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Without aid, a car crash may be ahead

Bensinger and Zimmerman are Times staff writers.

The Big Three carmakers got no bailout money from Congress last week. If the same thing happens again in two weeks, when they return with concrete plans to spend the $25 billion they’re requesting, General Motors Corp., Ford Motor Co. and Chrysler will be forced to make hard decisions about how to stay solvent.

After a year marked by continuous cost-cutting, precious few options remain for the cash-hungry carmakers. With credit tight, they can’t borrow money. Would-be car buyers are also having trouble getting loans, and consumer confidence is low, so selling a lot of autos isn’t very likely.

Offloading big assets to raise cash is also problematic because potential buyers -- such as foreign carmakers -- are being conservative and may have a hard time financing purchases. Laying off more workers could also be problematic because of the costs associated with downsizing. Some warn that bankruptcy could be the only option.

“I do believe the Detroit three will be insolvent within 12 months” unless they receive government cash, said Sean McAlinden, chief economist at the Center for Automotive Research.

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GM has laid off about 30,000 workers this year; Ford has reduced its U.S. workforce by more than half since 2003. Between them, they’ve closed or temporarily idled more than a dozen plants this year. Chrysler has performed perhaps the most drastic surgery of late, cutting a quarter of its white-collar workforce and closing the Delaware facility that was to make its first hybrid models.

As executives prepare the business plans Congress requested by Dec. 2, they’re breaking out their knives again.

GM said Friday it was cutting production at five U.S. plants and extending holiday shutdowns into the second week of January. Ford announced extended shutdowns at several plants, while Chrysler awaits responses to the most recent buyout offers it extended to 14,000 white-collar employees.

Meanwhile, in an effort to curry favor with lawmakers, GM and Ford announced plans to reduce their fleets of private jets, which drew scathing comments at the recent hearings.

One much-discussed option has been consolidation. “We have been restructuring for the last few years,” Mark Fields, Ford’s top executive in the Americas, said at the L.A. Auto Show last week. “Now we’re going to have to continue to restructure the business.”

Still, Ford dismissed a merger entreaty from GM this fall, and subsequent talks between GM and Chrysler, and between Chrysler and Renault-Nissan, went nowhere.

Assets are on the table, but there are few willing buyers. GM has been trying to sell its Hummer brand since June and recently put its AC Delco aftermarket parts operation and a plant in France on the block. No serious bidders have emerged.

When assets are sold, they often bring in relatively little cash. Last week, Ford sold a significant portion of its stake in Mazda Motor Co. for roughly $540 million, a fire-sale price because Mazda’s shares are down more than two-thirds this year. And GM said it would sell its 5% stake in Suzuki Motor Corp. for $230 million, about half of what it could have raised earlier this year.

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The companies still hold a few potentially salable assets, however. Ford could put Volvo on the block, GM could sell its high-end Saab brand, and Chrysler’s Jeep brand still has some cachet. But with corporate credit tough to get, it could be impossible to unload these assets at a decent price.

Carlos Ghosn, chief executive of Renault-Nissan, runs two profitable carmakers and has repeatedly expressed interest in GM and Chrysler properties in recent years. But he played down the prospect for now.

“No matter how attractive their assets, I don’t think anybody will take the initiative,” he said in an interview. “At least not until the financial disruption is over.”

Perhaps the most obvious solution to a cash crisis would be to sell more cars. But with the U.S. economy in the doldrums and consumer confidence at a record low, showroom promotions by the Big Three are failing to goose sales. GM launched its annual Red Tag sale early, while Ford is offering employee pricing on all its models. Chrysler is offering up to $6,000 in rebates on some models, plus 0% financing.

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Yet even sales promotions carry risk in this environment. In August and September, similar promotions by GM buoyed sales. When the incentives ended in October, GM’s retail sales were cut in half compared with the prior year, one of the worst monthly declines in the company’s history.

It’s not just U.S. automakers that are struggling to make sales. Toyota Motor Corp. began offering 0% financing on many vehicles for the first time, and several other Asian automakers offer similar deals.

Despite these efforts, total U.S. vehicle sales this year are forecast to fall short of 13.5 million units, down from 16.1 million last year. This month, the University of Michigan predicted that sales could dip to 12.2 million in 2009, a 25-year low.

Further cuts in payroll and vehicle production remain the most likely alternatives for staving off insolvency. And all three automakers are spending less to develop new vehicles. Ford halted redesign work on several SUV models, and GM said it sharply reduced product development across its lineup. Chrysler’s pipeline is so dry that it has been reduced to advertising 5-year-old models such as the Chrysler 300.

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The Big Three are also dramatically cutting budgets for advertising and marketing. This year, Ford dropped off the list of the 10 largest U.S. advertisers for the first time, and Chrysler dropped its sponsorship of the National Hockey League. GM canceled ads during the Oscars and the Super Bowl, and on Monday said it would end its nine-year endorsement deal with golf star Tiger Woods, citing “the search for budget efficiencies during a difficult economy.” Ending the arrangement is expected to save $7 million a year in endorsement fees.

Although those cuts may be the easiest to make, they create problems for the carmakers if they survive. If the companies cut production too much, they risk being unable to meet demand when buyers return to dealer lots. With development in the slow lane, there could be few appealing cars on those lots. And without robust advertising, many customers won’t know what the automakers have to offer.

All of it, some say, amounts to a road map to Bankruptcy Court. Some experts argue that seeking protection under a Chapter 11 bankruptcy filing could allow GM, Ford or Chrysler to shed burdensome pension obligations, close unprofitable dealerships and unneeded factories, and wring further concessions from their unions.

But such a move could backfire, noted Shelly Lombard, a debt analyst at Gimme Credit. Bankruptcy could spook customers, and banks could be reluctant to provide operating financing for companies in bankruptcy. It could also disrupt the supply chain and halt production in unintended areas.

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For GM in particular, “bankruptcy could turn into a roach motel,” Lombard said. “The company goes in but doesn’t come out.”

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ken.bensinger@latimes.com

martin.zimmerman@latimes.com

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