Car makers: running on empty
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Associate Editor
David Stevenson Apr 03, 2009
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The end of the road for Chrysler?
General Motors and Chrysler have been granted a brief stay of execution, but slumping car sales mean their survival is in doubt. David Stevenson reports.
What's the latest in the auto industry?
It's been another fraught week for the world's car makers, especially in America where sales fell by an estimated 40% year on year in March. General Motors (GM) and Chrysler are fast running out of cash. As the deadline approached for these two to show their "viability", Barack Obama threw out GM's request for a further $16bn (£11.3bn) in emergency loans and rejected calls for $6bn in extra funding from Chrysler, whose condition is even worse. Bosses are being booted out: GM chief executive Rick Wagoner "resigned" under pressure from the US administration, while in France Peugeot Citroën heaved out its CEO, Christian Streiff, in a spat over job cuts.
Are GM and Chrysler out of road?
It seems so. "Detroit has just been told that President Obama is now the general at GM, the czar of Chrysler and the man who will call the shots on if and how the two ailing car makers are restructured with public money," says Canada's The Chronicle Herald. GM will now get 'adequate working capital' over the next 60 days while the 'auto task force' assesses whether the firm has consolidated enough brands and cut its debt load to survive. Chrysler has been given just 30 days' grace to sort itself out. It has since announced an "agreement on a framework of a global alliance" with the Italian car maker Fiat, but no details have emerged.
Is bankruptcy the most likely outcome?
"President Obama has a clear message for GM and Chrysler," says BusinessWeek's David Welch. "Come back with a better plan or taxpayer funds are cut off." The US government doesn't want to stay in the auto business long term, so both GM and Chrysler must survive without becoming "wards of the state", says Obama. But he added that, "we cannot, we must not, and we will not let our auto industry simply vanish". So for GM, a 'quick rinse' bankruptcy looks the most likely outcome, with government providing financial support and backing service warranties (the guarantees that new vehicle buyers receive). For Chrysler, the jury's out until the terms of the Fiat deal are published. But it could well be the same story.
Would this work?
It would let GM and Chrysler keep trading, but without the millstone of "crushing obligations to its bondholders, unions and other stakeholders", says the Los Angeles Times's Ken Bensinger. But it would still be very bad news for creditors, shareholders and employees. Bondholders would be likely to "lose more than two-thirds of their investment", says the Chicago Tribune – while shareholders would be wiped out. The workforce would suffer badly too because plant closures and mass layoffs would mean wages, health care and pension benefits being slashed. Companies dependent on the auto makers, such as dealers, suppliers and advertisers, would be hit hard as well.
Where does this leave Ford?
Ford is the only US car manufacturer not taking federal aid. It's seen as the healthiest among the Detroit Three, being the only one to get United Auto Workers union concessions to make labour costs competitive. The firm is also making progress in reducing its $25.8bn debt pile by up to 44%, says Bloomberg's Keith Naughton. But ironically, Ford could lose its competitive edge if Obama-inspired cost-cutting works at GM and Chrysler. "This really pulled the rug out from under Ford," says former Ford product planner John Wolkonowicz. "The government wants to have GM survive as a leaner and greener company and Ford will need further restructuring to compete." As auto industry consultant Laurie Harbour puts it, you could have Ford standing at the government's door saying, "Now what do I do?" CEO Alan Mulally has done all the right things, but it could all be for nothing if GM gets an unfair competitive advantage.
What about the world's other car makers?
Massive global overcapacity – even with US output dropping – means car manufacturing everywhere is in a critical condition. European sales last month fell 18% year on year, and the €780bn (£724bn) European car industry is now suffering from at least 20% oversupply. Industry expectations for worldwide sales of 70 million have become at best 50 million this year. Now the US move "has sent a signal to the global auto sector to get its act together or drown", says The Guardian's David Gow. "Lacking the systemic importance of the banking sector, which has been bailed out with trillions of dollars, the car industry is being left to bleed to death – or consolidate." In other words, huge losses mean a major global shakeout is on the way.
Who will survive the shakeout?
Volkswagen's chief executive Martin Winterkorn said he predicts the survival of one Japanese firm, a few Chinese, two or three Europeans, and Ford in the US. In Europe, VW is a certainty to pull through, while the French will do their best to keep Renault, part-owner of Nissan, ticking over. But Mercedes-owner Daimler and BMW may be forced to merge, and the Obama-backed shotgun marriage of Chrysler and Fiat may not be enough to save either. While losing money this year, Toyota is the best-placed Japanese firm. China's 150 auto firms "will be forced by Beijing into a series of mergers and acquisitions", says David Gow in The Guardian, while "in Korea, Kia is likely to emerge as the big player with Hyundai – linked to GM – on a funeral pyre". In India, "Tata – if it survives its expensive Jaguar Land Rover takeover – will dominate the landscape".
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