Crisis at Detroit Three drives industry rethink

GREG KEENAN,  From Monday's Globe and Mail

The crisis threatening the future of the Detroit Three will radically reshape the industry even if the talks between Chrysler LLC and General Motors Corp. don't bring about a merger.

“What we're witnessing is the utter collapse of an outdated business model that developed for a much different era when the North American market was vastly less competitive,” said John Casesa, a veteran auto industry analyst and now managing partner of Casesa Shapiro Group LLC in New York.

That model consisted of expensive labour and auto makers that were global in scope but granted their regional operations almost complete independence to develop their own vehicles, instead of sharing resources and best practices throughout the company.

Detroit only began working on redesigning that model a few years ago, and now it's probably too late, Mr. Casesa noted.

“I think these events will lead to a much smaller North American-owned auto industry,” he said. “Detroit's domination is over.”

That could be through a Chapter 11 bankruptcy filing by one or more of the companies, mergers, takeovers by offshore players such as Fiat SpA or Renault SA seeking to jump into North America, or forced marriages by a U.S. government determined to create a national champion.

“The accelerated remaking of the domestic auto industry is proceeding down an irreversible course,” said industry consultant Bill Pochiluk, president of AutomotiveCompass LLC in West Chester, Pa.

The talks of merger and whispers of looming bankruptcy filings come amid a global credit crisis that has hammered three companies already struggling to stay afloat.

The credit crisis is the third of a series of towering waves that have swept over the Detroit Three in the past decade.

The first wave – gradually at first and then more rapidly – was the erosion of their long-standing market domination in North America.

They started adjusting by restructuring and slashing work forces and manufacturing operations earlier this decade.

The second and third waves battered the companies in rapid succession this year, even as they were still rebuilding from the damage caused by the first.

The second wave was the sudden spike in gasoline prices to more than $4 (U.S.) a gallon this spring. That sent sales of pickup trucks plunging and obliterated demand for traditional sport utility vehicles, which had been the source of any profits the companies were making.

The credit crisis is the third wave, and it threatens to wipe out their financial resources and send them over the edge.

GM, for example, unveiled a plan this summer to boost its financial reserves by $15-billion by the end of next year through a combination of cost-cutting, asset sales and raising of new capital.

That plan assumed – then thought to be a grim scenario –vehicle sales of 14 million this year and in 2009 in the U.S. market.

But sales are tanking below even that level, with two forecasts predicting sales barely above 13 million.

There were reports over the weekend that Ford Motor Co. is seeking to sell its 34-per-cent holding in Mazda Motor Corp. of Japan in another effort to raise cash.

Rating agency Standard & Poor's warned last week that Ford and GM could deplete their financial resources by the end of the year. That sent those companies' shares tumbling to record lows.

All three Detroit auto makers took the unusual step Friday of denying that they are planning to file for Chapter 11 bankruptcy.

But the credit crisis has effectively eliminated their ability to raise money, which means GM won't be able to finance a merger with Chrysler, industry sources said.

“No bank is going to come anywhere near this,” said one source. “If a bank was to do it, what bank? Where's that money going to come from?”

Chrysler, which Daimler AG sold to private equity fund Cerberus Capital Partners LLP, appears to be in the worst financial shape of the three because of its lack of global scope and heavy reliance on the now-collapsed pickup truck and SUV market.

But analysts questioned the cost savings that are said to be the prime motivation behind a potential merger with GM.

“If Daimler couldn't make it work, how could anybody make it work?” one analyst asked.