Investing

Auto Future: 'The Big 3' Becomes 'The Big 2' (F, GM, DAI)

burning-money-pic25“The Big 3” is now likely more than ever about to become a term of the past.  Chrysler looks like it may be the first one out, and the question immediately after that is on the future of General Motors Corporation (NYSE: GM).  So far, it is Ford Motor Co. (NYSE: F) which is the only ‘healthy’ car company.  Imagine having losses this wide and being considered the healthy one.  But there is no bailout money requested on Ford’s part.  Today’s numbers may lessen the blow of it, but analysts still see a sea of red ahead for Ford’s P&L statements.

Daimler AG (NYSE: DAI) has to be extremely happy that it dumped its ownership of Chrysler.  We have seen speculation and have had discussions with traders and industry members that Chrysler was headed for Chapter 11 by the administration’s auto task force.  That may be sooner rather than later if you believe the multiple media reports of yesterday and today.  It probably does not matter that the WSJ has noted that Chrysler is telling its dealerships that bankruptcy is not imminent.  That is like a negotiator telling a suicide jumper that the concrete isn’t that hard.  We also do not know if Cerberus will have much of a role in the outcome or in the future of whatever Chrysler becomes.

Our belief is that Chrysler will become a part of Fiat (or another company) after some sort of reorganization under Chapter 11 or under another code for reorganization.  It is also very likely that it will have fewer brands and much lower production.  We don’t want to pan any of these car makers too much because it would just add insult to injury, but unfortunately there is a serious matter at stake.  It is called relevance.  What is the future of the brands of Dodge, Chrysler, and Jeep?  Whatever it is, the answer includes much smaller numbers and many casualties.  The Jeep brand is probably the jewel here, but there is no way to ultimately assume what a buyer would do in today’s economy.  And the wild card at Jeep is of course the fuel efficiency under the new regulations.

There is another notion that is probably unpleasant to discuss, but this would be very incomplete if it is not addressed.  General Motors is now getting funding from Uncle Sam.  This and the comments this week from lawmakers and the administration puts GM up against the wall after Chrysler.  The administration has already tipped its hand as to how far it is willing to go to rectify GM, and the Chrysler developments this week are perhaps the closest shot across the bow so far.  Kicking out Rick Wagoner, or “Way-Goner!,” was just a prelude.  And now CEO Fritz Henderson has capitulated and signaled that GM will take whatever steps are necessary.  That includes bankruptcy.

Ford will be able to claim the “Last Man Standing” status because it is still independent of government funds.  Their earnings this morning and their notation that they don’t need government funding will drive that notion home.  That unfortunately does not mean that the last man standing is really on stable ground.  Not at all.

The long and short is that this is probably an auto version of the ultimate no-win scenario as far as the industry and as far as the economy is concerned.  The government guaranteeing warranties and parts suppliers won’t stop what is coming.  The UAW is probably going to lose, existing car owners are going to lose as some of these cars may be discontinued, the states are going to lose, and the local economies dependent upon units of these companies are going to have to suffer on top of what they have already endured.  That unfortunately affects every local business that caters directly or indirectly to workers at these factories and offices.

So the notion of ‘The Big 3’ being gone is one thing.  Ultimately, there is a question if the U.S. Army’s 1st Infantry Division will mind that the ‘Big Red 1’ could move from a military term to an auto term.

JON C. OGG

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