- The Washington Times - Sunday, December 14, 2008

Washington is crafting a political solution for Detroit that avoids picking winners and losers and seeks to prevent a bankruptcy by any of the three U.S. automakers, but the reality is at least one of the companies may need to fold as part of an industry consolidation that brings production of cars in line with falling sales in the United States.

The small loan package the administration is considering offering General Motors Corp. and Chrysler LLC to stay in business would only postpone the failure of one or the other — or both — for a few weeks, analysts say, while getting Congress and the White House entangled in what promises to be a messy and volatile future for the industry.

With automakers geared to produce more than 16 million vehicles a year but sales of cars falling to a 10.5-million rate in recent weeks, Michael Robinet, an analyst at CSM Worldwide consulting group, is one of many who say a major downsizing of the industry cannot be avoided. And he is not shy about saying which one of the companies needs to go.

“Can we see Chrysler as a viable entity for five or six years?” he asked Detroit’s Automotive Press Association recently. “I don’t think anybody thinks that. … A controlled wind-down of Chrysler is in everybody’s interest,” with the company broken up and money-making assets like the Jeep and minivan divisions sold off to more viable competitors, he said.

By many measures, GM is even closer to bankruptcy than Chrysler, which has the deep pockets of the Cerberus private equity firm that owns 80 percent of the company. The largest U.S. car manufacturer has been inching toward bankruptcy for weeks, exhausting its bank line of credit, canceling nonessential expenses such as promotional contracts, and leading the parade for a bailout from Washington.

This week brought further telltale signs of the auto giant’s impending demise, as GM slashed first-quarter production by 60 percent, and some GM suppliers fearful of bankruptcy started asking for payment ahead of time, while its faltering GMAC finance arm announced that it may have to abandon its quest to become eligible for a Treasury cash infusion.

“Washington has lost all common sense,” said Olivier Garret, chief executive of Casey Research. “The best thing that could happen for the auto industry is for the Big Three to file for bankruptcy protection. … As a former turnaround professional, I am convinced that the tools afforded by the bankruptcy courts would allow these companies to restructure dramatically, thus allowing them to renegotiate and drastically lower most of their liabilities.”

Easy-money loans and leases during the credit boom enabled the car companies to sell more than 16 million vehicles in 2006 and 2007, but as the credit crisis deepened this year, it killed off sales to customers with subprime credit ratings — which made up nearly a quarter of total of sales in the boom years — helping to deflate sales by 40 percent in the last year. With auto loans now more difficult to come by and requiring bigger down payments and other stiff terms, analysts say the market is likely to shrink significantly in the future.

Mr. Garret expects auto sales to range between 12 million and 15 million a year in the future. “If car sales decline dramatically, manufacturing capacity has to be reduced to match demand. This means that the less-productive plants would be shut down, employees laid off, and that the supply chain would have to adjust accordingly,” he said. Instead, taxpayers are being asked to bail out the “losers” to prevent such a downsizing, he said.

Congress’ move to bail out the companies is motivated by worries that allowing the automakers to fall into bankruptcy will cause further massive disruptions in the fragile economy and financial markets. Legislators frequently cite estimates by the Center for Automotive Research, which receives some funding from Detroit, that the economy could lose 3 million jobs if all three companies failed at once - an unlikely scenario.

After resisting a bailout for weeks, the White House threw its support behind short-term loans, citing a potential loss of 1 million jobs and other severe economic consequences from a bankruptcy. Even the Big Three’s competitors, such as Toyota and Honda, say they are opposed to bankruptcy because it would be too disruptive for an industry that is highly interconnected through a common chain of suppliers and dealers.

Standard & Poor’s Corp. on Friday lent credence to the automakers’ argument that consumers would refuse to buy cars from a bankrupt company for fear of losing warranty service, saying that “concerns about bankruptcies have added to the declines in GM’s and Chrysler’s sales” in recent months.

But Mr. Garret and other financial specialists say fears of huge job losses and other disruptions are overblown, since Japanese and European manufacturers with plants in the United States are likely to produce more cars if one of the U.S. carmakers bows out.

“The argument that GM closing its doors would result in the loss of 2 million jobs or more is ludicrous as the competitors that pick up the slack will hire workers and buy more from their suppliers,” Mr. Garret said. “While that may not be good for Detroit, it may be good for the Carolinas or Tennessee.”

In a letter to Congress last week, Federal Reserve Chairman Ben S. Bernanke addressed another fear; namely, that the bankruptcy of a major automaker could set off a string of defaults and bankruptcies within the far-flung auto empire that would do serious damage to the economy.

Mr. Bernanke suggested the consequences of bankruptcy — at least in the financial markets — might be manageable. He noted that deep discounts on automaker bonds — which are selling for 20 cents to 40 cents for each dollar of face value — suggest that investors already are anticipating a bankruptcy, although banks that hold some $30 billion of automaker loans may suffer additional losses.

The Fed chairman said the central bank has decided against using its authority to lend money to the automakers, and he said Congress should consider “a range of possible policy actions” besides direct loans, including company mergers or a government-assisted “orderly bankruptcy reorganization.”

Aiding the auto companies is a particularly treacherous task, he noted, because their survival depends on “their ability to develop and produce vehicles that the public wants to buy,” and it is “unknown” whether they can accomplish that.

Peter Morici, University of Maryland business professor, said bankruptcy may be the best strategy for Chrysler and the other automakers.

“Proposals to save from Chapter 11 one or all of the Detroit Three with a federal bailout would be a poor policy choice if such assistance is not accompanied by specific requirements for systemic reforms,” he said.

“If Chapter 11 reorganization is endured now, rather than several years into the future, more jobs can be saved among GM, Ford and Chrysler and their suppliers, and better prospects for U.S. leadership in new technologies can be cultivated,” he said. “If Chapter 11 is put off several years through federal assistance, the successors to GM, Ford and Chrysler that emerge from a bankruptcy reorganization process will be smaller and support fewer jobs and less innovation.”

After the current shakeout is over, the winners in the industry most likely will enjoy a period of brisk growth as consumers satisfy pent-up demand for cars and seek out the latest fuel-saving technologies, said Gary A. Williams, chief executive of wRatings Corp. He said foreign automakers such as Honda and Toyota are poised to profit the most from the next upturn, but a few good American brands like Harley-Davidson and GM’s Saturn should also benefit.

“Whichever auto companies can make it through the current downturn will take part in one of the best bull markets for autos ever seen,” he said. “Companies with visionary CEOs and revolutionary products, similar to what Steve Jobs did with the iPod, will be the big winners.”

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