Can General Motors and Ford survive?

By BusinessWeek

At the close of business on Friday, General Motors' (GM, news, msgs) market capitalization stood below what it was in 1929 and down more than 94% from its 2000 peak of $52.4 billion.

At its low, GM's market cap stood at $2.6 billion. It was about $4 billion (or $48 billion in today's dollars) when the stock market crashed in 1929. GM closed at $4.89 Friday on the New York Stock Exchange. Over the past 52 weeks, GM's high was $43.20.

GM was not alone. The Dow Jones Industrial Average ($INDU) closed down 128 points, to 8,451.19, on Friday. Ford Motor (F, news, msgs) closed at $1.99. Ford's 52-week-high was $9.24.

Balance-sheet issues

The automakers' shares have been hammered because their balance sheets and cash burn were a problem even before the investment calamity that forced the U.S. government to approve a controversial $700 billion bailout. The financial crisis has since spread to European and Asian markets.

GM, its dealers and would-be car buyers are all suffering from lack of access to credit. "Action to establish some normalcy to credit markets is important to our industry, period," said GM President Frederick Henderson.

• Read more: End of the road for US automakers?

Rating agency Standard & Poor's said Thursday it was reviewing GM and Ford for further downgrades based on grim forecasts by firms like J.D. Power & Associates that the industry will sell 2 million fewer vehicles to consumers in 2008 than last year and that the cratering of demand for new vehicles will last through next year.

The ratings being reviewed by S&P include the B- long-term corporate credit ratings for both Ford and GM, along with the B- long-term counterparty credit ratings for the two companies' respective financing arms, GMAC and Ford Motor Credit. The ratings already indicate the companies' debts are below investment grade.

"While the global automotive industry is clearly experiencing a slowdown in 2008, the global market in 2009 may experience an outright collapse," said Jeff Schuster, J.D. Power's executive director of automotive forecasting. (Like BusinessWeek, S&P and J.D. Power are divisions of The McGraw-Hill Cos.)

Consumers are key

The wild card, executives at J.D. Power say, is how long consumers will stay out of the car-buying market. "Buying a new car is something that can be put off indefinitely," says J.D. Power Senior Vice President Gary Dilts, who used to be the top sales executive at Chrysler. "When people start looking at their 401(k) statements and looking to conserve cash, they could stay out another a year or more."

• Top Stocks blog: Ford family loses billions

Besides an overall decline in sales, GM and Ford are especially hurting from a drop-off in demand for their pickups and full-size sport-utility vehicles. Those models have historically provided the companies with most of their profit. The spike in demand for small cars, from which the companies earn only about one-fifth as much profit, is not enough to compensate for the slowdown in the sales of bigger vehicles.

S&P believes that both automakers have enough cash for at least the rest of 2008 but that rapidly worsening industry conditions will make things tough for them in 2009. Fitch Ratings said this week that Ford could be down to $8 billion to $10 billion in cash by the second half of 2009, which is the minimum a car company the size of Ford needs to fund day-to-day activities.

Continued: No help from financing arm

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