Detroit & Economy: Can GM and Ford Survive?

Detroit is running out of money and it's running out of time. Throughout this dark decade for Motown, bankruptcy talk has picked up speed. Now Detroit is gripped with a full-throttle panic: a blaring black headline in today's Detroit News that reads: "Auto Fears Grow." And for good reason. Wall Street, which has driven down GM and Ford stock to nearly nothing, now says both money-losing automakers are running out of cash and might not have enough in the till to make it to 2010, when new fuel-efficient models are supposed to save the day. In fact, Standard & Poor's says GM, America's largest automaker, might not have enough money to make it through next year. "The odds are increasingly stacked against these companies getting through 2009 unscathed," says veteran auto-analyst John Casesa.

Bankruptcy is now a clear and present danger because already ailing Detroit is caught in the backdraft of the inferno engulfing Wall Street. GM stock dropped by nearly one-third Thursday, to $4.76, its lowest price since 1950, when tailfins were new and Truman was in the White House. Ford's stock plunged 22 percent to $2.08, a low-water mark not seen since the first Reagan administration (during the double-dip recession). On Friday, Ford's stock fell below two bucks, to $1.99, down 4.3 percent, while GM rebounded slightly to $4.89, up 2.7 percent. What's more, bond sellers are valuing GM's and Ford's bonds at 25 cents to 30 cents on the dollar. "You don't see bonds trading at 30 cents on the dollar unless the market thinks you're going bankrupt," says Shelly Lombard, a senior analyst at Gimme Credit Research.

Until now, Detroit's wounds were mostly self-inflicted—they stuck to their guzzlers as gas climbed to $4 and buyers turned to Toyota. But as Wall Street melted down over the last few weeks, all automakers, even Toyota, saw shoppers stay out of their showrooms as credit dried up and confidence evaporated. Auto sales fell 23.5 percent last month and now analysts are warning of a total collapse of the global car market. Even a reprieve in gas prices, which now average $3.35 a gallon, down from $4.11 in July, goes nearly unnoticed in this calamitous car market. "If you think of all the things that could align against the domestic auto industry, I can't think of a worse scenario short of war in America," says Casesa. "But maybe that would be better because we would need tanks from Detroit."

Still, it won't be a sinking stock price and cheap bonds that push Detroit into bankruptcy. Like it would be for you or me, it will be because they simply run out of cash. GM's risk is the highest, analysts say, because it's burning through a breath-taking $1 billion a month and maybe more. Sure, it has $21 billion on hand, and just raised nearly $4 billion in September by drawing on its credit lines and swapping some debt for equity. But GM needs between $11 billion and $14 billion just to keep the lights on. So it could burn down its cash pile to less than $1 billion by the end of next year, Citigroup estimates.

Ford gave itself a bit of a cushion when it literally bet the house—putting up its factories, offices and even the Ford name as collateral—to borrow $23.4 billion in 2006. Now no one is lending to Detroit, especially after Standard & Poor's warned Thursday it might push GM's and Ford's credit ratings deeper into junk territory. (Chrysler, now privately held by Cerberus Capital Management, says it has $11.7 billion in cash, but that can't be independently verified.) "Where's the cash going to come from to support these companies?" asks long-time auto analyst Maryann Keller, who rates the prospects for a Detroit bankruptcy "very high."

The automakers, naturally, insist they're not going broke. "Bankruptcy protection is not an option GM is considering," says spokeswoman Renee Rashid-Merem. Adds Ford spokesman Mark Truby: "We were fortunate to go to the markets at the right time and secure significant liquidity before the economic downturn." Chrysler spokeswoman Shawn Morgan also contends, "Bankruptcy is not a measure we are considering." And they are all frantically cutting workers and closing factories to try to conserve cash. GM is even trying to sell its corporate headquarters to raise money. (No takers so far).

But the decision to go Chapter 11 might ultimately be out of the auto bosses' control. If cash runs down and bills come due, it will be the creditors driving the companies to bankruptcy court. "GM would rather light its toes on fire than go into bankruptcy, but it could reach a point where they have no choice," says Lombard. "A bond could come due and they might have to throw up their hands and say, 'We don't have the cash.'"

In Detroit, bankruptcy has always been viewed as the kiss of death. The conventional wisdom held that no one would buy a car from a bankrupt automaker. And that might well be true. But since very few people are actually buying cars at the moment, this could be viewed as an opportune time for Detroit to get its house in order under Chapter 11 reorganization. (And most analysts believe once one Detroit automaker goes Chapter 11, the others must follow so that they get the same cut-rate deal from creditors). "There aren't as many people out there shopping now, so you've got a lot less to lose," says Keller. "Maybe this is the time to do it and then you come out smaller, more focused companies." Some analysts even suggest that through bankruptcy, the Detroit Three could be whittled down to the Detroit Two or even the Detroit One, with combined forces and brands that can finally take on the world.

But the road trip through bankruptcy would be the ride from hell for Detroit and its industrial neighbors in the upper Midwest. Thousands of car dealers would be closed and tens of thousands of workers would lose their jobs, as bankrupt automakers would use the courts to tear up contracts with their once powerful unions and retailers. The population drain from the rust belt would accelerate, leaving permanently weakened economies wherever an auto factory once stood. In fact, Detroit's shock would course through the entire economy, especially in its anemic state. More than one in 10 jobs in America are connected to the auto industry, according to the Center for Automotive Research. And auto production represents 3 percent of the gross domestic product (down from 4 percent when times were good). "It will make an already bad economy even worse," says Casesa. "But for the upper Midwest, this would be a disaster."

That it has come to this, leaves Detroit feeling dizzy. Auto execs continue to point to turnaround plans formulated before the bottom fell out, as if the old rules still apply. But the reality is that as the economy rapidly takes a deep downturn, Detroit's prospects grow ever bleaker. "This is far uglier than anyone imagined," says Keller. "The economy is unraveling right underneath our feet." And that means Detroit could be running out of road.