They used to be known as the Big 3. Then they got much smaller, and GM, Ford, and Chrysler became known as the Detroit 3. Soon they might be the Detroit 2.
The news that General Motors is exploring some kind of merger with Chrysler is a startling turn in an industry where pride, heritage, and protection of your turf have been key parts of the business plan. But in Detroit, clearly these are desperate times. Plunging sales have hit the domestic carmakers much harder than their competitors, largely because of an overreliance on big gas guzzlers that many people can't afford these days. The credit crunch and deepening recession are scaring off even more buyers and leaving the automakers threadbare. If the rocky road persists into 2009—which seems likely—GM and Ford could run short of cash and face the probability of bankruptcy. Chrysler—which is now privately owned and enduring the steepest sales dropoff of all—might already be veering off the road.
Blame will fly as the damage deepens, but the unhappy fact is that the market really doesn't need three big U.S. automakers any more. Compared with peak sales of nearly 17 million vehicles in 2006, sales in the U.S. market are likely to decline by at least 20 percent this year and possibly next year, too. The Detroit 3 had too many factories during the boom times, and their overcapacity seems vast now that Americans are poised to buy 3 or 4 million fewer vehicles. "This is an industry full of duplication," says Jack Nerad, executive editorial director of kbb.com. "There are too many car plants, too many models, and too many brands."
Over the past few years, a plump economy concealed the bloat in Detroit, helped along by flush homeowners trading home equity for lavish cars and other trappings of wealth. But the housing collapse and other factors have now produced a vicious Darwinian struggle among the automakers, who are fighting over a shrunken customer base that's not big enough to sustain all of them. The car market will bounce back somewhat by 2010 or 2011, but the more Detroit struggles, the more its competitors will earn the loyalty of American buyers. And if current trends hold, consumers in 2011 will be more interested in buying a Toyota Prius made in Mississippi than a Chevy Cobalt made in Ohio.
If it were a pure battle of the fittest, one of the Detroit 3 might be headed toward the same oblivion as predecessors like Plymouth, Oldsmobile, and American Motors. All three Detroit automakers have been losing billions. Overall, industry sales are down 13 percent from 2007 to 2008, but Detroit has fared far worse. Here's how each of the six biggest automakers has done so far this year, according to J. D. Power & Associates:
At GM and Ford, there are at least a few bright spots, like the acclaimed GMC Acadia and Ford Edge crossovers and popular cars like the Chevy Malibu, Ford Fusion, and Ford Focus. But there's little if any excitement at Chrysler. Sales of every mainstream model are down in 2008, except for the Jeep Patriot, which had limited sales in 2007, its introductory year. Even thrifty, inexpensive crossovers like the Dodge Nitro, and Jeep Compass—which ought to be gaining market share as buyers downsize from bigger SUVs—have lost sales. When U.S. News determined the 10 cars least appealing to consumers and critics alike, four belonged to Chrysler. No wonder the company that was once the third-biggest U.S. automaker is now No. 5, behind both of its crosstown rivals, as well as Toyota and Honda.
Chrysler's precarious future grows out of a turbulent history. Daimler-Benz, the German automaker, bought Chrysler in 1998, then sold 80 percent of it last year to Cerberus Capital Management, a private equity firm. For a bunch of financial whiz kids, Cerberus has shown terrible timing. The year before buying Chrysler, Cerberus bought 51 percent of GM's financing arm, GMAC—right before the bottom fell out of that company. In addition to its car loans, GMAC also has a huge mortgage business that has been severely stung by soured subprime loans. GMAC lost $2.5 billion in its latest quarter, and subprime losses could mount just as the firm is bracing for a spike in auto-loan defaults as well. When regulators warn about other big lenders at risk of failing just like Bear Stearns, Wachovia, and Washington Mutual, GMAC is one of the companies they're talking about.
But Chrysler might be in worse shape, and rumors have been swirling recently about Cerberus trying to unload the automaker—to a Chinese upstart looking for a global foothold, to India's Tata conglomerate, and now to GM. One possibility is that Cerberus is trying to strong-arm GM into taking Chrysler off its hands. GM still owns 49 percent of GMAC, which arranges financing for many of the consumers who buy GM cars. While offering GM about $11 billion in cash on Chrysler's balance sheet as an inducement, Cerberus may also be wielding the threat of a lending cutoff to GM customers if it doesn't buy Chrysler. GMAC recently announced it was significantly tightening its lending standards, for example, which could crimp GM's sales even more. That forced GM to hustle up a lineup of other banks able to finance car purchases. Some analysts speculate that Cerberus might be holding a gun to GM's head, trying to force a shotgun marriage with Chrysler and cut its losses.
If GM agrees, it would get Chrysler's cash and a few valuable assets, like the Jeep brand and the Dodge Ram pickup. Buying or merging with Chrysler would also remove one of GM's two domestic competitors (which would benefit Ford even more). But GM would also get a whole lot more headaches than it already has: Even more aging infrastructure that needs to be closed or overhauled, even more unsalable SUVs, even more unionized workers who require more pay and healthcare than the automaker can afford. Any kind of deal would have to account for all those drawbacks, one reason many analysts think it's too complex and risky to happen.
Besides, the valuable parts of Chrysler might be available for much less, later on. Dealmakers have been closely watching the rapid recasting of the banking industry, where the banks that survive the carnage have been able to buy failed institutions like Wachovia and Washington Mutual for a fraction of what they were worth just a few months earlier. And if GM rejects a Chrysler linkup, the odds are sinking that Chrysler can survive on its own in such a cutthroat environment. "I don't think Chrysler is going to be able to become competitive again," says analyst David Silver of Wall Street Strategies, an independent research firm. "I think Cerberus will do what private equity does and start selling off the parts. Private equity is interested in preserving capital—not saving the auto industry."
Saving the auto industry, however, may end up being Washington's job—at taxpayer expense. Congress has already approved $25 billion in loans for the Detroit 3 and several of their suppliers, and there's talk of another $25 billion in loans for next year. If privately held Chrysler is the canary that starts to croak first, that will put the Feds in a tricky spot, forcing them to decide whether to bail out a privately held firm purchased by multimillionaires who should have known what they were getting into. It might seem implausible, but since the government has already bought stakes in several banks and a huge insurance company, why not an automaker? You might even be able to pick up some stamps or renew your passport when you stop in for an oil change.