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US automakers face worst crisis in their history

By Roland Freund
DPA, DETROIT, MICHIGAN
Sunday, Oct 12, 2008, Page 12

‘In a bitter irony of history, GM is due to celebrate its 100th anniversary in a few weeks. The jubilee itself is a symbol of the worst crisis: The troubled automaker will have to sell its spectacular skyscraper headquarters in Detroit.’

Automakers in the US are looking right into an abyss, and experts note that the US economy is facing its next health problem following the collapse of its financial sector.

After a downward slide that has already lasted years, and with losses worth billions of dollars, General Motors (GM) and Ford appear to be racing ever closer to the precipice.

The financial crisis threatens to cut off the funds of the heavily indebted manufacturers. The stock exchange has already discounted the staggering auto giants, as share prices fell even faster than sales figures.

Leading US automaker GM and second-place Ford have slipped into a life-threatening downward spiral: Even before the credit crunch they were registering record losses because of their mistaken strategy with too few thrifty models.

To make matters worse, it is not just that the US is in a catastrophic condition, but other automobile markets around the world are also having trouble. Because of the US credit crunch, urgently needed fresh funds will come to GM and Ford only at a very high price — if at all.

Now the dramatic drop in the price of their stock is reminiscent of the recent fate of several banks, which were finally broken by the freefall in the price of their shares.

GM’s titles have not been so low in over 50 years. The whole company is only valued at about US$3 billion on the stock market, while Ford’s shares are worth a bit more.

Nothing seems to help. Automakers have already drastically reduced their costs, and eliminated tens of thousands of jobs. Still, GM intends to save an additional US$10 billion and to earn US$5 billion through the sale of subsidiaries — the iconic Hummer will have to go.

Officially, Ford wants to hold on to its loss-generating subsidiary Volvo, but many in the industry think it will not do so for long.

Whether it is currently possible to find buyers for the brands is quite another question.

The latest blow came from the credit-rating agency Standard & Poors (S&P), which threatened to reduce further the already damaged credit rating of both companies. GM and Ford still have money for this year, but they will be in serious trouble next year, S&P said.

Each of the manufacturers is currently burning through around US$1 billion a month.

Their liquidity problems could reach a point where they can no longer stay in the business, S&P analyst Robert Schulz said.

GM and Ford could among other factors be saved by their European subsidiaries. However, GM’s Opel is fighting its own sales drop of more than 6 percent in the first nine months of the year. Production lines are grinding to a halt. In Germany, Ford is releasing temporary workers earlier than it planned to.

Prospects for the future are even more grim: Industry analysts are predicting sales of just 13.6 million vehicles for the US market this year, a drop of 16 percent and the lowest figure in close to 20 years. Next year is expected to bring no change in the trend.

The often-cited boom in countries like China and India is also losing steam. Even industry leader Toyota is suffering.

The dramatic situation of GM and Ford is a threat to the whole US economy, experts say. Nobody wants to imagine the picture if the two giants, with hundreds of thousands of employees, suddenly stop paying wages.

Bankruptcy is not an option, GM boss Rick Wagoner and his Ford counterpart Alan Mulally say. If it did happen, however, it would be the largest case in history in which a company files for protection from creditors under US law.

Bankruptcy is a possibility, US expert David Cole of the Center for Automotive Research told the New York Times. However, the probability of it happening is low, he said. The reason is that it would entail too high a risk for the government, analysts said.

Speculation is already rife about more government aid, beyond the US$25 billion loans already promised to the industry.

In a bitter irony of history, GM is due to celebrate its 100th anniversary in a few weeks. The jubilee itself is a symbol of the worst crisis: The troubled automaker will have to sell its spectacular skyscraper headquarters in Detroit.

Also See: GM in merger talks with Chrysler LLC
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