AEG No Status Quo Scenario For Autos – MIRS 11-25-08

The Anderson Economic Group (AEG) today released a study on possible outcomes for the Detroit Big Three in light of the nation's continuing credit crisis -- and nearly all the scenarios are fraught with risk for the companies, their suppliers and employees.

"Despite the speeches that were made last week, there's no way to avoid a reduction in employment, a reduction in the number of plants and a reduction in the number of models," said AEG Founder Patrick ANDERSON.

The study notes that since September, the per capita auto sales are at their lowest levels since World War II. The rate of sales that has persisted since September is 10.5 million units a year -- a reduction of 40 percent -- a decline that cannot be accommodated alongside the survival of all three companies.

"The U.S. economy could barely support the Detroit Three when it was consuming 15 million units a year. It cannot support three Detroit-based automakers with demand below 12 million," reads the report. The AEG study also contends that the current sales rate alone, will most likely "push" one of the Big Three out of the marketplace.

The report outlines six possible scenarios confronting Detroit's auto sector. They are:

- A Federal bridge loan and a GM-Chrysler merger

- A Federal bridge loan and radical restructuring outside of bankruptcy

- A Federal bridge loan and radical restructuring outside of bankruptcy for GM and Ford; Chrysler assets purchased by competitors.

Without federal assistance, the scenarios are:

- Chrysler files for Chapter 11 bankruptcy; GM & Ford restructure outside bankruptcy

- Both GM & Chrysler file for Chapter 11 bankruptcy

- All Detroit 3 file Chapter 11, along with major suppliers

According to Anderson, none of the six scenarios he laid out involve a continuing of the "status quo."

"Bankruptcy is a real possibility," he said. "There were some comments last week that (talk of Big Three going bankrupt) was just game playing. It's a real option for at least one automaker."

A week ago, GM President Rick WAGONER said if his company went into bankruptcy, he expected it to become a "chapter 7 event." According to Anderson, that would mean the dismantling of the auto giant with the brands and other assets being sold off.

Anderson added that use of a traditional, or "prepackaged" bankruptcy reorganization for one of the Big Three simply wasn't an option because people won't invest $30,000 in their primary mode of transportation if they don't believe that vehicle will be serviced in the future.

"We disagree with analysts that compare a GM bankruptcy with, say, one involving an airline," Wagoner said. "The franchise and warranty nature of the automobile industry makes it much more important for consistent business relationships than one-time purchases like plane trips."

In order to facilitate a bankruptcy proceeding for one of the firms, Anderson suggested a warrant fund for consumers, both current owners and prospective buyers, would have to be established to ensure they would receive service.

The economist suggested that with a federal bridge loan, it was possible for two of the Detroit Three to survive. However, he warned that there are real risks to the automakers in accepting the political price that Congress appears to be attempting to extract.

"Any restructuring plan with a chance of success must include all the items listed under 'elements of a successful Chapter 11 reorganization,' and a restructuring that will require the elimination of many plants, brands, and employees," reads the report. "Few of these will be considered politically acceptable to a Democratic-dominated Congress."

If one or two of the companies do survive, Anderson said there could still be a bright future for the remaining firms.

"The situation is dire for the automakers, but we disagree with the notion that the entire industry is a herd of 'dinosaurs' or that the Detroit Three do not produce vehicles Americans want," he wrote. "In fact, they produce lots of vehicles Americans (and, particularly for GM, others in the world) want. One or two surviving Detroit-based automakers, with a significant restructuring, could become quite profitable companies producing a smaller set of vehicles through a streamlined dealer network."