The Dow was trading at a hair above 200 points, the Soviets had just declared themselves a nuclear power and the US population was half of today’s level. Much has changed since 1950, but the share price of the world’s largest car company, General Motors, is back to where it was in those heady days of American industrial supremacy and there is rampant speculation it is heading to zero, with Ford – which on Friday announced the departure of its chief financial officer – not far behind.
The collapse in domestic auto sales to the lowest level since 1992 and a poor outlook make it likely that Detroit’s big three, rounded out by privately held Chrysler, will burn through much of their cash by late next year. Bets on their debt in financial markets give low odds to their creditors getting all their money back over the next five years. CMA Datavision puts the probability of default for Ford and GM at 90 and 97 per cent respectively.
But the rumours of the US auto industry’s death may be exaggerated. Even under a nasty sales scenario, voluntary bankruptcy filing makes little sense. It would do nothing to boost demand and, after concessions on wages and healthcare by unions last year, would not result in much better labour terms. Bankruptcy would help shed unsecured debt, but this is not the US auto industry’s big problem. It is that their cost structures are still too big for their shrunken domestic market share, currently about 44 per cent, down from a virtual monopoly 35 years ago.
The easy credit that put more cars on American roads than licensed drivers is history. After decades of management miscues, though, executives in Detroit have made big adjustments in order to sell better cars to a smaller slice of a shrinking market. The credit crisis is gaining speed, but it is far from certain to catch up with an industry that now has the pedal to the metal.
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