Editorial: Wither Detroit?

It’s that time of the year when industry pundits [usually] run out of news. Normally, this leads to retrospective reflection and informed speculation. The autoblogosphere has been pretty bad at this, of late. They missed carmageddon more or less completely, treating Detroit’s BS like the Lord’s own gospel. That said, TTAC has offered its share of botched timelines and devil-may-care details. One nice, unforeseen twist: Ford. CEO Alan Mulally flew in from Seattle and kicked some Blue Oval butt. As a result, I give FoMoCo a chance of making it– albeit a shot rather than a dead cert. Ford must withstand the fallout to come, as GM and Chrysler head for bankruptcy. Now that’s for sure– regardless of the automakers’ progress on Capitol Hill of Pennsylvania Avenue. While I’m at it, I’ll go out on a limb and make some more predictions for 2009.

Near Term – Next Few Months

I repeat: the U.S. federal government will bail out Detroit. Despite the Republican Senators’ moaning and groaning and defeat of the first go-around, the money will head for Motown– even though the bailout billions only delay the reckoning day for a few months. Plenty of TTAC fodder ahead as we watch GM and Chrysler try to negotiate with their creditors and the UAW.

GMAC will avoid going bankrupt– barely. The debt exchange hasn’t been going down well with bondholders; it’s now on its last iteration with plenty of sweeteners. But they’ll make it across the finish line. GMAC will convert to a bank holding company and voila! Another government bailout via TARP. Too bad its base of principal customers– GM dealers and their car buyers– is gonna be much smaller. And soon. Another bad deal for Cerberus. No tears here.

Auto sales will still suck. Yep, the entire first quarter will be a disaster for everyone. More dealers will fail; at least a thousand. All manufacturers will cut production. Again.

Transplants’ fear of the UAW organizing their plants has disappeared. Their workers know for certain that union affiliation has zero benefits (as if it ever did before). The Republican bailout bill mandated that Detroit blue-collar working stiffs get paid the same as Toyota workers today, not in the future. In the next Congressional go-around, the Republicans will stick to their guns on their “wage parity” demand. So why would transplant workers consider organizing and give two hours a month of pay for union dues and get nothing in return? Answer they wouldn’t.

Toyota and Honda will furlough employees.

Ford’s MY2010 Fusion will get [more] rave reviews. Three years since the launch of the Hermosillo trio, Ford’s redesigned and reengineered C/D mid-size vehicle will be hailed as a true competitor to the Camcord duo. FoMoCo’s four cylinder EcoBoost will provide more power with better fuel economy than any engine from the Japanese. And the Fusion hybrid, with its US-sourced technology, will officially beat the pants off Toyota’s hybrid. Only problem: low gas prices mean no one will care.

Mid Term – Next Spring/Summer

Assuming the government steps up this week with a federal grant (a.k.a. loan) now, GM and Chrysler will go belly-up later. Over the winter, the financial situation at both companies will worsen, and the cash burn will increase. There’s not enough emergency money in the government kitty. Worse, the attempts to get reorganized outside of bankruptcy will fail miserably; every single creditor will want a better deal. The UAW will show its real intentions: no sacrifices. “We already gave.”

The car czar will have no enforcement power to make the deal work. And even if he does, the cuts required will be so drastic that they border on ridiculous (at least outside of bankruptcy).

Cerberus will refuse to support Chrysler. It will go straight to Chapter 7.

Congress will step in with Debtor-in-Possession (DIP) financing for GM. Expediting the bankruptcy, cutting out any negotiation in the bankruptcy process among creditors, will be allowed as a “national matter.” Some will cry foul, but Obama will take the lead from his “bully pulpit.” Hard to argue with the President – makes you look bad.

The biggest losers will be the bondholders – the hedge guys get their knees chopped off in the non-negotiated reorganization. Amazingly, GM will still believes it can support its multiplicity of brands. Thankfully, Rick Wagoner will resign (forced out) and take rest of the Board with him to Aruba. The new CEO will call the game: Chevrolet and Cadillac are the “go forward” brands. The Swedish government will take on Saab (and Volvo from Ford). Every other GM brand will die.

Ford will get close to seeking government assistance, but instead tap its credit line. Ford will count on picking up sales as Chrysler folds, especially in the truck business. CEO Alan Mulally will decide not to replace Chrysler’s foregone rental fleet business with his own vehiclesl he will figure that nameplate devaluation will be too severe. GM will jump on with the business along with Hyundia, Kia, Nissan,and Toyota. But Ford will have a new problem: GM’s cost basis will be lower than Ford’s.

Long Term – Fall

Ford will negotiate a partial debt for equity swap with its debt holders. The deal will dillute current shareholders but the possibility of prosperity is on the horizon. Mulally will keep the Ford jet and his paycheck. Time will name him “Person of the Year.”

GM will undergo a painful restructuring. The dealer body count will fall drastically. Half of GM’s labor force will get shown the door, with little compensation. The UAW’s health care VEBA superfund will get stock in the new GM but little cash. It will be enough to give UAW retirees full health care coverage short term, but it will only be a promise for the future. Ouch.

Parts of Chrysler will find their way to other car companies. Mostly to GM, which will get the minivan business. Ford will scarf the Jeep brand but only pick up the Wrangler. Nissan will pass on the Saltillo truck plant, rightly figuring it can never compete with Ford, GM and Toyota in the pick up market.

As the credit crisis passes, car sales will rebound late in the second half of 2009. But to everyone’s chagrin, car prices actually increase, forcing folks to “trade down.” This plays right into Ford’s 2010 playbook with its line up of well-equipped small cars.

What say you?