GM and Chrysler on the brink?

By The Wall Street Journal

As talks between General Motors (GM, news, msgs) and longtime rival Chrysler continued over the weekend, a harsh reality has emerged: Without a merger and possibly an assist from the federal government, two of Detroit's Big Three automakers could run out of cash within a year.

Though GM and Chrysler dismiss the notion, analysts and investors have begun to question whether one of the companies -- locked out of the credit markets and burning cash rapidly -- might have to seek bankruptcy protection.

Such a filing could set off a chain reaction across the U.S. auto industry, choking off parts supplies to healthier Asian and European carmakers and slamming thousands of local car dealers.

It could also create a mess for the federal government, whose pension-guarantee program would be swamped by the addition of hundreds of thousands of retirees.

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The automakers and Michigan political delegations have proposed at least three plans in recent weeks to unlock federal cash for a merged GM-Chrysler, including seeking an equity investment from the government or unlocking funds from its Troubled Asset Relief Program, or TARP.

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.

"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, 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."

GM and Chrysler said publicly this month that bankruptcy proceedings are out of the question. Auto-industry executives have long said that seeking bankruptcy-court protection would destroy the reputation and desirability of their products. Automobiles are typically the second-biggest purchase for a family, behind a house, so buyers want to make sure the manufacturer will be around for the life of the vehicle to provide parts or honor the warranty.

"We continue to hold the position that bankruptcy is not an option," said GM spokesman Steve Harris. Chrysler spokeswoman Lori McTavish said: "Bankruptcy is not an option for Chrysler -- it doesn't make sense for us."

Several people involved in the GM-Chrysler merger discussions say the companies have talked to federal officials about their proposed transaction. But there are no specifics yet about what role the government could, or will, play. There is no indication that Treasury, which oversees the TARP program, is currently considering proposals for anything but financial institutions.

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 United States at more than 110 assembly, stamping and parts plants. An additional 600,000 retirees depend on the two carmakers for health care and pensions.

GM and Chrysler "are basically waiting on the government," said one person involved in the merger talks. "The three choices are bankruptcy, a big intervention from the government or some big deal like this that has massive cost-cutting possibilities," this person said. "That's it. And even the big deal may require government help."

People familiar with the GM-Chrysler talks said over the weekend that the sides are also considering forming a new company that could include a third automaker.

Talk of a GM-Chrysler merger began in September, following brief discussions between GM and Ford Motor (F, news, msgs), the third major U.S. automaker. Cerberus Capital Management, a private-equity fund that owns 81% of Chrysler and 49% of GMAC -- GM's lending arm -- approached GM about swapping GM's 49% stake in GMAC for ownership of Chrysler.

Such a merger would have been unthinkable in recent years because it would have only added more brands, dealerships and slow-selling models to GM's bloated structure. But with credit markets tightening and collapsing U.S. auto sales draining GM's cash, the automaker is scrambling to keep itself afloat.

U.S. car and truck sales are down 13% through September this year. GM sales have fallen about 18%, while Chrysler's are down 25%. Ford's sales are down 17% so far this year. Ford's condition is not considered as grave as that of GM and Chrysler because it has more cash on hand.

In the next 12 months, U.S. auto sales could sink to levels last seen during the early 1980s recession, according to several forecasts, when there were 70 million fewer Americans. Sales peaked at 17.4 million in 2000 and remained near 17 million for five more years. This year, 13.6 million vehicles are expected to be sold, and sales are expected to fall by an additional half-million vehicles in 2009, according to consumer-researcher J.D. Power & Associates.

Today, the Big Three have the capacity to build 3 million more cars and trucks than they currently sell -- about 10 plants' worth of idle capacity. "These are truly unimaginable times for our industry," Chrysler Chief Executive Robert Nardelli told employees Friday in announcing 5,000 new white-collar-job cuts.

Continued: Human toll could be high

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