Delphi: Car Company Canary In A Coal Mine

Robert Lutz, the oldest car company executive in the history of the industry, recently said that Detroit could not raise the money it needs to retool its plants to build fuel-efficient cars. The businesses are too badly damaged and the capital markets are in tatters.

Lutz probably has a point which is why he is heading off to Congress to ask for $50 billion in loan guarantees. He has also looked across town to see big auto parts company Delphi head down the road to liquidation, an ignominious end, especially since in is already in Chapter 11.

According to The Wall Street Journal, "Delphi’s bankruptcy financing expires at year end, and there are indications that its current lenders may balk at renewing it." A number of analysts think that the cash runs out at GM (GM) and Ford (F) sometime toward the end of next year.

Domestic car sales could be as low as 14 million units this year. That number could drop again in 2009. The US auto companies cannot cut costs fast enough to stay with that declining sales pace and have any hope of retaining the capacity to ramp up production in a recovery. Their balance sheets do not stand up to those of the large auto firms in Europe and Japan.

It is popular to say that the US firms will go out of business. That is not going to happen. Their assets are too valuable to overseas operations like VW and Honda (HMC). Ford and GM are not ever going to be liquidated. They are just going to have new owners.

Douglas A. McIntyre