American Car Companies On the Rocks

Only time will tell how this will come out, but I know one thing for sure, if the federal government gets involved, the struggle for survival will take a lot longer plus it may do more harm than good.

If the big three can't make it on their own than let the market dictate the outcome. If they have to down size until the general public can see some sense in their products, then so be it. The market has always been the best indicator of how a business should be run. Again, history is the best teacher. Our market economy works.

Keep the faith while you take a long look at our domestic cars, we have some good ones to choose from. The battle field 'Detroit' is on going.

Can America's Auto Makers Survive?
By PAUL INGRASSIA August 7, 2008

The late Sen. Daniel Patrick Moynihan used the term "defining deviancy down" to describe the acceptance of behavior that was once deemed intolerable. Now Detroit's car companies are defining disaster down.

In 1991, General Motors posted a then-amazing, full-year loss of $4.45 billion, and 10 months later CEO Robert Stempel was out. Last week, GM reported a $15.5 billion loss for just /one quarter/, and GM's board this week reaffirmed its support for CEO Rick Wagoner. GM's loss easily eclipsed the quarterly loss of $8.7 billion announced by Ford just a week earlier. As for Chrysler, pick a number. The company is owned by private-equity firm Cerberus Capital Management, and thus its results aren't public.

Whether all, or even any, of the three companies can survive has become a legitimate question. In truth, no one knows for sure. But other questions can be addressed with more certainty:-

Should Detroit have seen this disaster coming?

Yes. Gasoline prices have been climbing steadily for more than three years now. The Bush-Bernanke debasement of the dollar didn't do Detroit any favors, because the dollar's collapse has contributed mightily to the soaring price of crude oil.

But the Detroit Three stuck with a business model based on leasing SUVs for way too long. The two things wrong with that model were, well, leasing and SUVs. The residual values on which SUV lease payments are based turned out to be enormously inflated. With gas around $4 a gallon, the auto makers can't resell leased SUVs, after they are returned by customers, for anywhere near the price that the companies had assumed. Big write-downs to reflect this "impairment" contributed to the recent multibillion-dollar quarterly losses at Ford and GM, prompting the Detroit Three to curtail or cease their leasing programs.

Japanese and European car companies are suffering leasing losses too, but they are much less dependent on SUV leases than Detroit. All this said, let's acknowledge that it's human nature to resist changing behavior that has been successful, as SUVs were for two decades. If Detroit is Exhibit A, then Exhibit B surely must be the newspaper and magazine industry.

It has been equally clear for most of this decade that the business models of print publications, which are based on selling advertising, were becoming as obsolete as big SUVs, because advertising is shifting to the Internet. Not many journalists saw this sea change coming, much less acted on it, in their own business. The stock of McClatchy, one of the nation's largest newspaper chains, has plunged from nearly $75 a share to around $4 a share in the last three years, a 94% collapse that exceeds even the 89% nosedive in GM's stock since the beginning of this decade. The prices of other newspaper stocks have performed much the same.-

Which one of the Detroit Three has the best chance of survival?

My assessment is Ford. Certainly the company's serial abuse of its Lincoln brand contrasts sharply, and most unfavorably, with GM's progress in reviving Cadillac. And Ford, like GM, must revamp its product lineup quickly to emphasize smaller cars instead of trucks and SUVs. But Ford's plan to transfer to the U.S. the fuel-efficient cars it has developed overseas makes sense.

Meanwhile, GM has enormous structural challenges that Ford doesn't face. The tab to assist the bankruptcy restructuring of Delphi, GM's automotive components spinoff, continues to rise. GM added another $2.8 billion in Delphi-related charges in the second quarter, on top of $7.5 billion in Delphi charges taken already.

Meanwhile, GM'S financial services company, GMAC, continues to rack up huge losses -- $1.86 billion in the latest quarter -- from its foray into residential mortgages a few years back. The only silver lining here for GM is that GMAC is now 51% owned by the unfortunate Cerberus, so only about half of the losses hit GM's books.

Ford has moved more quickly to shed its money-losing minor brands, Jaguar and Land Rover. But GM only recently -- and belatedly -- announced plans to explore selling Hummer. And it has a confusing plethora of eight domestic brands, a relic from its glory days. While the company has some very good cars, trying to market everything means effectively marketing nothing.

Meanwhile, GM is burning through $1 billion of cash each month, prompting the company's current scramble to raise $15 billion by cutting more costs, selling assets or attracting new investment. This capital has to be raised within months.

As for much-weakened Chrysler, the only questions are who will buy it, when and how.-

Should the federal government bail out Detroit?

No. The recent commitments of taxpayer dollars to lubricate the sale of Bear Stearns and keep Freddie Mac and Fannie Mae afloat are bad enough -- especially because Freddie and Fannie are being allowed to keep their bumbling boards and management teams intact. But at least it could be argued that a collapse of those companies would pose a broad risk to the entire U.S. financial system. The risk that Americans would be consigned to driving Hondas or Hyundais seems less threatening.

One suspects, though, that if Barack Obama wins the White House, a Detroit bailout plan will get serious consideration. If so, the Chrysler bailout plan of a quarter-century ago provides a useful model. In return for guaranteeing loans to Chrysler by banks and private lenders, the government -- i.e., taxpayers -- got low-priced warrants to buy Chrysler stock.

As events unfolded, Chrysler recovered, no loan-guarantee payments were made, and the government made some $400 million on the warrants. In other words, we taxpayers were rewarded for taking a risk.

Detroit's fight for survival doesn't threaten economic doomsday for America, but it's incredibly sad nonetheless. The three companies, and General Motors especially, once symbolized the bedrock strength of American capitalism. If they can restructure and recover, as must be fervently hoped, they will symbolize the potential for renewal. Meanwhile, Motor City residents must be regretting the message on a T-shirt popular in their town for years -- "Detroit. Where the Weak are Killed and Eaten." Let's hope it wasn't a prophecy about General Motors, Ford and Chrysler.

Mr. Ingrassia, a former Dow Jones executive and Detroit bureau chief