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October 27th, 2008

Without Intervention, GM/Chrysler Could Go Broke



As merger-talks continue between General Motors and Chrysler, analysts are holding strong to the belief that without either a merger or government loan, two of the Big Three could go broke within a year:

“Without external intervention, from consolidation or government assistance, we expect GM to reach its minimum cash position in under 12 months,” Deutsche Bank auto analyst Rod Lache wrote last week. In an interview, Mr. Lache added that Chrysler is also running dangerously low on funds. “We believe Chrysler is in the same position. It’s either August 2009 or December 2009 they run out. Both have a limited runway.”

Officials from both companies have persistently thrown out the notion of bankruptcy, as it would kill consumer and part-supplier confidence alike, local dealerships, as well as dump the companies’ pension-guarantee program for retired workers on the shoulders of the federal government (translation: taxpayers). Consequently, the automakers as well as Michigan politicians have drawn up various alternatives for a merged GM/Chrysler to access federal cash, including a strategy to unlock TARP funds.

GM and Chrysler estimate that a combined entity would need $10 billion in new equity to lay off workers, close plants, integrate the two companies and provide liquidity, according to several people involved in the talks or briefed on them.

GM and Chrysler, through a network of 10,000 dealers, have combined U.S. sales of between $110 billion and $130 billion, a figure that approaches 1% of the U.S. gross domestic product. They employ an estimated 145,000 people in the U.S. at more than 110 assembly, stamping and parts plants. An additional 600,000 retirees depend on the two car makers for health care and pensions.

The automakers’ options have been narrowed to bankruptcy, a substantial government loan, or a merger that could lead to the creation of a new company. Either way, taxpayers are likely to feel the pinch as federal dollars will be necessary no matter what.

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One Response to “Without Intervention, GM/Chrysler Could Go Broke”

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