A credit crunch has made it impossible for the automakers to borrow money privately and US auto sales are expected to sink to between 10 and 13 million vehicles next year. -- PHOTO: REUTERS
CHICAGO - DARK days lie ahead for the US auto industry even if executives from General Motors, Ford and Chrysler manage to convince skeptical lawmakers to fund a massive bailout package, analysts warned.
And if Republicans manage to block the multi-billion dollar aid package, as they appeared set to do on Thursday, it is likely that at least one of the Detroit Three will simply be liquidated.
GM warned last week that it could run out of cash in a matter of weeks if the federal government does not come through with an immediate aid package.
Ford is expected to run out of money by the middle of next year and Chrysler's private owners are looking to offload the struggling automaker.
A credit crunch has made it impossible for the automakers to borrow money privately and US auto sales are expected to sink to between 10 and 13 million vehicles next year from recent averages of 15 to 17 million.
'It would be difficult for them to put together a package that would allow them to emerge from Chapter 11' bankruptcy protection said Ms Kristin Sziczek, an analyst at the Centre for Automotive Research.
Restructuring the business would cost billions and in the current credit crunch 'there is no money', she told AFP.
The economic repercussions of a bankruptcy would be far-reaching.
If even one automaker were to fail, it would be extremely difficult to keep already struggling automotive suppliers in business and vehicle production in the United States could be temporarily shut down, Ms Sziczek warned.
If operations at the Detroit Three were simply cut in half, Sziczek estimates that 2.5 million jobs and US$125.1 billion (S$189 billion) in personal income would be lost nationwide in a single year.
While that would be painful in the short-term, 'other companies will take up the slack should they vanish', said Prof James Schrager, of the University of Chicago's Booth School of Business.
The US steel industry is in much better shape after it was allowed to fail and rebuild itself with lower structural costs, Prof Schrager said.
And despite recent attempts by the management of the Detroit Three to restructure and downsize their businesses, their current problems cannot all be attributed to the financial crisis and resulting sharp drop in demand.
'Other companies have found a way to successfully make cars in this country,' Prof Schrager said in a telephone interview.
'If you bail out GM are they going to make better cars or are they going to flush it down the toilet?'
Despite the protestations from lawmakers who say they do not want taxpayers to have to pay for the automaker's mistakes, the 'massive risks associated with Big Three bankruptcies will eventually compel the US government to intervene,' predicted Deutsche Bank analyst Rod Lache.
'The risk now is that GM could run into liquidity trouble faster than the US government is prepared to act', Mr Lache wrote in a recent report, adding that 'GM's collapse would be inevitable' if assistance is not provided before January.
But even if these dire warnings manage to convince lawmakers to bail out the automakers, deep cuts will still be needed as the automakers face a steep decline in demand.
'Even if GM succeeds in averting a bankruptcy, we believe that the company's future path is likely to be bankruptcy-like', Mr Lache wrote.
GM is going to have to kill unpopular brands, cut back on its bloated dealer network, slash its costs, and spend billions shutting down factories and restructuring its massive debts and liabilities, he added.
Ford, which is in a slightly better cash position, will likely be able to share in the bailout package required by GM and could even gain some of GM's market share, but it also requires significant restructuring to cope with the current downturn, Mr Lache wrote.
Chrysler may have more difficulty accessing government aid because it is owned by a private equity firm and is the smallest of the Detroit Three, JP Morgan analyst Himanshu Patel said on Thursday.
While a sudden failure would be 'more disruptive than it would be beneficial' Mr Patel said 'the industry is likely best-served by allowing a large amount of capacity to be removed from the system'.
'In the event a convincing case cannot be made for the long-term viability of any one of the Detroit Three automakers, likely the goal would then turn to an orderly disposition of assets and phase-out of non-continuing product lines over time to give the supply chain time to adjust', Mr Patel wrote in a research report. -- AFP
