After both General Motors (NYSE: GM) and Ford (NYSE: F) last week revealed they were still bleeding billions of dollars in cash, their situation was viewed as even more dire than previously thought. The push to get them federal assistance has become particularly acute.
And it's not about GM buying Chrysler anymore. While GM had wanted to divert some of the $25 billion package earmarked for loans to retool plants to pay Cerberus Capital for its share of Chrysler, those plans are on indefinite hold after being coolly received in Washington.
Michigan officials want to double the previously announced loan amounts to $50 billion, the amount the Big Three had originally sought. They also note that President-elect Obama has expressed support for the higher amounts, saying the auto industry is a high priority.
Right now, GM is more concerned about getting cash just to survive beyond the end of the year. When it delayed reporting results by 45 minutes on Friday, some investors assumed a bankruptcy filing was in the works. No, but GM's adjusted net earnings came in at a $4.2 billion loss for the third quarter, as sales fell 13%. The company has only $16 billion in cash; it's estimated it needs somewhere between $11 billion and $14 billion to fund its operations just for the rest of 2008.
Ford, on the other hand, reported that it lost $3 billion for the quarter on Friday and has almost $19 billion in the bank. Yet both have been burning through cash at a far greater rate than anticipated, and GM might actually run out of cash before the end of the year, while Ford would probably survive a few months longer.
Chrysler is in no better shape. Without merger plans on the table anymore, analysts say its future is very cloudy. While the company, now private, doesn't make its financial situation public, analysts think the situation is every bit as precarious as the other two.
Before we help ...
Many point to these numbers as proof that we need to help out, even giving them access to the kitty from the $700 billion financial industry bailout. With the bailout of Wall Street under way, and American International Group (NYSE: AIG) getting a new deal to the tune of $150 billion, the case against helping the carmakers becomes more difficult to make. Yet in our rush to throw money at them, let's ask why some are so hell-bent on preserving the Big Three in their current form.
Yes, there would be an immediate displacement of workers if GM or Ford file for bankruptcy protection, but let's not forget all the opportunities that were squandered. Ignore for a moment the short-term memory lapses that led Detroit to make gas-guzzling vehicles for years after the oil shocks of the past few decades, even as Toyota (NYSE: TM), Honda (NYSE: HMC), and Nissan (Nasdaq: NSANY) built more fuel-efficient vehicles.
More recently, GM and Ford spurned the advances of Nissan's Carlos Ghosn when he made overtures to combine the companies. Cast an eye at GM taking a big gamble by drawing down its credit line. See how Ford rejected the possibility of hooking up with GM as recently as September. Now, of course, GM is willing to marry anyone and everyone -- shotgun or not -- but wants access to taxpayers' money to do it. Even now, Ford is investing in its plants to increase production of its F-150 pickup because it sees opportunity in lower gas prices. What that means is that the company still hasn't learned its lesson.
How American is this?
Argue that we must preserve American manufacturing jobs, but in this day of global interdependence, there is no distinction between U.S. and foreign carmakers because the foreign ones have so many workers here. Honda employs more than 18,000 people in its U.S. facilities; there are more than 38,000 Toyota employees in North America; Daimler (NYSE: DAI) employs more than 24,000 people in the U.S.; and even Hyundai employs more than 3,000 workers at its Alabama manufacturing plant. These carmakers aren't any less important to the economy -- or any less American.
The point is, if GM, Ford, or Chrysler were to fail, there would be more opportunity for other carmakers to grow -- and hire any displaced workers. There are simply too many car companies these days, and only the most efficient should survive. Propping up any of the carmakers merely delays the inevitable, or, at best, puts taxpayers at risk of having to foot the bill.
Management has not shown itself to be worthy stewards of these companies. While some argue that that means the companies need the government's help, bailing them out now -- with either loans or direct cash infusions -- is simply rewarding them for the mistakes they make.
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