Running on Empty: Can anything save Detroit's automakers?
http://www.newsweek.com/id/144522
Keith Naughton
Newsweek Web Exclusive
Updated: 3:18 PM ET Jul 3, 2008
I am driving a dinosaur this week. No, I'm not Fred Flintstone working
in the rock quarry. Rather, I'm test-driving a Ford F-150, Harley
Davidson edition pickup truck. It's got a big supercharged V8 engine
that rumbles to life like a Harley hog. It's got a cool two-tone copper
and black paint job, leather captains chairs embossed with the Harley
logo, satellite navigation, moon-roof and power everything. This fully
loaded ride has a sticker price of $50,035 and it's wicked fun to drive.
But it also gets 12.8 miles per gallon and costs $123 to fill up. It's
just the sort of big rig suburban cowboys couldn't get enough of back
when gas was cheaper than bottled water (as they used to say in
Detroit). But these days, this model is going nowhere. And neither is
Detroit.
The complete collapse of the pickup truck and SUV market is causing a
calamity in the Motor City. Auto sales drove off a cliff in June,
falling to a 15-year-low. GM stock fell below $10 for the first time
since 1954, reaching its lowest level since Eisenhower was in the White
House and tailfins were the latest rage. Ford's stock is nearly as cheap
as a gallon of gas. Factories are closing and workers are being
ca****ered at a breath-taking pace. And now the B-word—bankruptcy—is
creating panic in Detroit. First, Chrysler fended off rumors last week
that it was going bankrupt or about to be sold by its owner Cerberus
Capital Management. Then, GM's stock tanked Wednesday after Merrill
Lynch auto analyst John Murphy wrote "bankruptcy is not impossible if
the market continues to deteriorate."
So is Detroit headed for the end of the road? Not yet, but there are
certainly dangerous curves ahead. The Detroit Three are burning through
billions in a race to overhaul their lineups from guzzlers to sippers.
(Some analysts estimate GM is chewing through $1 billion in cash a
month). And profits are nowhere in sight, as many of the new fuel
friendly models are two years away or more. Ford just backed off a
prediction that it would be back in the black by 2009 and now, like GM,
won't say when it expects to make money again. Chrysler, which is now a
private company that doesn't re****t profits, is seen as in the worst
shape, since its is the most dependent on trucks, SUVs and minivans, and
doesn't have the profitable overseas operations of its crosstown rivals.
Those bleeding balance sheets—along with an anemic economy—are fueling
the bankruptcy talk. "If nothing changes—oil prices stay high, the
capital markets remain seized and consumers remain depressed—then
Chapter 11 might be the only way out for all three companies," says
veteran auto analyst John Casesa.
But that still doesn't make bankruptcy inevitable for Detroit. Far from
it, in fact. Sure, Chapter 11 might allow them to get their financial
house in order, while euthanizing dogs like GM's Pontiac or Ford's
Mercury and paring their bloated dealer network. But the consequences of
bankruptcy are more dire for a carmaker than for an airline or steel
company. Consumers, analysts say, would steer clear of a bankrupt
automaker, fearing there would be no parts or dealers to service their
cars down the road. "Would you buy a Chevy from a bankrupt GM?" says
David Healy, auto analyst with Burnham Securities. "It would do a lot of
damage to their marketability."
That doesn't mean Detroit won't reorganize. It's doing that already,
having shed a quarter-million workers and 15 points of market share this
decade. It just won't seek the assistance of a bankruptcy court to
oversee its overhaul. Instead, Detroit will either re-engineer itself or
get help from the outside. Here are some potential scenarios:
The savior scenario.
A big money player willing to gamble on a Motown turnaround could team
up with a healthy automaker to ride to the rescue of a Detroit car
company. The most obvious combo is Vegas billionaire Kirk Kerkorian, who
has amassed 6.5 percent of Ford's stock this year, and Renault-Nissan
CEO Carlos Ghosn. Kerkorian already admires Ghosn for his legendary
turnaround of Nissan. Kerkorian attempted to engineer an alliance with
Ghosn and GM in 2006 that failed. Now Kerkorian is offering his help,
and a possible cash infusion, to Ford. Might he again attempt to seek
the services of Ghosn? Casesa sees that as a possibility, but it would
require the Ford family to give up their iron grip on the company that
old Henry founded 105 years ago. And that's not easy.
Strip and flip scenario.
With GM and Ford's stock so cheap, private investors could snap them up
for a song. Then they could break them up and sell parts to the highest
bidders. Emerging players in China, India and Korea might relish the
prospect of acquiring famous American auto brands like Ford or Chevy.
(Remember, Tata Motors of India just bought Jaguar and Land Rover from
Ford.). Old Detroit would fight this scenario fiercely, but when your
stock is this low, it's hard to hold off the buzzards. The most potent
poison pill against this scenario might be Cerberus's rough ride in
Detroit.
Misery loves company scenario.
There's been some speculation in Detroit that GM could combine with Ford
or Cerberus could sell of Chrysler to one of its domestic rivals. The
thinking seems to be that taking the best of each company—Chrysler's
minivans, say, or GM's Cadillac line—and putting them together under one
roof makes for a stronger company. But I couldn't find a single analyst
who buys into that. All it would lead to, they say, is massive layoffs
and crosstown culture wars. "That's just Detroit buzz," says veteran
analyst Maryann Keller, "and it doesn't make one thimble full of sense."
The government bailout scenario.
Remember Lee Iacocca and Chrysler? He was back at the company last week
being lauded for convincing Congress 28 years ago to give Chrysler a
free ride back to prosperity in the form of government loan guarantees.
Keller now believes another federal bailout might be the only way to
save Detroit. "Where else does the money come from to completely
restructure their product line so that they have a future?" she says.
The biggest problem with this scenario: Detroit—which fought fuel
economy regulations for decades and rode the SUV boom way too long—is
seen as a victim of its own arrogance. "Wa****ngton does not have any
sympathy for what's happening in Detroit," says Casesa.
There is still an argument that can be made that Detroit will ride out
this storm and eventually emerge smaller, but healthier. Cars like GM's
plug-in hybrid Chevy Volt and Ford's stylish subcompact Fiesta are
coming in 2010. And they certainly will be more in step with the times
than the high-riding, gas guzzling Harley pickup truck I'm driving this
week. The question is: Does Detroit have enough cash in the till to make
it until then? Wall Street certainly seems skeptical. If anxious
consumers start buying into the bankruptcy talk, Detroit's fate could be
sealed. "A frenzy is being created and it's only going to make things
worse," says Global Insight auto analyst John Wolkonowicz. "It could
become a self-fulfilling prophecy."
If the long-predicted death of Detroit were to happen, that would be the
ultimate reversal of fortune. The nation credited with putting the world
on wheels would find itself dependent on other countries for its
mobility. "Should we look to the rest of the world to provide us with
cars?" asks Keller. "Should we be held hostage to the rest of the world
for something so basic?" It's a question worth contemplating in
Detroit's time of despair and Wa****ngton's time of renewal.
--
Civis Romanus Sum
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