Can Washington save the Big Three automakers?
Posted: 09 November 2008 0252 hrs

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DETROIT, Michigan : With the Big Three US automakers teetering on the edge of insolvency, it appears Washington may finally be ready to come to Detroit's rescue.

Only hours after both General Motors and Ford Motor Co. announced large third-quarter losses -- and stressed that they are both rapidly running out of cash -- President-elect Barack Obama focused on the industry's plight during his first news conference since Tuesday's election.

"I have made it a high priority for the transition team to work on additional policy options to help the auto industry adjust," Obama told reporters gathered in Chicago.

Just how bad a situation the automakers are facing was hammered home on Friday, when GM reported a 2.5 billion dollar net loss for the third quarter, bringing to nearly 57 billion dollars its losses since the beginning of 2005.

Ford's 129 million dollar quarterly loss, meanwhile, brought to nearly 24.5 billion dollars the deficit it has run up since plunging into the red in 2006.

Yet the losses only partially state the true depth of the problem for the automakers.

Going into the third quarter, GM had 21 billion dollars on its books. By the end of September, that had plunged to 16.2 billion dollars, coming perilously close to the 11 billion to 14 billion dollars it says it needs on hand to keep the company operating.

Ford burned through 7.7 billion dollars in the quarter, though its reserves are nearly twice as richer thanks to a massive line of credit it acquired last year.

Though it doesn't report its full financial data, the privately-held Chrysler LLC is also thought to be fast running out of cash: one reason, analysts believe, why its parent, Cerberus Capital Management, was so eager to sell Chrysler to GM.

That deal, however, was scuttled by GM, and observers believe Cerberus may now rush to find another buyer as the economy continues to worsen.

"I doubt there's anyone who challenges the fact that we're operating in difficult times, perhaps as difficult as we've ever faced in the auto industry," GM Chairman and CEO Rick Wagoner said during a Friday conference call with reporters and industry analysts.

Detroit's situation has certainly worsened in the face of the current economic crisis that combines what many describe as a "perfect storm" of factors, such as high fuel costs, tight credit, job losses and rising commodity prices.

But the seeds of the current crisis date back to the last big oil shock, of 1979, which helped the Japanese gain a foothold for small, fuel-efficient products.

As gas lines faded from memory, the Asian automakers continued to gain ground by focusing on quality, something GM, Ford and Chrysler have only recently come to grips with -- and with varying degrees of success.

Further compounding the situation, Detroit has been consciously slow to embrace changes in the American automotive marketplace, especially the shift from big trucks to small, fuel-efficient passenger cars.

And even where it has, lamented Consumer Reports' auto analyst David Champion, it has needed "more models that were exciting for people to buy."

Again, Detroit has begun to address that complaint, and a flood of more fuel-efficient -- and exciting -- models are on tap to debut over the next several years. The challenge now will be to keep that flow going.

GM President Fritz Henderson said Friday the automaker will have to cut back on some product programs in order to ensure liquidity.

That creates a conundrum, of course: to stay alive, short-term, the Big Three might be curtailing programs that would ensure long-term success.

So federal aid becomes all the more important, said Joe Phillippi, an automotive analyst and head of AutoTrends Consulting.

"Both the current administration and the incoming administration recognize it will take at least 50 billion dollars to tide the automakers over through 2009, when they start to get some labor cost relief, and an improvement in demand," he told AFP.

Obama said Friday he would push Congress to accelerate the delivery of 25 billion dollars in loan guarantees aimed at helping automakers develop more fuel efficient vehicles ahead of upcoming regulation.

The Big Three asked for another 25 billion in loan guarantees for more general expenses during a meeting with top lawmakers in Washington Thursday.

"Automakers need immediate funding to stay on track during this difficult time," said National Association of Manufacturers president John Engler.

"We're talking about close to a million jobs in America -- we're talking about a lasting impact on our industrial production in the United States. We simply cannot afford to let the auto industry fail."

- AFP /ls