Three years ago, rating firms like Moody’s were talking about the chances that one of the "Big Three" automakers might have to file Chapter 11. That seems like a long time ago.

The cause for concern at that point was the cost base at domestic car companies. Employment, retirement, and pension expenses were way too high.

Detroit did a good job of solving that problem. It has cut billions of dollars from operating costs by squeezing suppliers, operating more efficient plants, and firing tens of thousands of people. Its new UAW agreements allowed the companies to drop expenses further.

The crisis has moved from the expense to the revenue side of the ledger. With unit sales falling 15% year-over-year, and SUV sales down closer to 25%, American car companies may not have cut enough over the last two years. Worse, they may not be able to cut enough in the future. Lehman recently projected that June sales numbers would show a ran rate of only 12.5 million total units sold in the US in 2008. Last year the market yielded 16.1 million sales.

Yesterday, Fitch whacked Chrysler and GM (GM). According to The Wall Street Journal, "Fitch warned that Chrysler’s issuer-default rating could be lowered two more notches from the current B-minus to CCC — nearly default status — if problems with rising loan delinquencies and losses on auto loans trickle down to retail volumes."

The US car company race between cash balances and revenue is on again in earnest. If domestic sales volumes drop toward 12.5 million units, Detroit can’t make the finish line.

Douglas A. McIntyre

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