Forecast rattles auto industry
GREG KEENANAUTO INDUSTRY REPORTER , From Tuesday's Globe and Mail
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A collapse to a 25-year low in U.S. auto sales next year could imperil not just the Detroit Three but also scores of suppliers and thousands of dealers.
The forecast of sales plunging to 11.7 million vehicles next year comes from beleaguered General Motors Corp., but it illustrates the dangers for all Detroit auto makers and every other entity in the industry.
The GM forecast would represent the lowest level of sales since the industry was climbing out of the recession of the early 1980s.
“That will have a catastrophic effect on the industry,” said Bill Pochiluk, president of auto consulting firm Automotive Compass LLC.
The sales figure of 11.7 million translates into vehicle production of about 10.7 million units, Mr. Pochiluk said, and could doom some auto parts makers.
Michael Robinet, vice-president of forecast services for consulting firm CSM Worldwide Inc., is slightly less pessimistic than General Motors, calling for U.S. sales of 12.7 million vehicles and production of about 11.5 million cars and trucks.
“It presents the most challenging environment they've seen probably since the [second World] War,” Mr. Robinet said.
Indeed, GM said yesterday that it would lay off 1,900 more workers at North American parts plants, following production cuts and layoffs of 3,600 people announced Friday.
In conference calls and reports yesterday, Wall Street analysts dissected the impact of a potential bankruptcy of GM, which said on Friday that even before the dismal forecast for 2009 comes to pass, it may run out of cash to operate its business.
Rod Lache, auto analyst for Deutsche Bank AG, wrote that the value of GM's shares has reached zero, sending the company's stock plunging on the New York Stock Exchange to a level not hit since the 1940s.
“At this point, without external government intervention, GM may no longer be able to fund its U.S. operations beyond December,” Mr. Lache wrote.
He also pointed out that the plunge in U.S. sales to a forecast 12 million next year from a peak of 17.4 million in 2000 will create a disaster for the entire industry.
The U.S. government may need to provide GM with $10-billion (U.S.) to keep it afloat next year and in 2010, he said, or as much as $25-billion to finance its cash burn and a restructuring.
Such a restructuring would strip it down to the Chevrolet, Buick and Cadillac brands, eliminate another 19,000 unionized employees through the shutdown of five assembly plants, buy out a few thousand dealers and defer money owed to the United Auto Workers in 2010 as part of the union's takeover of GM's health care plan.
But the $25-billion figure for GM alone matches the amount the Detroit Three as a group have asked Washington to provide to help them survive the credit crunch and the collapse in the market.
The best solution for GM is probably a bankruptcy backstopped by the U.S. government providing debtor-in-possession financing that permits a company to keep operating while it's in bankruptcy protection, John Murphy, auto analyst for Merrill Lynch, told investors during a conference call yesterday.
“We do believe it would be best if natural evolution were allowed to run its course,” Mr. Murphy said and the Detroit Three were allowed to scale back, possibly becoming the Detroit Two.
He noted that the 1980 bailout of Chrysler Corp. by the U.S. and Canadian governments meant that excess assembly capacity in North America was kept in place and “zombie-like” auto makers continued operating for another 25 years.
The most likely outcome of the crisis for Chrysler, he said, is that it will be broken up.