American carmakers
Surviving the crash
Nov 7th 2008
From Economist.com
Ford and GM announce huge losses, as American carmakers lurch from disaster to disaster
AMERICA’S government, after rescuing a financial system brought low by dodgy mortgage-backed securities, now faces the prospect of bailing out deeply troubled carmakers. On Friday November 7th Ford delivered the latest wretched figures for inspection that horrified even the industry’s tyre-kickers, who are well-used to bad news. It revealed operating losses of $3 billion in the third quarter and said that its carmaking operations had got through $7.7 billion in cash. The news from GM, later in the day, was worse: an operating loss of $4.2 billion in the quarter while burning through nearly $7 billion in cash.
Even before the announcements on Friday the beleaguered carmakers were in desperate shape. High fuel costs, the effects of the credit crisis and looming recession contributed to making October the worst month for new-car sales in 25 years. Sales at GM and Chrysler have fallen by 18% and 25% respectively this year and both companies will run out of cash next year if they continue to use it up at the current rate. GM even gave warning that its cash position was so precarious that it would run out in the first half of 2009. The massive losses GM and Ford reported on Friday show that the prospects are bleak for America's carmakers despite yet another round of cost cutting measures that are now planned.
America’s carmakers could at least cheer the election of Barack Obama as president this week. The Democrat is widely assumed to have sympathy for Detroit’s struggling car giants and has pledged to convene a summit shortly after taking office to address the problem. The outgoing administration of George Bush has done its bit too. Detroit secured the promise of $25 billion in soft loans (just as the government decided to pump huge sums into the financial system to save banks from disaster) to help it retool production lines to produce the smaller, more fuel-efficient vehicles that Americans now want.
This week the Bush administration agreed to speed the process of making the loans available, although it rejected a request to provide up to $10 billion to pay for a merger between GM and Chrysler, which is owned by a private-equity firm, Cerberus. The deal, in effect a GM takeover of its smaller rival, would have allowed the bigger firm to get its hands on Chrysler’s cash pile, while cutting costs by some $10 billion. It seems that Mr Bush would prefer that the Big Three become the Big Two on a new president’s watch.
The plight of GM, Ford and Chrysler also prompted a meeting between the bosses of all three firms and Nancy Pelosi, speaker of the House of Representatives, on Thursday. Reportedly under discussion was another lot of quick and cheap loans of $25 billion and a raft of other concessions. These include a similar sum to help with the cost of transferring health-care provision to the unions, as well as loans to struggling suppliers and access to Hank Paulson’s $700 billion financial-industry bail-out for the car companies’ credit arms. The additional $25 billion could be made available later this month as part of an economic stimulus package set to come before Congress. In light of the latest dire news the car companies might hope that Congress is willing to help.
Given the slumping sales and dwindling cash reserves facing America’s carmakers, the new president will face a tough decision when he takes office. Early in his campaign he made promises that were unpopular with the car firms, pledging to raise fuel economy standards. But he is also expected to show gratitude to the trade unions that generously funded his election campaign. Presiding over the bankruptcy of iconic American firms and huge lay-offs is unlikely to appeal. But pouring cash into basket cases with no end in sight to the outlay is equally as unpalatable.
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