RANTS #465

October 1, 2008

A Doomsday scenario unfolds for Detroit.

By Peter M. De Lorenzo

Detroit. First it was the mortgage loan meltdown, followed by the gasoline price spike last spring. The collapse of the casual use light truck and SUV market - almost the entire source of Detroit ’s profitability - came immediately afterwards. Then it was the perilous slowdown of the economy, resulting in the precipitous drop in car and truck sales. Add in the turmoil on Wall Street and the teetering banking crisis, and you have the ugly icing on an already bitter cake.

Now, in the midst of the nation’s banking crisis, the credit crisis – or lack of it – threatens to derail Detroit ’s best-laid plans for its very survival.

It is one thing for these companies to muster the expertise, the technical resources and the strategic imperative to reposition themselves for a resurgence in 2010, because their backs are to the wall and it’s a relentless, 24/7 siege to keep on track and keep focused on where they want to be, as opposed to where they are now.

It’s quite another to have the very lifeblood of their business – available credit – be yanked out right from under them, leaving them with painfully few options going forward.

The $25 billion in government loans at a favorable interest rate is one component of Detroit ’s lifeline that will be spent on new technologies and the development of more fuel-efficient vehicles for 2010. That’s a given. One that comes with strings but one that was sorely needed in order for Detroit to fuel its future product programs.

But if consumers can’t get credit to buy vehicles right now, or if it becomes extremely difficult to get credit even if a consumer’s credit rating is outstanding, then we’re talking about the collapse of the entire domestic automobile industry as we know it. Not just another negative step in a long line of negative steps for Detroit, but an imminent and outright collapse.

A lineup of glittering new products - no matter how technologically advanced or wildly efficient they are - counts for exactly nothing if consumers can’t afford them. And this isn’t just Detroit ’s problem, either. All car manufacturers will be in the same boat unless this credit situation is solved – and soon.

But the Detroit automakers are already under severe pressure because their cash position is beyond precarious to begin with. When you’re burning through $1 - $2 billion a month, it starts to add up, which is why the Detroit automakers are hanging by a thread. The best guesstimates for GM and Ford is that the end game is only eighteen short months away, if the “burn” rate continues at the breakneck pace it’s going now, and there’s no dramatic turnaround in their fortunes. Chrysler? They will partner with another company in that time frame, no matter what happens.

Losing access to credit is a Doomsday scenario that no one in Detroit – or the rest of the country for that matter – is prepared for. How could anyone be prepared for such a cataclysmic upheaval in the way America runs?

It’s easy for some to say that maybe this is the best thing that could happen, that the country needed a major correction in its credit addiction so that we could get back on track, but as good as that may sound theoretically, it spells disaster in a kaleidoscope of ways – for every sector of the economy – and particularly for the domestic automobile business.

The U.S. auto industry is teetering on the brink and has been for months. It has been one thing after another followed by another for Detroit, and each new turn of the screw redefines bad as we know it.

And just how much worse can it get?

Not much, because Detroit ’s giant bowl of Not Good is already filled to the brim.

With the domestic automakers planning on launching a brace of pivotal new vehicles for the 2010 model year, there is at least a shred of hope that two of the automakers can survive. New products, new technologies and compelling new fuel-efficient vehicles are on the way. But talking about all the great stuff coming in 2010 and surviving until then are two entirely different things.

Unless and until cooler heads prevail in Washington - which apparently is asking a lot - and the political grandstanding can be set aside for a day, then Detroit simply doesn’t have until 2010.

If people can’t get loans to buy cars or trucks, then it’s Game Over for Detroit.

Thanks for listening, see you next Wednesday.