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Big Three face bankruptcy fears
After huge losses and plunging sales, experts aren't ruling out the possibility that GM, Ford or Chrysler might eventually be forced to declare bankruptcy.

NEW YORK (CNNMoney.com) -- It's been a bumpy road for Detroit's Big Three automakers for the past few years. But it may get worse.

With their sales plunging as fewer consumers are willing to buy gas-guzzling pickups and SUVs, some experts fear that GM, Ford or Chrysler could be forced to head for bankruptcy.

Last week, General Motors (GM, Fortune 500) reported a $15.5 billion second quarter net loss. While its operating loss was only $6.3 billion, that's still more than the market value of the company.

GM's loss followed an $8.7 billion loss at Ford Motor (F, Fortune 500) and came on the same day that the industry reported a 13% drop in sales, its worst month in 16 years.

Chrysler LLC, which was bought by private equity group Cerberus Capital a year ago and does not report financial results. But it relies even more heavily on sales of light trucks, such as pickups and SUVs, than GM and Ford. Chrysler also has virtually no overseas sales to fall back upon.

As such, the credit markets have expressed doubts about Chrysler's prospects, as its finance arm was able to raise only $24 billion of the $30 billion it sought. The company recently stopped offering leases to its customers due to credit market concerns and the declining value its used vehicles.

'Clock is ticking'
All this had led to increased speculation that there could be a bankruptcy in the next year at one or more of the Big Three automakers. Credit rating firm Standard & Poor's cut GM and Ford deeper into junk bond status on last week, leaving their debt just barely above the level normally associated with firms at significant risk of near-term default.

"The clock is certainly ticking," said David Cole, chairman of the Center for Automotive Research. "Obviously there's a risk. Nobody is home free."

Most experts won't give odds that one of them will stumble into bankruptcy but said there is a chance they could be forced into doing so if market conditions don't improve.

"We think they wouldn't choose to file. But there is a risk they could be overwhelmed by the events," said Bob Schulz, S&P's senior automotive credit analyst.

Making matters worse for the Big Three is that it will take years to fully adapt to the changing consumer trends, i.e. the shift away from gas-guzzling trucks and SUVs to smaller cars.

"Fixing their product mix and cutting their staff down to manageable levels is going to take a fair amount of time to work down to the bottom line," said Bob Schnorbus, chief economist with J.D. Power & Associates. "If they continue to lose money at the current rate, their chances [of bankruptcy] are uncomfortably high."

But spokespeople at all three automakers insist that bankruptcy is not on the table, saying they have adequate cash reserves to see them through additional losses.

For example, GM spokeswoman Renee Rashid-Merem pointed out steps GM took in July to raise cash, including suspending its dividend, planned asset sales and additional cost cuts.

GM still has about $26 billion in cash and credit lines available to it. Ford is in the best cash position of the three, ending the second quarter with $26.6 billion in cash and $11.6 billion in available credit lines. Chrysler has $9.4 billion in unrestricted cash and securities on hand at the end of the second quarter.

But GM burned through about $3.6 billion in cash in the second quarter alone. Experts say even with the large cash reserves on hand, the automakers don't have much more than a year to show significant improvement before they reach a crisis point.

"GM looks like they have four or five quarters to get their act together," said Shelly Lombard, analyst for GimmeCredit, a fixed income research firm. Her most recent note on GM is titled "Being pecked to death by ducks."

What would follow bankruptcy?
Even if one or more of the Big Three were to file for bankruptcy, it would likely to be under Chapter 11, which allows companies to continue operations as it tries to shed costs, rather than Chapter 7 liquidation.

"They may not be running the business well. But they're still selling a lot of cars," said Lombard. "It's not buggy whips, it's a real business. I don't think any of them are going away."

Instead, most industry experts say that a bankrupt Big Three automaker might shed some of their weaker brands. To that end, GM is already looking to sell its Hummer brand, for example.

However, filing for bankruptcy protection would be a mixed blessing for the Big Three. On the one hand, a bankrupt automaker would have an advantage over its U.S. rivals since it would be able to shed some burdensome costs

However, most auto experts believe a significant percentage of buyers would shy away from an automaker in bankruptcy due to concerns about getting warranty work done on their vehicle.

Hope for Detroit?
Yet, there is a case to be made that the Big Three will eventually bounce back. In some respects, they should be in better position now than they were just a few years ago. Even as their losses started to pile up in 2005, that was due mainly to costs that were too high, not weak demand.

And while the Big Three were losing market share to Asian automakers, they were maintaining strong sales on expensive pickups and SUVs, which are far more profitable than smaller cars.

But less than a year ago, GM, Ford and Chrysler all won major concessions from the United Auto Workers union that will eventually allow them to significantly lower their health care and benefit-related costs.

At that time, it actually appeared that all three might be getting close to a return to profitability.

But before it could start seeing any of these savings, fuel prices began to soar. With that, consumers stopped buying as many trucks. This March was the first month in five years that cars outsold light trucks in the U.S. market.

In addition to pain at the pump, rising job losses and falling home prices have battered consumer confidence and leave the industry poised to record an 18% drop in sales, the largest decline since 1980, according to J.D. Power & Associates

J.D. Power is projecting no improvement in sales until late 2009 at best.

Still, the Center for Automotive Research's Cole said if the Big Three are able to hang on during this slump, there is a chance that pent-up demand in 2009 could lead to much stronger sales just as some of the labor cost savings finally start to kick in next year.

"It could be a much more robust future than they've had in quite some time," said Cole. "The trick is to survive long enough to get to that future. That's where the challenge really lies."

First Published: August 6, 2008: 5:25 AM EDT www.cnn.com
 

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It's a tough one for sure. I'm not sure why JD Powers and the Center for Automotive Research seems to think that things might get better in 2009 though. As far as I know, there is nothing new planned for 2009 at the domestics that will really help them. Seems like late 2010 to 2011 will be the turning point if they can hold out that long.:(
 

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It's a tough one for sure. I'm not sure why JD Powers and the Center for Automotive Research seems to think that things might get better in 2009 though. As far as I know, there is nothing new planned for 2009 at the domestics that will really help them. Seems like late 2010 to 2011 will be the turning point if they can hold out that long.:(
I'm with you. Until the auto makers start producing electric and plug-in hybrids, most people can not afford car payments and fuel at the same time.
 

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Uncle Sam will come and save the day. Privatize the profit, socialize the risk! Workers will be laid off while CEOs make huge profits. Who pays for the short-sighted SUV cash grab? The taxpayer of course!
 

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Who pays for the short-sighted SUV cash grab? The taxpayer of course!
Well I guess that's OK, because who asked GM and others to build all those SUVs and Pickups and then bought them? The taxpayers. With reguards to short-sightedness, GM has always had a competitive vehicle in every segment of the US market that Toyota and other foriegn brands have been in except one. Hybrids.

If GM has been short-sighted, so has every other car manufacturer in the world except Toyota and Honda. American buyers have consistantly told the automakers that they are not willing to sacrifice size, capacity and safety just to save a few bucks on gasoline, until now. So how did the Prius and Insight/Civic hybrids gain foothold in America and why did those companies decide to invest buckets of money to make them? Mostly because they knew they had a ready home market, in Japan, that would love these vehicles and in the US, there was a small but growing niche of well off, green minded people that want to "save the world". These people would be willing to help beta test and share the sizable costs. To these people, it is not about saving money at the pump, it's about ideals. The two combined markets made for a more convincing business case.

GM and others correctly identified the American green movement as not being a very large market and chose not to invest the huge amounts of cash into a niche vehicle because they do not have access to the Japanese home market, the Europeans are perfectly happy with their turbo diesels and the rest of the world can't afford the price of going green. This is still pretty much true today. The great many new Prius buyers here in the states are doing so because of the very recent spike in fuel costs and a desire to tell the Arabs to f-off, not because they woke up one day and became concerned about the rain forest.

The true story has a lot more to do with Toyota and Honda having huge piles of cash laying around that they might as well invest in R&D or it will just go to the Japanese government. Following their willingness to invest in a somewhat risky proposition, they got lucky with a turn in world events that is forcing the price of gas up. Clearly, they did not see this coming because at the same time they were starting to turn out Priuses, they were putting enormous resources into programs to try to crack the once very lucritive truck market in the US. Toyota with the Tundra and Sequoia, Nissan with the Titan and Armada, and Honda, because they pretty much seem to let Toyota go first on everything and then try to catch up, was just getting it's feet wet with the Pilot and Ridgeline.

So before you damn GM all to hell, you have to ask yourself, has there been an equal playing field between Japanese manufacturers and American ones? Should GM have really abandoned the booming truck and SUV market and focused on small car producion at a time when small cars in America were dead? Fifteen years ago, should GM have really invested a billion dollars to develop and market a hybrid car that only a tiny fraction of the car buying public here in the US wanted? Should GM have chosen to continue EV-1 production at a huge loss per vehicle year after year, just in the hopes that one day it might catch on?

GM management has made a lot of bad calls in it's history over the last 30 years and does deserve a fair amount of blame for their predicament, but their place in the market has not been easy and the unions, media and Wall Street have not cut them any slack. Americans more and more are turning on all things American. It's as though we are ashamed at being American and wish we could just be a number three or four country somewhere in Europe. Anyhow, I'm getting off track. I personally think America and it's industries are still worthy of support and even though I'm sure I'm in the minority, I hope that other Americans join us in a push for rebirth of a new industrial America.
 

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If the EV-1 was so unprofitable then they could have just stopped making them. GM went the extra mile though, they sold the battery rights to a gigantic oil company. Toyota managed to make many improvements to the NiMH battery technology, see the RAV4EV, but Chevron sued them to stop production. This is a collusion between the auto manufacturers, the oil companies, and the scumbags in the white house. Don't try to tell me the SUV craze was all about the consumer. There was a federal tax credit for gas guzzling SUVs! GM and the oilmen were pushing these things as hard as they could while holding back plug in hybrids and EVs. Maybe people are angry with GM because they are disgusted with their behaviour enough to overcome their patriotism.
 

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Still, the Center for Automotive Research's Cole said if the Big Three are able to hang on during this slump, there is a chance that pent-up demand in 2009 could lead to much stronger sales just as some of the labor cost savings finally start to kick in next year.

"It could be a much more robust future than they've had in quite some time," said Cole. "The trick is to survive long enough to get to that future. That's where the challenge really lies."



I think they are assuming that the global supply of oil is going to continue to grow. If you don't believe that then there will be no pent-up demand because we only have the 85 mbd to use.

Also, as we know from the Volt, it takes about 5 years to develop a new platform. So if the US automakers cannot come out with small efficient cars that match the Asian automakers (not likely because they have even more smaller cars already perfected in their own markets) then that so called "pent-up demand" will go directly to the foreign automakers. Thinking they won't is naive.

If you take a step back and really look at the big picture you can see that the only way for the big three to jump back into the lead is to grab on to the electrification of the automobile. It is not often there’s a major shift in such a mature industry. Very rare indeed.

If anything, the Big 3 have the least to loose in the transition! They have so much more production capacity for large SUVs and trucks that no longer make any sense in today's market. They have no choice but to cut huge and deep. Why not use all of those resources to lead the new electrification market?

With that said there is one remaining issue. Unionized labor. As hard as it will be for the people that have been working under the umbrella of the unions, those days are numbered, just like the days are numbered for the SUV and the truck. The reason for this is that the profit margins are going to be extremely small going forward. There is the huge up-front costs of the batteries as well as intense competition from all sides. If you factor in that there will be much lower revenue streams from auto maintenance and you can just about read the writing on the walls. The union is very unlikely to survive. If the union does not jump ship the ship will sink. If the union does not allow massive amounts of automation to be developed they will be unable to compete with foreign competitors that have no such restrictions.

The auto factories in the near future are likely to be as advanced as the automobiles they pump out. If the union dictates this use of manufacturing technology then you can only imagine how things will play out. Not good.

If you think about it, all the new platforms will be designed using the latest DFM (Design for Manufacturing) technologies. These all-new platforms will also require brand new production lines. It's really like a clean slate. If some companies decide to use the old way (union workers and minimal automation) or the new way (highly trained technicians managing highly automated factories) which ones do you think are going to be able to succeed with small car profits?

With all that said, I believe that all three of the auto companies will go into chapter 11. This is probably needed to completely restructure their entire operations, from unionized labor to new electric platform design. This will protect them from creditors during this extremely critical time. I believe the US government will help out (it must) but not prevent the companies from bankruptcy (due to the unions). There will be big talk from the auto makers that they are completely restructuring and will emerge anew for the next century. A new time of automobiles that use little or no petroleum products. Americans will go along with this because we all know what's going on with the oil problem and we will not stop buying cars from then because the US government will reassure people that their warranties will be honored.

The union model is like an outdated socialistic government system. They were very important in the past because employers were taking advantage of their workers. If a company had a union they deserved it! I feel the main problem with the union system is that they are trying to dictate how a car gets produced. That is where the non-unionized automakers (Toyota, Honda, etc.) really have an advantage. Would you say the auto workers in America working for Toyota are having a tough time and treated poorly compared to GM's workers? Hardly! Since Toyota (for example) is allowed use the best technologies and locations available to give them an edge they are able to outperform their unionized competitors that are constrained by where they can manufacture things, what technologies can be used (robotics, new manufacturing practices, etc.), what they have to pay, etc. Even if the market changes (like it is now) union shops still have to follow the rules and agreements laid out by the union. If they don't, you get the extremely damaging strikes.

Remember that Toyota has about the same amount of people working for them for the amount of cars they produce as GM does. They know that they need to treat their workers very well or the product quality will be poor and they will have a bad reputation. That will eventually lead to bad products, bad sales and bad profits.

Thus, I predict huge changes within the coming years. Complete restructuring of brands, platforms, manufacturing plants, labor systems, etc. As clean a sheet of paper as is possible. I see the new GM in the Volt group. An almost Google like approach to business.

I do know one thing, if they don't change they will either not make it or simply limp along like an aging athlete trying to get one more year in.
 

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If the EV-1 was so unprofitable then they could have just stopped making them.
Exactly. They did.

GM went the extra mile though, they sold the battery rights to a gigantic oil company.
Why not? They had intellectual property that they weren't going to use and could use the money to off set the expences incurred in the battery development. Why should they care who they sell it to?

Toyota managed to make many improvements to the NiMH battery technology, see the RAV4EV, but Chevron sued them to stop production.
This is an issue you could take up with Chevron, but GM's out of the picture once they sold rights. Besides, a patent is a patent. Clearly Toyota was borrowing too heavily and infringing on the patent holder's rights. You might not like it, but that's how intellectual property is protected in the West, by the courts.

This is a collusion between the auto manufacturers, the oil companies, and the scumbags in the white house.
Or just regular business dealings. I see no reason why the White House would get involved in a transaction between two companies.

Don't try to tell me the SUV craze was all about the consumer. There was a federal tax credit for gas guzzling SUVs!
It was about the consumer. I know lot of people with SUVs and nobody bought them because there was a tax credit. They bought them because they wanted them and they fulfilled a real or perceived purpose for those individuals. The government had nothing to do with the vast majority of SUV owner's decision to buy. In very recent years there has been a tax credit for light trucks, which includes SUVs as part of an economic stimulus plan meant to help our collapsing economy. The idea was to help promote small and large businesses in the purchasing of new equipment. Some individuals did no doubt use this a way to get a new vehicle that had nothing to do with business, but that's the way it goes taxes. I personally don't think SUVs should be classified as trucks, but because of the platforms many are built on, they are. Again though, I very seriously doubt that there were any buyers out there that were torn between a Suburban and a Prius and the tax credit pushed over.

GM and the oilmen were pushing these things as hard as they could while holding back plug in hybrids and EVs.
If I were in the business of selling SUVs and trucks, I'd be in favor of them too. Why would GM (in the past) push for tax credits on hybrids when they didn't have any? Which was more likely to spur spending in a down turn and help our economy, credits for businesses to buy trucks and SUVs, or green minded people to buy imported hybrids? GM wasn't holding back hybrids and EVs, there just wasn't a very big market for them until gas shot through the roof. It's really simple. EV's cost more to make than people were willing to pay for them, so no EVs. This is still the case. Hybrids cost a lot of money to develop and without a lot of demand, it was hard for GM without the benefit of clarevoyance, to make a case for building them. Interestingly enough, it was exactly this that kept Toyota out of the full sized pickup market for so long. They had no home market, or any other market in the world to sell a significant number of these vehicles, and in the US it was felt that it would be way to hard to break brand loyalty among pickup buyers, so Toyota delayed for decades the huge investment required to be in this market. I bet they wished now that they had delayed even longer, but they didn't have a crystal ball either.

Maybe people are angry with GM because they are disgusted with their behaviour enough to overcome their patriotism.
Maybe. Maybe it's just easier to play the victim and imagine a vast consiracy that is the reason for all our problems. That way none of the blame can fall on us, the poor manipulated consumers, or worse yet, be the result of an ever changing world and the chaos that can arrise in times of change. This has to be all planned by someone against us, just the way Darth Vader would have done.:D
 

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That was a good post, added some balance to my rantings. But you can't seriously be defending GM for selling the battery rights. They knew full well what they were doing by selling those rights to an oil company, they were killing any hope of having electric cars for the near future. But hey, gas was cheap so what could go wrong. The reasonable thing to do would be to hang on to those battery rights, or at least sell to someone who will put them to use.

And yes, the white house definitely did have something to do with the situation we're in now. It all started with Reagan completely throwing out conservation measures because gas was cheap again and there were profits to be made. This pattern has continued with republicans ever since. Doesn't it have some kind of impact when the president of the united states tells his country to burn as much gas as they want? Note the close ties to oil companies the last three republican presidents had and tell me there's no conflict of interest there.

I didn't mean to imply that the consumers are blameless here. But it's pretty clear that public opinion can be manipulated to a significant extent by advertising campaigns. I concede that it is all about the consumer, but the consumer can be told what to want.

And I'm sorry to give the impression that I'm a run of the mill conspiracy nut, maybe my name doesn't help my case. I think it's pretty clear that big business has dominated government policy for a long time, to the detriment of the country and the entire world, in the short-sighted pursuit of profit. It's not so much a vast evil conspiracy as it is a severely broken system of government hijacked by special interests.
 
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