Chance of GM, Chrysler Bankruptcy 75 Percent Without Loans, Says IHS Global Insight
November 20, 2008
The odds of General Motors and Chrysler filing bankruptcy in early 2009 soars to 75 percent without a government rescue package, predicts forecasting firm IHS Global Insight. With federal loans, the odds drop to 25 percent.
"Without a loan package, the probability of both GM and Chrysler going bankrupt in early 2009 is about 75 percent -- almost a certain probability," George Magliano, IHS Global Insight's director of North America, said in a Webcast on the economy and auto industry Thursday morning.
Magliano further said his firm believes Detroit automakers need more than the $25 billion to get through 2009 they requested this week. But if they do get through what Magliano described as a "horrendous" 2009, they will be better positioned to perform better when the recovery begins in 2010.
He predicted Detroit automakers will not get the rescue package this year, but will when the new Congress and new Obama administration take charge in January. In the meantime, GM and Chrysler "will have to do whatever they can to get to 2009," he said.
GM/Chrysler Bankruptcy Impact Debated
Magliano said the impact of GM and Chrysler going bankrupt "is not as severe as is being bantied around." The Center for Automotive Research in Ann Arbor, Michigan, did a study that shows 2.5 million to 3 million total jobs would be lost if one or all three of the Detroit automakers go out of business.
That's not to diminish the impact, noted Magliano. A GM and Chrysler bankruptcy would mean the loss of 1 million to 1.5 million jobs at GM, Chrysler, their suppliers, their dealers and other industries.
"It would be a severe loss and would drive the economy and industry vehicle sales closer to our pessimistic scenario [of 10 million SAAR next year]," Magliano said. "Bankruptcy would be another severe slap to the economy and a slap to the auto industry."
The firm's analysts on the Webcast admitted they are analyzing and debating internally the precise impact of a GM and Chrysler bankruptcy, which is now more real than it had been before this week's Congressional hearings. They hope to have an official what-if outlook solidified in the next couple of days.
They are discussing how severe the impact would be industry vehicle sales. And if they do fall to the 10 million units next year in their pessimistic forecast, how will the 10 million be divided among manufacturers?
GM CEO Rick Wagoner has insisted that consumers wouldn't buy vehicles from a company in Chapter 11 reorganization. The analysts at IHS Global Insight are analyzing whether that's true or if GM and Chrysler, even in bankruptcy proceedings, would keep some sales.
"Who gets what is the part we're still working on," said Rebecca Lindland, the firm's director of the Americas.
In any event, the ripple effect of a GM-Chrysler bankruptcy to dealers and suppliers as well as the global economy as a whole would be devastating.
"Remember," said Magliano, "the supply base was in worst shape than the assembly base 12 and 24 months ago. The big suppliers and the suppliers who supply them are in rough financial shape today and that only gets worse if the assembly base contracts. Nobody in the industry, beyond Detroit, would be immune. Everybody, including the foreign automakers, are tied to this. There would also be a massive ripple effect in the steel, rubber and chemicals industries."
Similarly, Lindland noted, the globalization of GM and Ford has tied the rest of the world to Detroit automakers' fortunes. "It's impossible for anybody to operate in a vacuum...the parts bins are open to everybody," she said.
No Good News for Awhile
Magliano warned not to expect any good news on the sales front for the next few months. He expects the annual selling rate to be about what it was in dismal October -- about 10.5 million a year, the lowest since 1980. "And no one will be immune," said Magliano.
Source by: IHS Global Insight, Inc.
IHS Global Insight has continually downgraded its auto vehicle sales forecast throughout the year and has done so again.
For 2008, the firm forecasts sales coming in at 13.3 million units. For 2009, sales slump to 12.2 million and with a weak recovery beginning in 2010, sales rise to 14 million.
"We'll get some improvement in 2010 and start coming back in 2011, but it'll be 2012 before we're back on track for more than 17 million sales. That's a year later than the general recovery for the economy."
Sales surge to 17 million and 17.5 million in the middle of the next decade, he said.
Of course, all bets are off if GM and Chrysler file bankruptcy and other "significant shock waves" could spread through the economy, Magliano said, which would push auto sales into IHS Global Insight's most pessimistic scenario.
Source by: IHS Global Insight, Inc.
Posted by Michelle Krebs at 8:17 AM under Analysis , Chrysler , Featured , GM | Comments (4) | digg this | Seed Newsvine
Since the politicans will not listen, I can vote by not buying American. I am tired of paying the UAW Legacy premium. Chrysler should go, its a private company we owe absolutley nothing. Maybe with Chrysler gone ford and GM could make a better go of it. How about a relaible car without the Imax in the back seat!
Posted by: drhawc | November 20, 2008 at 4:48 PM
The last graph is hilarious! People actually thing that the economy will turn around by next year?!? Come on! It won't turn around for a long, long time. Peter Schiff has been right about the economic trends when he predicted the housing bubble and a major recession over two years ago. And now he's predicting this to be a lot longer than any other "economist" says it will.
These Keynesian economists have no clue how the market actually works. They always concentrate on the short-term and never on the long-term. Yes, Ch 11 will be a rough road for the American companies at first. People will be skeptical about buying them. But it's impossible to hurt their sales more than they already are... that is unless the federal government continues to devalue our currency like they've been doing through all these bailouts. But the long-term effect of Ch 11 for the automakers is exponentially more promising than the feds spending BILLIONS of dollars of OUR money to merely help them to "keep afloat". Face it: all three companies are on a downward spiral. If anyone thinks that a few billion dollars for each company is going to fix things, they're sorely mistaken.
Mark my words: if the bailout happens, we'll see nothing but a weaker dollar, a continued recession, and billions of taxpayer money down the tubes along with those failing companies. Bankruptcy is the only logical way out.
Posted by: flicmod | November 21, 2008 at 8:44 AM
Bottom up. Titleholders first.
Put the $25bn in a lottery. 3 million winners get $8,300 each. Lottery money must be used to purchase or lease a new '08,'09,'10,'11 vehicle, in stock or order out, during calandar year 2009. Any and all brands qualify. Wining tickets can be sold or gifted to people who don't already have a winning ticket, but the money must be used during 2009.
Three million ups coming into the dealerships with $8,300 down would result in a net increase of 2.5 to 3.5 million units putting calandar 2009 in the 15 million sales range. Not so bad. It would thaw credit markets, improve attitudes, and put this part of the economic depression on the mend. It also puts money directly into the dealerships; many of whom are among the largest employers in their communities.
Doling out the $25bn directly to the OEMs is ineffective. It doesn't put one more unit down the road. It is only going to postpone the Chapter11 or Chapter7 proceedings until the next quarter as well as trigger the whole supplier avalanche.
Go online to any of the OEMs' 2007 Annual Report and see how rosy everything looked before the fecal substance was propelled through the air handling device.
Posted by: fulcrumb | November 22, 2008 at 4:30 PM
fulcrumb,
The thing that's wrong with your idea is that you're still allowing the government to make preferential treatment to a select group of people, which inevitably alienates another (or in this case multiple) group(s) of people.
Again, this is Keynesian economics. Every time the government spends money it's to the benefit of one special group of people. Whether they be farmers, doctors, lawyers, or car salesmen. This thinking always excludes every other group. It artificially creates demand for a product that no one actually wants. This would have the same long-term effect as the $25 billion bailout directly to the automakers, which is it'll only prolong the time before a bankruptcy.
Further, since you'd be creating artificial demand for a product that means that you'd be detracting from other industries, whether that's refrigerators and toasters, or tv's and computers. You'd be detracting from it. So, also in the long-term, you'd be damaging the market further by forcing people to consume a specific product instead of what they actually have a demand for. Again, preferential treatment.
The best way is to let companies fail and let new ones arise. If the government should do anything, it's to pay off the existing national debt (while cutting spending programs) and then cut all taxes for EVERYONE. No preferential treatment. It'd help the economy by putting the true power of demand (along with their rightfully own money) back in the consumers hands.
Posted by: flicmod | November 25, 2008 at 6:37 AM