Why Detroit's Big 3 Car Companies Could Become Big 2

An abandoned Dodge dealership hints at Chrysler's troubles.

To many Americans, Chrysler is a household name. But what about the Sebring? Or Caliber? Or Nitro?

If those don't sound like must-have vehicles, that helps explain why the Detroit 3 may soon become 2. As Chrysler explores a shotgun wedding with General Motors—or, failing that, Nissan-Renault—Detroit's defenders argue that soaring gas prices, the housing bust, and other unforeseen factors have blown domestic automakers off course and forced emergency measures. But the sudden pressure only hastens a Darwinian reckoning that's been looming over one of America's biggest manufacturing sectors for a decade. Detroit is finally facing a gruesome reality: America no longer needs three homegrown carmakers.

When the gravel stops flying, the Detroit 3 might still be intact, since Washington is obviously bailout happy. The Feds have already agreed to lend GM, Ford, Chrysler, and their suppliers $25 billion this year, and there's talk of another $25 billion in 2009. And since Washington has already taken over Fannie Mae and Freddie Mac and purchased stakes in several banks, some automaker shares might balance out the federal portfolio.

But even a bailout could be poisoned medicine, because there simply aren't enough buyers for all the cars Detroit pumps out. Just a few years ago, Detroit could peddle mediocre models like the Chrysler Sebring, Chevrolet Equinox, and Mercury Montego because the car business, fueled by soaring home equity, was booming. All three automakers had plans to downsize operations and restore profitability—gradually.

But they planned for a clear road, not a cliff dive. With the economy faltering, sales this year could be as low as 13.5 million vehicles—down from the 2006 peak of about 17 million. Next year, they could fall below 12 million. Automakers are hurting worldwide, but Detroit, with too many SUVs and a weak lineup of smaller vehicles, is suffering the most. If 2009 plays out as expected, GM and Ford could run out of cash. Privately owned Chrysler doesn't report its finances, but its sales have plunged more than those of any of its competitors. "I don't think Chrysler is going to be able to become competitive again," says David Silver of the research firm Wall Street Strategies.

Hummer. The government bailed out Chrysler once before, in 1980, and Detroit has seen much consolidation over the decades. Chrysler itself is an amalgam of Dodge, acquired in 1928, and American Motors, picked up in 1987. But a GM-Chrysler linkup would be a makeshift marriage at best. There are only a few positives. GM could use Chrysler's minivans, and the popular Jeep lineup could replace the ostentatious Hummer division, which GM hopes to sell. But GM might have to kill the remainder of Chrysler's lineup.

That could threaten at least 30,000 jobs, says trade publication Ward ' s Auto, and still leave an oversupply problem. Ward's estimates that if GM kept only Chrysler's Jeep and minivan operations, overall industry capacity would still be about 25 percent higher than actual sales this year. Much of the overhang would belong to GM, which could lose at least $10 billion in 2008, according to Zacks Equity Research.

But the deal isn't about "synergy" anyway. Last year, private equity firm Cerberus Capital Management bought most of the No. 3 U.S. automaker from DaimlerChrysler—pretty lousy timing. Cerberus also owns 51 percent of GM's financing arm, GMAC—and appears to be using GMAC as a cudgel to unload its hydroplaning car company. GMAC recently tightened lending standards, for example, which could crimp GM's sales even more. But if GM buys Chrysler, those loans might loosen up. Cerberus could also sell Chrysler in parts, which might be painful but possibly the best long-term solution. "The American industry would be much stronger today if Chrysler had been allowed to go out of business in 1980," says Jack Nerad, executive editorial director of kbb.com, a car research site. He points to other brands, like Oldsmobile and Plymouth, that vanished without wrecking the industry. So maybe it's a good time to buy a Sebring after all. It could end up a collector's item.

• Check out 10 cars nobody would miss if they disappeared.