Could Uncle Sam Save Detroit?

Posted by: David Welch on October 10, 2008

With stocks in both General Motors and Ford sinking to historic lows, it’s clear that Wall Street thinks bankruptcy is a serious possibility. While no one is calling Wall Street “the smart money” these days, investors are right to worry about Detroit’s liquidity crunch. It’s very real. Ford is better off, having mortgaged its assets to get cash in the bank before the credit crunch. GM didn’t see around the same corner and will have a tough time raising more money to weather the storm.

What will happen? If car sales remain this weak, GM, Ford or Chrysler could end up in bankruptcy court in the not-too-distant future, analysts say. For its part, GM says bankruptcy is not an option. The company will fight hard to avoid it. If GM does stay out of Chaprter 11, the plot will track something like an Indiana Jones movie. That’s especially true now that overseas markets, where GM has actually made money and generated cash recently, are slipping into recession. Only a sales turnaround in North America or a helping hand from Uncle Sam may pull one or all of them back from the brink.

Don’t discount a government bailout. First, Congress and Pres. Bush have already greenlighted $25 billion for carmakers to use to develop and build fuel efficient cars. Don’t be surprised if that green capital becomes operating capital. The government could even approve another $25 billion in loans for Detroit to stave off bankruptcy. That was already bandied about as part of the energy bill a month ago. Bailouts are about as popular as Wall Street executives these days, but keeping Detroit on a lifeline is a relative bargain next to the $700 billion of rescuing the banking system.

Reader Comments

james walsh

October 10, 2008 2:50 PM

Maybe the big three should adapt a just in time business model. Act like Dell did 12 years ago and don`t build it until it`s ordered. turn product into cash in 30 days or less. The dealers would still have showrooms with a few cars,but the lots wouldn`t be full of unsold inventory.Dealers still make their money in the service bays and the
manufacturer would become nimble. The unions would still have jobs.
They need to rid themselves of the billions in inventory that dealers can`t
give away. This is Business 101 and most manufacturers have tried to impliment it
to the degree that their customers will tolerate. Auto and truck buyers will wait a few weeks if they can have the vehicle their way.

David E. Connolly, Jr.

October 10, 2008 10:24 PM

Mr. Sony said long ago that "People are not going to buy what they don't want." What don't you understand about that? Why must you save the big three automakers? They make garbage, and have for going on 37 years. Why do they deserve to be saved with taxpayer money? When you say "Uncle Sam," it is really a way to avoid saying the taxpayer, because that would mean you are spending the money of real people, and not some make believe "Uncle Sam," right? Get real. We are in a money crunch. Only the best and brightest, if they are lucky, will survive, and deserve a leg up, and Detroit doesn't fall into that category.

Rajiv Mahajan

October 11, 2008 2:42 AM

What is the worth of Stanford, Havard or whatever business school if these have to churn out idiots who would preside over such a royal economic mess in the world. It is high time all the 'business schools' ponder over as to what is wrong with what they teach. And if the end product has to be this only as a part of economic cycle, then why not ordinary grads who would at least take home less for the same amount of scum.

munidas pereira M.B.A (McGill)

October 11, 2008 7:38 AM

Giving these companies taxpayer money unless they change their attitude is subsidising incompetence
One major reason why the Japanese companies got ahead was by having much better quality/reliability as shown by independent sources like consumer reports.
While there has been some improvement in the recent past, there is still a significant gap.
The north american companies have only themselves to blame (not opec or oil speculators)for this.

jack

October 11, 2008 3:48 PM

If they go under that means over 2 mil unemployed new workers (including all the businesses feeding off the big 3). That would also mean chaos in the lending market since both Ford and GM own extremely large lending outfits. That would also put Wall St in shock since they are symobolic of US industrial power and really the last employee orianted industry in America. And oh yah the State of Michigan can close its doors and throw away the key. Lastly they make decent cars and can be profitable just as they were in the past (some of their cars (especially Ford) are actually excellent -especially those sold in Europe)

So be it

October 12, 2008 10:01 PM

No. It's too late. US auto makers had messed it up long time ago. For decades, execs at top US auto makers had given away their companies in terms lucrative union contracts which made them very uncompetitive. At this point, government assistance would be wasting of money.

I am not too worried about failure of US automakers, because their competitors (Asian and European) are making cars in US now. Laid off US workers may well end up working for Asian or European automakers. So, it's not completely loss of jobs. US consumers already are buying foreign cars anyway. So the only loss would be the outdated US style labor structure.

ballbuster

October 13, 2008 4:03 AM

The Japanese auto companies have Wagoner and company surrounded. After wagering a losing battle for nearly a decade, the out-foxed and out-fought Wagoner's company is on the verge of capitulation. With its resources near empty, ammunition running low, and morale of the troops at its lowest ebb in history, Wagoner and his troops can no longer go on the offensive. Incompetent Wagoner has refused to resign from his command in order to infuse new leadership into the company while his Chief of Staffs, Lutz,Wellburn, Fritz, and a bunch of appointed self-serving sycophants are reluctant to relieve Wagoner's command. The result is that on almost every battlefield, Watanabe has spear-headed Commander Wagoner on almost every front. If Wagoner has any sense of honor, he would have long ago committed Hari-Kari or dishonorably surrendered and save everyone the anguish, humiliation and suffering. Nevertheless, the end is near for Wagoner and his company of disillusioned troops. Ninja Samurai Watanabe has Wagoner encircled and is preparing the final Bonzai charge. What the Japanese failed to accomplish at Pearl Harbor, Wagoner single-handedly has now made it possible: Domination of America by the Japanese. Yamato would be proud. Tojo is doing back-flips in his grave. The Emporer has several Geisha positions available.

ps

October 13, 2008 4:55 PM

Where is the accountability here? yes, the gas spike caught Detroit offguard but did these executive idiots think gas was going to be cheap forever? They put all of their eggs in 1 basket, which was gas guzzling SUV's which also kept the American stereotype as fat stupid and selfish incredibly intact. the big 3 virtually ceded the market for more practical machines to Europe and Asia. It's hard to play catch up when your image is that of Hummers, Excursions and Durangos while Asia and Europe have the image of Camrys, Insights, Prius's and Astras. Yes, the other guys make gas pigs too but they didn't let their image be defined by them. I do hope they pull out of this mess but they have to get rid of the bean counters and let the car men run the show. With Lutz and Wagoner, there is still a chance.

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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