Six Quarters to Doomsday - Autoline on Autoblog with John McElroy

2010 is shaping up to be a pivotal year in the American auto industry. From a product standpoint there will be a lot of interesting hardware in showrooms, including range-extending EVs, plug-in hybrids, clean diesels, pure electrics, and flex-fuel vehicles running on cellulosic ethanol. But it's also shaping up to be the year when the domestic industry will have to deal with its greatest challenge ever.
In short, the "Big Three" are running out of money, and running out fast. At its present spending rate, General Motors will burn through almost all the cash it has in the next 6 quarters. Ford can hold out a little bit longer. And Chrysler? Well, who the hell knows what's going on there?

John McElroy is host of the TV program "Autoline Detroit". Every week he brings his unique insights as an auto industry insider to Autoblog readers. Follow the jump to continue reading this week's editorial.

Each company is mortgaged to the hilt. They've either dumped most of the assets that could be sold off, or are in the process of trying to dump them. They're borrowed enough money to fuel the economies of several small countries. And they have grabbed every line of credit that any bank would extend to them. But even that's not enough.

The big problem is that their revenue is plummeting. GM's revenue in North America alone dropped $10 billion in the second quarter. In fact, Ford is now bigger than GM measured on revenue. GM pulled in $38.2 billion on a global basis in the last three months, but Ford earned $38.6 billion. The last time Ford was ahead of GM was when old Henry was still making the Model T.

That's why they've all taken an axe to their operations. With less and less money coming in, they're being forced to slash spending. But now they're not just cutting out the fat, they're cutting into the marrow of the bone.

It's painful to watch. When you've got to meet your numbers, sentimentality goes out the window. Ford, for example, just laid off Richard Gresens, the chief designer for the Ford Flex, the newest vehicle in the company's showrooms. When you start getting rid of talent like that you know these are desperate times.

And let that be a lesson to anyone in the industry who's working on full-size trucks, SUVs and V8 engines: they don't need nearly as many of you anymore. Better get your resumes updated, or figure out what your second career is going to be.

Car and truck sales in the U.S. market will probably end the year somewhere north of 14 million units, a breath-taking 3 million unit drop from 2006. That's the equivalent of closing roughly 12 assembly plants, 6 engine plants, 6 transmission plants, 7 stamping plants and dozens and dozens of component plants. Talk about gutting the U.S. manufacturing base!

But obviously the bad news isn't over. With no hope of boosting revenue this year or next, and with their borrowing capabilities almost tapped out, the Detroit three will have to cut expenses even more than they have already to try and stretch out the cash they have for as long as they can.

Of course Chrysler is trying to present itself as immune from this impending disaster. It claims that it made an operating profit last quarter, that it has plenty of cash on hand, and that it is right on plan. But for any outsider it's almost impossible to believe what the company is saying.

GM lost $16 billion last quarter. Ford lost nearly nine. Yet Chrysler would have us believe that it's doing reasonably well even though it's lost more sales and market share than the other two. Well, when no one can look at your books, I guess you can claim whatever you want.

So what's going to happen? Some are gleefully counting the days to when General Motors and Ford have to declare bankruptcy, and when Chrysler is broken up and sold off in pieces. But I don't think that's going to happen.

As much as Congress is in no mood to bail out the "Big Three," they're not going to sit idly by and watch them die an excruciating death. There's already a move in the House to offer low-interest loans to GM, Ford and Chrysler.

It's not an unreasonable offer. If Detroit can hold out until 2011-2012, the future suddenly starts to look a lot brighter. The massive cost reductions from their UAW contracts fully kick in at that point, they'll have a much more competitive line-up in their showrooms, and presumably the U.S. economy will be back on its feet.

But can they hold out that long?


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