Endgame in Detroit

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The US car industry resembles a game of musical chairs with the song about to stop. Already running round in circles, it looked earlier this year as if big reductions in overheads had bought Detroit’s Big Three time to emerge in 2010 as smaller, leaner companies. But the tune has now changed. A plunge in sales amid the credit freeze has put Chrysler, controlled by private equity firm Cerberus, into play. A deal may be weeks away. Chrysler’s preferred suitor, General Motors, also does not have the luxury of time. With the credit crunch possibly pushing annualised US car sales to multi-decade lows, GM could burn through enough cash to breach minimum working capital levels by next spring.

Existing plans for raising $15bn, which include selling Hummer, now appear unrealistic, which is why it covets Chrysler’s $11bn cash pile. A deal could save billions more in the long run but it would also have high upfront costs for redundancies and dealer compensation. Banks, the government, Cerberus or some combination of the three would have to stump up cash to make a deal fly.

A deal with Renault/Nissan has more obvious synergies but also requires cash to keep Chrysler viable. The Japanese end of the alliance already has agreements to provide small cars to – and source large pick-ups from – Chrysler, so Renault/Nissan may not buy the cow when it has the milk already.

Meanwhile, Ford is the least distressed of the Big Three, owing to big secured debt issuance before the credit crisis began. Casino mogul Kirk Kerkorian taking his chips off the table at a steep loss and departures in the executive suite and boardroom do not necessarily presage a near-term crisis. Ford may even benefit from its rivals’ shake-out. This is not the end of the road for the US car industry but it might look very different by Christmas.

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