http://www.detnews.com/apps/pbcs.dll/article?AID=/20080702/AUTO01/807020364/1001
Wednesday, July 2, 2008
Slumping sales cloud Big 3's prospects
June's 18% decline tied to high gas, falling asset values; Outlook gloomy as financial pressures increase, consumers sit on sidelines
Bryce G. Hoffman, Brian J. O'Connor and Eric Morath / The Detroit News
This was supposed to be the year Detroit's automakers started to turn things around.
Long-overdue restructurings were under way at General Motors Corp., Ford Motor Co. and Chrysler LLC and they were poised to leverage their global resources like never before. Critically acclaimed new products were hitting the showrooms. And they finally had a contract with the United Auto Workers that promised to make them cost-competitive with Asian rivals by 2010.
But the industry's 18.3 percent sales decline in June, with steep drops for the Big Three, capped six months of bad news. With little prospect for relief in sight, the future of Detroit's automakers has never been murkier.
Options that would have been unthinkable six months ago are now being weighed seriously by executives desperate to stop the decline that has already cost thousands of workers their jobs and imperils many more. Bankruptcy rumors are swirling around Chrysler and GM, while billionaire investor Kirk Kerkorian continues to amass shares of Ford stock. There is talk of reopening the UAW contract, of using profitable overseas operations as collateral for further loans, and of looking to foreign sovereign wealth funds for cash.
"A year ago, the thought was that the auto guys just needed to correct their cost structure," said Shelly Lombard, senior high yield analyst with Gimme Credit in New York. "Now, they don't have the business they had two years ago. The housing crisis, high gas and the economy are killing the automakers now."
Just as the ink dried on the new labor pacts, American consumers were hit by two triple-whammies.
First, the sub-prime mortgage meltdown put 3 million homeowners on the street, crippled the ability to borrow for many would-be auto buyers and sent the housing market crashing, prompting contractors and construction workers to put off buying new, highly profitable pickups.
Then spiking oil futures sent gasoline prices up nearly 50 percent in just two years, soaring food costs ate up whatever money households had left, and layoffs rattled anyone who still had a job, sapping consumer confidence.
To make matters worse, trade-in values plummeted for the sport utility vehicles many still have in their garages, while car loans became harder to come by for consumers with less-than-perfect credit. Meanwhile, oil prices continued to set records, sending consumers who are in the market for a new vehicle scrambling to more fuel-efficient cars and crossovers. Detroit automakers, which have until recently focused on producing more profitable trucks and SUVs, have less to offer in these segments than their foreign competitors.
Even when Detroit's Big Three begin to realize cost savings from their restructurings and revamp their product lineups to make smaller cars, the companies face more threats. Rising commodity prices, especially for steel, are eating into the gains from lower labor costs.
Additionally, their consumer lending operations that have long been a source of reliable revenue are drying up -- victims of rising loan defaults and a weak market for used vehicles.
In a desperate bid to keep up with changing consumer demand, the companies are idling truck factories, retooling to produce more cars and crossovers, and rushing the introduction of new, more fuel-efficient models. The moves are expensive and the Detroit automakers are burning through cash at record rates.
Analysts are growing increasingly concerned about the companies' dwindling bank accounts.
"If the rate of sales does not improve in 2009 -- if it remains flat -- we could see both Chrysler and GM getting down to what we consider the minimum required level of liquidity to finance ongoing operations," said Mark Oline, managing director of Fitch Ratings. "Ford is in a little bit better position, both in terms of liquidity and future product mix."
But he said Ford, too, likely will require additional capital to complete its restructuring.
"The companies need time and they need liquidity to get through to 2010, when they will reap the benefits of the new UAW agreement," Oline said.
To buy time and secure more capital, automakers may have to swallow some bitter pills.
Ford may have bristled at Las Vegas casino mogul Kerkorian's offer to discuss a cash infusion that would likely come with plenty of strings attached, but analysts say it has to take that offer seriously in light of Tuesday's grim sales news. Pressure is also mounting for Ford to sell off its last remaining European brand, Volvo, but tight global credit markets mean it is unlikely a buyer will emerge that is willing to pay what the Swedish brand is worth.
Analysts say GM also is looking overseas for a solution.
With the current value of all of its outstanding stock at just $6.65 billion, Detroit's largest carmaker has little prospect of raising additional capital through conventional means. Wall Street is abuzz with rumors that it is looking for ways to tap its profitable foreign operations for additional liquidity. That could mean using its overseas divisions as collateral for new loans. It could also mean spinning them off as subsidiaries and selling stakes in them to raise more cash.
Privately-held Chrysler has fewer options.
"They're a limited liability company -- when they run out of money, they've run out of money," said Steven Davidoff, a corporate law professor at Wayne State University who studies the automaker's owner, private equity firm Cerberus Capital Management LP. "Cerberus may push for the nuclear option and go into bankruptcy to restructure their organization."
In bankruptcy, Cerberus could accelerate restructuring plans, possibly including opening up the contract with the UAW. Delphi Corp. and other suppliers have won concessions from the union while in bankruptcy, he said.
That could be an option for GM and Ford as well, said David Cole, chairman of the Center for Automotive Research in Ann Arbor.
"The last thing labor would want is a failure of one of these companies," he said. "You have to do what you have to do."
The UAW did not respond to a request for comment, but labor expert Harley Shaiken, a professor at the University of California, Berkeley, said reopening the contract is unlikely. He said the union made many painful concessions in the contracts it negotiated last year and is already working with the companies to achieve more efficiencies on a plant-by-plant basis.
"It's a mistake to think that you can remedy poor strategic decisions by slashing up the labor contract," Shaiken said.
Economists also point out that, even as Detroit addressed its structural issues, carmakers lagged in developing new fuel technologies, such as hybrid engines.
"What they could have done is to use all the money they were making on SUVs in the '90s to invest in fuel-efficient technology," said Peter Cohan, an economic analyst and professor of management at Babson College in Wellesley, Mass. "But they didn't really do it ... you have to put the blame on them."
As consumers lose interest in Detroit's products, investors are losing confidence in Detroit.
The Dow Jones index is down 14 percent this year, but shares of Ford and GM -- now dubbed by some "the dwindling duo" -- are down even more. GM shares rose 2 percent Tuesday on better-than-expected sales results to close at $11.75, helping to lift the overall stock market. But they have dropped by 53 percent this year, and the total value of GM stock is the thinnest of all 30 companies in the Dow -- less than one-quarter the value of Alcoa Inc., the next-smallest.
"What's GM worth now -- $7 billion?" asked Bruce Birger, managing director of Birger Capital Management. "People can write checks for that amount."
Ford shares are down 30 percent for the year and closed Tuesday at $4.71 -- just about the cost of a gallon of regular gas in California.
Detroit News Staff Writer Christine Tierney contributed to this report. You can reach Bryce Hoffman at (313) 222-2443 or bhoffman@detnews.com. |
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