Sunday, August 3, 2008

Automakers Race Time as Their Cash Runs Low

Automakers Race Time as Their Cash Runs Low

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The downturn in the American auto industry is rapidly becoming a full-blown fight for survival among Detroit’s big automakers.

With the combination of high gas prices and a weak economy crippling vehicle sales, the resources of General Motors and the Ford Motor Company are being stretched to the limit.

Both companies have undergone major revampings in recent years, yet they continue to post huge losses. And even as they burn through their cash reserves and slash more costs to stay afloat, the future looks tenuous.

In the latest sign of the deepening troubles, G.M. reported a stunning second-quarter loss of $15.5 billion on Friday because of a continuing fall in United States sales and charges for job cuts, plant closings and the falling value of trucks and sport utility vehicles.

That followed a loss of $8.7 billion reported last week by Ford. Overall sales fell by 13 percent in July.

Chrysler, the smallest of the three Detroit auto companies, is privately owned by Cerberus Capital Management and does not report financial results.

The losses stem from a freefall in sales and a shift by consumers away from bigger vehicles that were once G.M.’s and Ford’s most profitable products.

G.M. and Ford had expected economic conditions to improve in the second half of this year, but now are forecasting an even more dismal sales environment.

Neither company appears in immediate danger of failure. But analysts say Detroit is in a race against time.

“Things are pretty bad, and the river is getting deeper, faster and wider,” said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. “The question is, can they get to other side before the cash runs out?”

American automakers have decided — critics would say, belatedly — to shift production from trucks and sport utility vehicles to smaller, more gas-efficient cars, including hybrids. But it takes time to switch equipment for production. And it is unclear whether the automakers have sufficient cash to remain solvent until their new vehicle lines are ready for customers.

The overall United States auto industry is headed for its worst year in more than a decade. Sales so far this year have fallen 10 percent from 2007, including a 13 percent decline in the month of July.

The market has been tough for nearly every automaker including Toyota, whose sales fell 11.9 percent in July. But the Detroit companies have been hit the hardest.

Sales at G.M. dropped 26.1 percent in July, 14.7 percent at Ford, and 28.8 percent at Chrysler. And the three companies’ combined United States market share hit an all-time low of about 43 percent during the month.

G.M. ended the quarter with $21 billion in cash reserves, which would be considered a healthy financial cushion in normal times.

But the automaker is burning through more than $1 billion in cash each month, a worrisome indicator that has prompted some investors to speculate about the potential for G.M. to go bankrupt. One indication of a loss of faith is that the company’s bonds were trading on Friday at 48 cents on the dollar.

Trying to fight such doubts on Wall Street and elsewhere, Rick Wagoner, G.M.’s chairman, last month outlined a broad program of cost cuts, asset sales and debt offerings intended to increase the company’s liquidity by $15 billion.

The moves temporarily calmed fears on Wall Street about a possible bankruptcy filing, and injected a renewed sense of urgency among G.M. executives.

Compounding Detroit’s problems is the rush by consumers to buy small cars and the collapse in sales of pickups and sport utility vehicles that historically provided the bulk of the profits at G.M., Ford and Chrysler.

Ford last week announced that it would radically shift much of its North American production from trucks to cars, and bring six of its European models to the United States market.

G.M. had already laid plans to make more cars and car-based crossover vehicles, while downsizing its truck production.

But the question facing Detroit is how it can continue to finance its operations and product programs until the market rebounds and its new models hit the showrooms.

“This is almost like evolution, and the survival of the fittest,” said Jesse Toprak, chief industry analyst for the automobile research Web site Edmunds.com. “They are on the right path to make fuel-efficient cars, but it’s going to take time.”

G.M., Ford and Chrysler have already gone through wrenching revampings and eliminated more than 100,000 manufacturing jobs in the United States since 2006.

The three companies are also in the process of cutting about 10,000 salaried workers from their payrolls this year.

But even as they shrink their employment and close unneeded factories, the automakers still need enormous capital budgets to develop new products. G.M. and Ford have also invested heavily to build their businesses in global markets like China, Brazil and India.

And while they have successfully expanded their international operations, Detroit is paying a heavy price for relying on trucks and S.U.V.’s in the United States.

Sales of truck-based products have fallen 23 percent this year at G.M. and 19 percent at Ford. Both companies have drastically cut production of those vehicles, and temporarily laid off thousands of workers to reduce inventories.

However, the companies have been forced to take big financial charges to account for the declining value of used S.U.V.’s coming off leases. Chrysler is dropping leases entirely and G.M. and Ford will be scaling back their lease programs. Analysts said the pullback on leases, which helped fuel the growth of the market previously, could further hurt sales going forward.

G.M.’s quarterly loss reported Friday, the third-worst in its 100-year history, encapsulated the range of troubles it faces.

The company’s revenues in North America declined by a third, and it lost $4.4 billion on operations. Because of the decline in profitable truck sales, G.M.’s revenue-per-unit sold dropped almost $4,000 from the first quarter of this year.

The company also took write-downs of $9.1 billion. Included in the charges were $3.3 billion to buy out 19,000 of its hourly workers and $2.8 billion related to the bankruptcy of Delphi, its former parts-making division.

“I do not see any panic here,” Ray Young, G.M.’s chief financial officer, said in an interview Friday. “I do see more of a resolve. We need to take these actions and focus on what we can control.”

Frederick A. Henderson, G.M.’s president, said the company was accelerating plans to bring more fuel-efficient vehicles to market. The key, he said, was to increase G.M.’s sales and revenues as quickly as possible.

“The most important thing we need to do is rebuild our revenue base,” Mr. Henderson said. “We understand the market is decidedly weaker, but it is what it is.”

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