The battle for survival among American car companies is slowly reaching a tipping point.
President Bush continues to bumble his way towards a possible short term $US14 billion package of short term loans for General Motors and Chrysler; Ford doesn’t want any yet, and foreign builders like Toyota, Nissan and Honda are in the process of winding back their output.
Overnight he indicated, in the same paragraph, that he may or may not organise aid for the car groups, after a spokesman had earlier suggested the White House was very near a decision.
George confused everyone by saying he didn’t like the idea of a "disorderly bankruptcy", and then went on to add that he didn’t like throwing good money after bad.
No wonder so many people will be glad to see the back of this man next month.
Even if the money comes it will merely put off the tough decisions until the new Administration takes power on January 20.
It’s a story that will continue to rattle confidence in US and global financial markets until there is some conclusive resolution.
For regulators and governments, the plight of the US car giants and some other car and truck groups around the world, is looming as the big concern at year’s end and in early 2009.
If could be that the Fed ends up as the lender of last resort to effectively support the three companies until there’s a stabilising of the economy and demand for cars starts recovering as the car makers restructure.
To further concentrate the minds of the US government and its advisers, GM, Chrysler and Ford have stepped up the pressure to where someone has to blink to stop a collapse further damaging confidence and sending the US economy deeper into recession.
GM, Ford and Chrysler will shut about 60 factories over the next month as they struggle to adapt to the worst sales in 26 years and await the decision from the Bush Administration on the short term aid package.
While the temporary closures are designed to save cash and slow the ‘burn’ and cut production of unwanted cars and stocks of unsold vehicles, they are sending a message to the government, financial markets, unions and car buyers that suggests the worst could be possible if aid is delayed.
Having closed a plant, however temporarily, it is much easier to keep it closed if cash gets short or the company needs to protect itself by going into bankruptcy protection.
The slump in credit lines for dealers and loans for car buyers is also damaging demand, as are the rumours about the shaky state of the companies: suppliers are getting worried and reportedly demanding to be paid early.
Sitting on the sidelines the foreigners such as Nissan, Honda, Toyota, BMW, etc know that if any of the big three collapse, the industry will be badly hurt, costs will rise and unemployment will rise, further depressing demand for cars and cutting sales, raising costs and increasing losses.
They are quietly cheering for the bailout plan, knowing that it will help them as well to avoid larger losses and lower sales.
Bloomberg reported a man called Ed Kim, the director of industry analysis for consulting firm AutoPacific Inc in California as saying that. The industry is “imploding to a degree I’ve never imagined could happen, and at a speed I’d never expected”.
Bush had told Fox News on Wednesday he was still “thinking through” details of any government assistance. A day later he was worried about a "disorderly bankruptcy", a strange phrase because while its an option, it’s not an either or option right now, or is it?
The Wall Street Journal reported that GM and Chrysler have also re-opened merger talks. The paper says Chrysler owner, Cerberus Capital Management initiated the move and has signalled a willingness to cut the value of its interest. GM denied a day later that those talks were happening.
GM and Cerberus also own GMAC, the finance arm and home lender which is struggling towards raising enough new capital to become a bank and get saved by the Fed. reports overnight suggest that GMAC may fall short of the required figures to do an exchange with bond holders and raise the required amount of new capital.
Chrysler will shut all 30 of its plants for at least a month starting tonight and Ford said it will idle 9 of 15 North American assembly plants in the first week of January.
GM said a new $US370 million factory making engines for the Chevrolet Volt electric car is being delayed to conserve cash.
GM has already announced it is cutting production in the March quarter by 250,000 vehicles, which is a 30% cut compared with the first quarter of 2008.
Ford said its move was part of a previously announced plan to reduce first-quarter output in its North American plants by 38%
GM, had $US16.2 billion at September 30 and needs at least $US11 billion on hand for working capital and to keep the business ticking over.
Chrysler ended last quarter with $US6.1 billion and needs at least $US3 billion in working capital.
Chrysler Financial has also said that it might temporarily stop the loans used by dealers to finance their purchases of vehicles from the car maker as the retailers drain $US60 million a day from the account that helps finance their borrowing.
But the big foreigners are also suffering. Toyota, Nissan and Honda, Japan’s three biggest car companies, have cut North American output this year by more than 300,000 units compared with this time a year ago.
All three have announced cuts to scheduled production.
Toyota stopped assembly work at its San Antonio pickup truck plant for 15 weeks this year because of rising in
