielding 34 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
  • Ford’s 7.45 percent note due July 2031 declined 0.4 cent to 34 cents on the dollar, yielding 22 percent.

Tags: Car Market