The Auto Dead Zone

The cover page of Chrysler's restructuring plan, submitted along with GM's late Tuesday, tells you all you really need to know about these 100-page-plus tomes. Replete with pictures of World War II Army Jeeps, dead men in starched collars -- and the now-obligatory "hybrid" logo and plug-in car -- the first page declares that Chrysler "is the Quintessential American Auto Company."

None of that has anything to do with whether it has a viable business model or cost structure now. Consider: Chrysler's plan, which runs to 177 pages, cuts 100,000 cars out of its 2.5 million-car capacity. And this for a company that currently sells one million cars a year. It is, in other words, a political document more than a financial plan.

Meanwhile, the companies' "downside" scenarios from late last year have become this year's reality, with auto sales running at an annual pace of 9.8 million for the entire industry in January. GM insists that its plan will allow it to be profitable on an "adjusted" cash-flow basis "at industry sales rates of 12.5-13.0 million units." This assumes GM can maintain its market share when sales eventually pick back up, even though it has been bleeding share for the better part of three decades. While every auto maker has suffered from the 40% or so decline in sales, GM and Chrysler have been among the worst affected, with Chrysler's unit sales falling 55% year-over-year in January and GM's dropping by 49%.

At the same time, GM's funding needs are growing even faster than its market share is shrinking. Its latest plan foresees a total of $30 billion in government loans before it reaches its projected break-even point -- this for a company that, by its own reckoning, has a "net present value" in the range of $5 billion to $14 billion and market capitalization of only $1.25 billion. That $30 billion request doesn't include the possibility of pension-fund contributions over the next few years. It also assumes that additional aid will be forthcoming from European governments where the company has plants -- a possibility those governments view with dread.

Read the full article at The Wall Street Journal: Opinion Journal

Date published: Feb 19, 2009

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