The automakers are doomed. It's not that General Motors (NYSE: GM ) and Chrysler aren't committed to fundamentally changing their business, it's just that the progress reports they submitted to Congress the other day are so far removed from reality as to be meaningless.
At 117 pages, GM's plan has ballooned in size from the 37-page missive submitted back in December. In the rarified air of Washington, however, that's not completely unexpected. With the carmaker also boosting the amount it wants to get from the bailout by $12 billion in just two months, anything less would have been the real surprise. Chrysler's new 19-page effort seems threadbare by comparison.
Yet bloated or bare-bones, neither plan is grounded in reality. Take, for instance, their expectations for auto sales. GM's "downside" scenario sees auto sales growing to 14.5 million cars in 2012, with breakeven being achieved somewhere around 2010 domestically and 2011 for global operations. Problem is, that suggests over a 50% increase in volumes from today, even though sales have been dramatically falling for 15 consecutive months and have been on the decline for the past few years -- they dropped 18% last year and on are on track to fall another 21% more this year. Remember, this is GM's worst-case scenario!
Sales in January plunged 37%, with GM falling 49% and Chrysler tumbling 55%. Ford (NYSE: F ) was only slightly healthier, at a 40% decline. But the pain wasn’t confined to the Big Three, even foreign automakers Toyota (NYSE: TM ) , Nissan (Nasdaq: NSANY ) , and Honda (NYSE: HMC ) witnessed drop-offs in sales of 30% or more.
Chrysler's plan isn't much better. While it's predicting only a 25% jump in sales by 2014, its assumptions begin with a baseline number that starts at a higher level than what current sales trends suggest. January's numbers indicate a 2009 run rate of around 9.6 million units, but Chrysler starts its forecast at more than 10 million vehicles. At least it sees the possibility of no growth to slow growth the first year or two; GM's plan simply draws a straight line upward, with even it's so-called disaster plan counting on a 20% surge in car sales in 2010. When was the last time sales grew 20% annually?
The amounts the carmakers are seeking are also growing exponentially. While GM and Chrysler requested an additional $21.6 billion in additional loans, that significantly underestimates the total bailout cost being sought. On top of the $17.4 billion the two got in December (and the $9 billion line of credit Ford asked for, just in case), the taxpayers have pumped $25 billion into the carmakers to retool their plants and $5 billion more into financing arm GMAC. Let's not forget that the parts suppliers are crafting a bailout plan, auto dealers are looking to sponge some money away, and the car rental industry wants a handout, too.
And in the event the government gets the sneaky idea to force GM into bankruptcy to ensure its original loans get repaid, the automaker made sure to point out that a traditional bankruptcy would cost about $100 billion. The good news being that a pre-packaged bankruptcy might cost as little as $30 billion. Just keep giving us these loans, Uncle Sugar, it's cheaper for you in the long run.
With the auto industry's bailout plans based on unreasonable assumptions and rosy predictions, it seems fated for sure-fire failure. But if any of these proposals pass muster, it is the taxpayer who will be doomed.