Can GM and Ford Scrape By?

(page 2 of 2)

Moratorium on SUV Redesign

It's cold comfort, but GM isn't alone when it comes to swinging the ax. Last week, Chrysler cut 250 white-collar workers. Ford also has laid off salaried staff and shelved new models, including a rear-wheel-drive sedan for Lincoln. In addition, the company has delayed a redesign of its hulking Lincoln Navigator and Ford Expedition SUVs.

But those plans to slash costs and raise money haven't increased confidence among equity investors or lenders that the carmakers will be able to ride out the storm. While investors were selling off auto stocks, Fitch on Oct. 6 downgraded Ford's credit rating to deep-junk territory, CCC, where GM and Chrysler issues are already languishing. Fitch analyst Mark Oline says that the credit crisis, combined with an already tough economy, will keep car sales in the doldrums through 2009.

Oline says Ford had $26.6 billion in cash at the end of the second quarter. At its cash-burn rate, the company can stay flush for 18 months. Then it would hit its minimum of $10 billion to $12 billion needed to run the business. Ford could also tap some of the federal government's recently approved $25 billion credit line.

Cash to Last a Spell

Things are a bit trickier for GM. The company has tapped most of its credit lines. Its international operations were generating cash, but overseas economies are slipping now, too, says Oline. That means the company will almost certainly have to find a way to raise more money. GM had $21 billion in cash at the end of June. The company has a further $5 billion in available credit and cash and plans to save $10 billion from cost cuts. Assuming GM can also tap $5 billion to $7 billion in federal loans that the federal government has approved, GM has up to $21 billion in excess liquidity on top of the $14 billion it needs to run the company, says Gimme Credit analyst Shelly Lombard.

Given GM's cash-burn rate of more than $3 billion a quarter, the company has five to seven quarters before it gets down below the bare minimum it needs to buy parts and keep factories humming, Lombard says. GM's best bet is to tap the government's loan program and hope the market turns up.

Welch is the Detroit bureau chief for BusinessWeek.
With David Kiley in Detroit