-- General Motors gm and Ford Motor f report quarterly financial results Friday — almost certainly huge losses — but more telling will be how fast the automakers are burning through their cash hoards.
The cash-burn numbers will signal the likelihood of the until-recently unthinkable: a Detroit automaker filing for bankruptcy-court protection to try to survive — or simply going out of business.
"It just feels like a matter of time" until one company makes such a dramatic move, says Kevin Tynan, an analyst at Argus Research. That includes Chrysler, 80.1%-owned by private investment company Cerberus Capital Management and thus not required to disclose profits and losses. Germany's Daimler, which owns the other 19.9%, valued the stake at just $268 million in June and recently wrote it down in the third quarter to $0.
The numbers show the traditional American auto industry is near collapse — so close that industry and labor heads have been pleading for a federal bailout to survive. Detroit auto executives and the head of the United Auto Workers union met Thursday with House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., to ask for broader access to low-interest federal loans.
While Americans have been distracted by how to pay for $4 gasoline, or how to retire on 401(k)s that some now bitterly joke have shrunk to 201(k)s, or how to fix the roof when the bank won't cough up a home-equity loan, America's already staggering industrial icons — the Detroit 3 — have been hammered by disappearing sales.
"The plunge in consumer confidence coupled with the difficulty in obtaining credit has caused the near collapse of the auto market in recent months," Troy Clarke, president of GM's North America operations, says. "This may be the most crucial time in the history of our industry."
New vehicle sales have tumbled to a level that, adjusted for population growth, hasn't been this low since just after World War II, an "unsustainably weak level," says Mike DiGiovanni, GM's executive director of global market and industry analysis.
Without significant revenue — never mind profits — from new vehicle sales, Detroit's cash on hand soon may dwindle to where automakers have too little to keep up day-to-day operations. GM, for example, needs some $14 billion in the bank at any point just to keep the doors open — make payroll, pay for supplies, put aside money for retirees.
Analysts say that has left automakers eating into their prospects for any future rebound. "They're in liquidity crisis mode. They're saying they can't afford any cash going out the door, so they're canceling product programs," Tynan says. "What they're doing is hurting the future to preserve cash."
GM burned through a little more than $5 billion in the first half of this year, ending the second quarter with $19.4 billion. Ford spent the same amount, but had more cash on hand, ending the second quarter with $30.1 billion. Cerberus said Chrysler ended the second quarter with $11.7 billion.
Though all three pooh-pooh it — "Bankruptcy would not be in the interests of our employees, stockholders, suppliers or customers," GM says — analysts and economists are beginning to factor a Detroit bankruptcy into their scenarios.
"Cash burn accelerates, and you're looking at some point in 2009 of having liquidity concerns," Tynan says. "It's a problem that feeds on itself, because you have a consumer that is already in a bunker mentality. Then you throw in the uncertainty of the viability of the automakers overall, and the consumer starts thinking, 'I'm not going in there and throwing down $26,000 on a vehicle from a car company that I don't know is going to be in business in a few months.'… It's a downward spiral."
Van Conway, a partner in a Detroit restructuring firm, doesn't think an automaker should choose bankruptcy as a way to cut costs. Automakers continuously restructure supply and labor contracts and don't need bankruptcy-court protection to do so. "There are negatives and positives to bankruptcy, but I don't think it's a good strategy for them."
He says there would be no choice, however, if an automaker becomes so broke it can't pay its bills.
Detroit's problems have exploded suddenly, but have long roots. The underlying thread is the rise of Japanese competitors, who already had fuel-efficient small cars during fuel shortages and high prices in the 1970s and '80s, while Detroit didn't.
But more recently, U.S. automakers haven't been able to build cars as inexpensively as foreign-brand rivals. A major factor is Detroit has higher costs for retirees. And Asian brands have done a better job than Detroit of selling their cars in huge volumes worldwide, keeping per-car investment costs low.
Underlining how tough the times are, even Toyota, considered the world's strongest automaker, is stumbling. "Automotive markets, especially in developed countries, are contracting rapidly," Toyota Executive Vice President Mitsuo Kinoshita said in a statement as the Japanese automaker posted earnings Thursday. "This is an unprecedented situation."
Toyota reported that its earnings sank 69% in its fiscal second quarter, to $1.4 billion. Global revenue dropped 8% to $60 billion. Its shares have lost 37% this year.
The Center for Automotive Research, in a report this week that sketched the footprint of the Detroit auto industry, said that if all three suddenly shut down, 3 million jobs would vanish the first year. Unlikely, of course, but it makes clear that the car business is marbled throughout the U.S. economy.
"This is not a sector you want to collapse," says Bruce Josten, head of government affairs at the U.S. Chamber of Commerce. He says the auto industry is the largest purchaser of steel, glass and other materials, and that one job of every 10 in the U.S. is directly or indirectly tied to the auto industry.
The question now raised is whether, if it's the only answer in the current economy, the industry should be bailed out by U.S. taxpayers.
"The government is going to see there are critical industries that need assistance to get over the hump," Thomas Donohue, U.S. Chamber of Commerce president said Thursday.
Dana Johnson, chief economist of Comerica Bank, disagrees. "I think (the government) would help autos, but I think it's a terrible idea. I don't think we should get in the mindset that every sector in distress is given public monies."
Economists generally say that while a Detroit collapse would be horrific, it wouldn't bring down the economy, and thus fails the test for the federal dole.
That hasn't quieted pleas from the industry.
Auto dealers have gone as far as asking for outright tax credits for people who buy new cars.
The U.S. Chamber is calling for aid that would ease loans from automakers' financing arms.
Some federal money already is available, but Department of Energy rules for $25 billion in low-interest loans to automakers limit the money's use to projects that boost fuel economy to at least 125% of 2005 levels for similar vehicles.
And to get the loan, the government must judge the company financially healthy enough to repay it.
"It's completely premature to judge who would meet this criteria until we see applications," Energy spokeswoman Healy Baumgardner says.
The government is expected to start accepting applications for those loans within a few days.
Seeking some aid and access
The auto and union representatives were asking congressional leaders Thursday for access to the $700 billion the government committed to rescue the financial industry. Detroit's asked, but so far failed, to gain access to that pot.
Automakers also appealed to congressional leaders for $25 billion more in federal loans for health and pension obligations and access to low-interest emergency borrowing from the Federal Reserve, such as is typically available for financial institutions. After the meetings, Ford CEO Alan Mulally said, "Speaker Pelosi and Majority Leader Reid are seeking ways to help the auto industry, given these unprecedented economic challenges."
No immediate actions were announced, though Pelosi said after her meeting, "It is essential that we preserve our manufacturing and technology base."
Even if Congress grants automakers more money, it must come immediately to help, says Paul Rubin, a GMC-Pontiac-Buick dealer in the Twin Cities suburb of White Bear Lake, Minn.: "If they get another $25 billion, I'm not sure that does anything, either — unless it's for current operations."
Contributing: Barbara Hagenbaugh, Chris Woodyard, The Associated Press