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Detroit Gets Its Leaky Life Raft

By Rich Duprey - Updated Apr 5, 2017 at 7:56PM

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The president approves a loan package, but automakers may still sink.

Well, Detroit got its life raft -- now let’s see if it can remain afloat. President Bush announced this morning that bankruptcy was not an option after all, that because consumers might be reluctant to buy a car from a car company that was bankrupt, he was making available $17.4 billion in loans. He expects General Motors (NYSE:GM) and Chrysler to sign on later today.

Consider the loans more like "floaties" than some inflatable boat, because while there is some room for maneuvering by the automakers -- contract negotiations are left up to them and the unions, rather than the immediate wage and benefit cuts the Senate Republicans had been demanding -- they're still going to have only until the end of March to explain how whatever plan they devise will keep them solvent. If they can't, the loans get recalled immediately.

This plan is coming in the nick of time for GM and Chrysler, both of which said they need the money immediately to forestall any bankruptcy proceedings. It's still doubtful whether it's going to help much.

Sales for November were horrendous. Chrysler sales were down 47% for the month, while GM's were off 41%. Ford (NYSE:F), which says it doesn't need a loan right now, saw car sales drop 31%.

Yet it's not just U.S. manufacturers that aren't moving cars off the lot. Toyota (NYSE:TM), Honda (NYSE:HMC), and Nissan (NASDAQ:NSANY) all saw their North American market evaporate. Sales were down 34%, 32%, and 42%, respectively. Even back home in Japan, the recession was starting to reach into the car markets. Toyota's Lexus brand, for example, saw car sales wither away at a 24% rate this year. The top automaker is closing assembly lines for two days, cutting production, and hacking executive bonuses.

U.S. automakers are also closing up shop to save money. Beginning today, Chrysler will be shutting all of its factories for at least a month, and Ford has said it plans to close nine of its 15 factories the first week of January. GM is cutting first-quarter production by 250,000 cars, a move expected to impact about 20 plants.

All of which explains why the loans are merely delaying the inevitable. Even with oil prices falling, there is little demand to undertake large expenses. Unemployment is rising, with jobless claims last week hitting their highest level since 1982. The economy remains in recession, and the Fed's all-in move -- cutting interest rates to virtually nothing -- means it has now run out of bullets. Car sales look like they're going to remain in the toilet for quite some time, which means that come the end of March, the automakers may need to have more than few billion on hand to repay their loans.

Bailout? This looks more like President Bush has offered the automakers a life raft with a slow leak -- putting off their sinking until there’s a new administration around to deal with the collapse.

Nissan Motor Co. is a Motley Fool Global Gains pick. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.

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Stocks Mentioned

General Motors Company Stock Quote
General Motors Company
$36.62 (-2.50%) $0.94
Ford Motor Company Stock Quote
Ford Motor Company
$15.19 (-3.74%) $0.59
Honda Motor Co., Ltd. Stock Quote
Honda Motor Co., Ltd.
$24.99 (-0.95%) $0.24
Toyota Motor Corporation Stock Quote
Toyota Motor Corporation
$152.94 (-2.09%) $-3.26

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