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GM staring into abyss as industry seeks help

For mighty General Motors, the news could hardly be worse. It's not the end of the road, one analyst said, "but they can certainly see the end of the road from where they are right now."
General Motors Corp. headquarters is seen October 26, 2008 in Detroit, Michigan.
The entire auto industry is in trouble, but GM appears to be in worse shape than its rivals. Rebecca Cook / Reuters

For mighty General Motors, the news could hardly be worse. The nation's biggest automaker said Friday it lost $2.5 billion in the latest quarter as it was slammed by a slowing economy, a global credit crisis and the effect of high energy prices.

The company is now going through cash at a rate of $2 billion a month and says that without help it will run out of money in 2009.

“This is not necessarily the end of the road for General Motors, but they can certainly see the end of the road from where they are right now,” said Aaron Bragman, an automotive analyst at consultancy Global Insight.

Without a federal bailout, GM could be looking at bankruptcy, he added.

The entire auto industry is in trouble, but GM appears to be in worse shape than its rivals.

Ford burned through $7.7 billion in the latest quarter to keep its operations running but said it has enough cash to make it to 2010, when the economy and auto sales are expected to improve. Chrysler, now privately owned, does not report financial results but has a relatively strong cash position — a major reason that GM was interested in acquiring the company from Cerberus Capital Management.

GM said Friday it was suspending those talks, however, "to focus on its immediate liquidity challenges."

Faced with these sobering statistics, the Big Three are turning to Capitol Hill. On Thursday, the three CEOs and the leader of their biggest union met with House Speaker Nancy Pelosi to discuss another $25 billion in federal aid on top of a $25 billion loan allocated just a few weeks ago.

The election of Barack Obama as the nation’s 44th president offers some new hope for the industry.

Obama singled out the auto industry Friday in his first news conference since the election,  calling it "the backbone of American manufacturing and a critical part of our attempt to reduce our dependence on foreign oil."

"I have made it a high priority for my transition team to work on additional policy options to help the auto industry adjust, weather the financial crisis and succeed in producing fuel-efficient cars here in the United States," he added. "I have asked my team to explore what we can do under current law and whether additional legislation will be needed for this purpose."

One big question is whether Congress will act in the upcoming lame-duck session, before the Jan. 20 inauguration.

“GM said they’ll be in trouble sometime next year, but it may come sooner than that,” Bragman said.

“The only scenario left now for GM and the other automakers is for the government to step in with some financial aid,” said Bragman. “The marketplace has not responded to the automakers’ pleas for money, or plans to sell its assets like the Hummer brand, so basically it’s up to the government now, and if they don’t step in quickly we’re looking at bankruptcy.”

In a conference call with reporters and analysts, Wagoner said the company will “take every action we possibly can” to avoid bankruptcy.

“We’re convinced that the consequences of bankruptcy would be dire,” he said. “We need to find a way to get through this, and that’s really our focus.”

Ford, which said Friday it plans to further reduce its workforce by 10 percent, is in a stronger liquidity position than GM, having mortgaged all its assets — including the iconic blue oval Ford logo — to the tune of $23 billion to finance its turnaround plan. Analysts expect Ford to have enough cash to finance its day-to-day operating needs until 2010, when the auto market is expected to pick up again.

For GM, the situation is grimmer. The automaker announced a range of moves Friday to improve liquidity by $5 billion by the end of next year by cutting capital spending, reducing sales promotions and further cutting production in the first quarter. The automaker also said it will lay off about 3,600 workers.

But those cost savings are not enough to save GM.

After the recent $700 billion bailout of the financial industry, there is some opposition to using taxpayer money to rescue yet another industry that has suffered from years of mismanagement.

But industry supports counter that the failure of GM or another automaker would have a severe ripple effect on the broader economy.

About 2.5 million American jobs would be lost in the first year if the industry shrinks by 50 percent, according to one dire report issued this week by the Center for Automotive Research in Ann Arbor, Mich. About 239,000 of those job losses would be at one of the Big Three companies, with the rest coming from parts suppliers and related industries.

“I can understand the sentiment — why reward failure? Why reward an industry that has suffered from 25 years of mismanagement?” said Bragman. “The answer is the consequences of a major failure in the automotive industry far outweigh the cost of keeping the major automotive companies going."

Bankruptcy is a poor option because buyers would be unlikely to buy a new car from an automaker that might be out of business within a few years. A bankruptcy also would also lead to more company failures and layoffs at companies that supply the automakers, and the foreign automakers like Toyota and Honda that those companies supply, Bragman said.

The loss of tax revenue would weigh on state and federal governments, and the government also could be liable for pension and health-care obligations to workers, retirees and their spouses. Those costs would ultimately fall to taxpayers.

“The idea that we do nothing and let market forces correct this problem is shortsighted,” said Bragman. “You’re looking at millions of jobs lost if the industry goes under, and a lot of people rely on it for their livelihood. The industry is the largest purchaser of raw products like aluminum and electronics — it’s a huge industry and impacts all aspect our economy.”

Instead of being costly, a government lifeline for the U.S. automotive industry would actually be relatively cheap, said Center for Automotive Research Chairman David Cole. Studies show the economic impact of an automotive industry failure would be far higher than the cost of keeping the industry afloat until 2010, when automotive sales are expected to pick up again, he said.

“The cleanup of a calamity is going to be a lot more expensive than the cost of prevention because you’d be taking one million-plus of people out of the economy,” Cole said. “It’s like Hurricane Katrina — if you could have prevented the disaster it would have been a lot less costly.”