American Auto Sector's Viability on Shaky Ground as Obama Administration Cuts Off Funds

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Researched by Industrial Info Resources (Sugar Land, Texas)--This is not a new problem for the American automakers, referred to as the Detroit Three. For decades, the Detroit Three have sat on the sidelines and watched the foreign automakers rip the majority of the American automotive sales market out of their grasp. A combination of poorly thought-out strategic moves, a focus on vehicles that were destined to not sell and bad union contracts have forced General Motors Corporation (NYSE:GM) (Detroit, Michigan) and Chrysler LLC (Dearborn, Michigan) to the brink of bankruptcy with Ford Motor Company (NYSE:F) (Dearborn, Michigan) only a step behind. Now, after both GM and Chrysler managed to wheedle billions in bailout cash from the federal government in recent months, the president has turned off the money tap, leaving these two automotive giants on a bed of quicksand.

With President Obama's announcement that money is no longer available for GM and Chrysler after they submitted recovery plans that fell well short of reviving the struggling automakers, both companies are faced with even harder decisions that must be made. The companies would have to cut thousands of jobs, close dozens of plants, reduce salaries across the board and renegotiate terms of outstanding debt, or be forced into a controlled bankruptcy.

The real problem here is that the management at these companies seems to have no idea what is necessary to return their corporate giants to viability. GM has said it intends to cut 47,000 jobs worldwide and focus on its core brands, Chevrolet, Cadillac, GMC and Buick, yet at the same time has talked about maintaining the Pontiac nameplate. Currently, according to its website, GM produces 100 models of vehicles under the name brands of Chevrolet, Cadillac, GMC, Buick, Pontiac, Hummer, Saab and Saturn.

If GM does focus only on the core brands mentioned above, and let's toss in Pontiac since the company appears to feel that it needs to be saved as well, then GM will be producing 82 models. This assumes it can manage to get rid of Hummer, which has been up for sale for a while, Saab, which just filed for bankruptcy, and Saturn. How is reducing the total number of models from 100 to 82 going to provide significant savings? Would it not make more sense to get rid of all of the models that are not selling, as well as all of the duplicate vehicles currently manufactured? If there is a significant difference between a Chevy Silverado pickup and a GMC pickup, no one has been able to find it yet, so why not slim down to a streamlined selling machine that only produces what the public wants?

This approach would certainly mean closing a number of plants and laying off thousands of workers. But that may not be avoidable at this point. If GM is forced into bankruptcy, these things will be forced on the automaker so why not make the tough choices now and avoid the lengthy bankruptcy process all together. Apparently, GM's upper management has been unable to make these types of decisions, so in addition to cutting off the funding, President Obama forced GM Chairman Rick Wagoner to step down and retire.

The actions taken at Chrysler were not as severe as no one was asked to leave the company. However, Chrysler's position is even more precarious then GM's when it's all said and done. It is the smallest of the Detroit Three and produces the fewest number of models -- nine. It also announced that it has an agreement in place with Fiat SpA (Italy) that will enable Chrysler to bring Fiat's smaller European-style vehicles to America in the hopes that it can manufacture the more fuel-efficient models here as well and save Chrysler. However, Chrysler will also certainly be facing additional layoffs and plant closures as it cuts costs. The one advantage Chrysler has over GM is that it is a privately held company and thus has more latitude in what maneuvers it can make to make itself viable. While it will probably not have to reduce the number of models it produces, Chrysler will have to find a way to convert those models into something the public actually wants to spend its money on.

Ford is in the best position of the Detroit Three and was not the focus of Monday's announcement. Ford has maintained it will be able to make itself viable without governmental assistance, and so far, it has been true to its word. But Ford is facing similar problems within its organization. It currently manufactures 39 models of vehicles and that will have to be reduced and streamlined. This will mean layoffs and plant closures at Ford as well. While Ford has asked for a line-of-credit in the future to help it past some potential rough patches in its reorganization plan, it has not pushed for it with the current administration and has essentially been left alone as of this point.

The bottom line for all three American automakers is they are facing D-Day. For GM and Chrysler this will probably mean a forced controlled bankruptcy with the federal government overseeing the process while they cut models, employees, salaries and plants. For Ford, it will be allowed to go on its merry way as long as it shows results in its own cost-cutting and reorganization measures. The time of free government bailout money has drawn to a close, according to President Obama and now it's time for the Detroit Three to step up to the plate and deliver, or the government will completely take over the fame and run it its own way, something none of the Detroit Three want to happen.

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