Big Three meltdown

DRASTIC consequences for America’s once-mighty ‘Big Three’ car-makers are inevitable as a result of the global economic crisis, with every option seemingly on the table – including acquisitions, mergers, sell-outs, even bankruptcies.

Already battered by mounting debts and falling sales, General Motors, Ford and Chrysler all incredibly face dire prospects and it seems inevitable that the US auto industry is about to change forever.

Wall Street insiders say that discussions are taking place to merge GM and Chrysler while Ford is reportedly considering the sale of its controlling interest in Mazda, which it rescued from oblivion a decade ago.

GM and Ford shares plummeted last week after ratings agency Standard & Poors posted negative credit ratings on both companies, which have been downgraded into so-called “junk” territory.

Chrysler, which is now privately owned, appears to be seeking a new owner, even if the GM merger does not proceed. It is said to be looking at a deal with Renault-Nissan and there is also speculation of talks with Fiat, Tata and Canadian company Magna International.

GM felt compelled to issue a statement last Friday saying it would not be seeking bankruptcy protection following a massive single-day share price drop of 31 per cent, but that did not stop the company’s market capitalisation falling further to just $US3 billion ($A4.54 billion).

Only a year ago, GM shares were selling for more than $US43 ($A65), but by the close of trading last week they were down to $US4.89 ($A7.41) – the lowest they have been since World War II.

Although GM posted a $US15.5 billion ($A23.5 billion) in the second quarter, it still had cash reserves of $US21 billion ($A31.8 billion), but is said to be burning through more than $US1 billion a month, a similar amount to Ford.

“Clearly we face unprecedented challenges related to uncertainty in the financial markets globally and weakening economic fundamentals in many key markets,” said the GM statement. “But bankruptcy protection is not an option GM is considering.

“Bankruptcy would not be in the interests of our employees, stockholders, suppliers or customers and we believe speculation about a possible filing is exaggerated and unconstructive.” Ford, which saw its shares drop 22 per cent on Thursday and close at $US1.99 ($A3.01) on Friday, also said it was not considering filing for bankruptcy as it seeks to steer a path through the financial crisis.

Although Ford and Mazda have both said that selling the Japanese car-maker is not an option being considered at the moment – and nor is selling Volvo in the current economic climate – the US company has already disposed of Aston Martin, Jaguar and Land Rover, and it clearly needs funds to continue operating.

GM president Rick Wagoner and Ford CEO Alan Mulally. Ford last made a profit in 2005 and has since posted a total of $US23.9 billion ($A36.2 billion) in losses, including a record $US8.7 billion ($A13.18 billion), in the most recent quarter. It still had $US26.6 billion ($A40.29 billion) in cash reserves, but that may only get the company through to the end of 2009 without liquidating major assets.

However, based on the latest Tokyo stock exchange share prices, Ford’s controlling 33.4 per cent stake in Mazda is worth less than $US1.4 billion ($A2.1 billion) .

Ford CEO Alan Mulally warned at the Paris motor show two weeks ago that stability in the financial system was necessary to turn the global economy around and that there would be no improvement in Ford’s fortunes next year.

“We won’t see a recovery until 2010,” said the former Boeing chief. “The downturn is longer and deeper than we foresaw a year ago.” The GM-Chrysler merger talks are being promoted by Chrysler owner Cerberus Capital Management LP, which bought 80.1 per cent of the company from Daimler AG in 2007 for $US7.4 billion ($A11.2 billion), leaving the German company with the remaining 19.9 per cent.

Interestingly, Cerberus also owns a 51 per cent stake in GM’s finance company, GMAC. Company insiders say that the plan is to swap the Chrysler shares for the remaining 49 per cent in GMAC – leaving Cerberus with a massive finance institution that would be covered by the US Government’s $US700 billion ($A1060 billion) rescue package while the merged GM-Chrysler auto unit would be left to survive on its own.

Industry analysts say this would make no sense for the auto companies because the acquisition of Chrysler would not solve any of GM’s problems and would make some of them worse. The only advantages would be some rationalization of plants and dealerships, and joint development programs.

In theory, the combined entity would dominate the US market with a combined market share of about 35 per cent, but its future would be questionable as its strength would be with big, thirsty pick-ups and SUVs that are becoming increasingly less popular.

Discussions are said to have commenced several weeks ago at the initiative of Cerberus and revolved around the benefits of a merger, but floundered when GM executives questioned the value being put on Chrysler, which includes the Dodge and Jeep brands.

A deal could also hinge on a bid by Cerberus for Daimler’s remaining stake in Chrysler.

Cerberus is also believed to have held talks with a number of Chinese car-makers about access to its US dealer network.

Exactly how much of that network will remain after the global financial shake-up remains to be seen, as US dealerships are also being hit very hard by plummeting sales and tightening credit.

National Automobile Dealers Association chairman Annette Sykora said last week that she expects 700 dealerships to go out of business this year. Three weeks, the biggest Chevrolet dealership in the country, Bill Heard Chevrolet, closed its doors.

Rising fuel prices, changing consumer preferences and the sub-prime lending disaster in the US had already devastated the new car sales market and the latest JD Power & Associates forecast is for 13.6 million units in the US this year – the lowest figure in two decades and a fall of 16 per cent on last year’s 16.1 million total. In September, US domestic sales were down 27 per cent, with Ford alone down some 35 per cent.

Even the booming Chinese market has taken a hit, with sales declining in the past two months – down 6.2 per cent in August and 1.4 per cent in September – ending a run of double-digit growth in recent years. JD Power still predicts that the Chinese market will be up for the full year, but the forecast 9.7 per cent increase would be well down on last year’s 24.1 per cent growth.

And it’s not all roses for industry leader Toyota, either, although it is still making billions and adding to its enormous cash reserves.

However, having lowered its global forecasts for this year and next, the Japanese giant’s shares fell 10 per cent last Wednesday after the Nikkei Business Daily reported that its annual profit would fall by 40 per cent to about $US12.8 billion ($A19.4 billion).

As General Motors ironically celebrates its 100th anniversary, Detroit can now only dream of such profits.