Detroit Bailout Can’t Solve Credit Crisis (GM)(F)(TM)(HMC)

Detroit is getting its $25 billion in loan guarantees from the federal government. Ford (F), GM (GM), and Chrysler did not have access to enough capital to upgrade their plants without outside help.

The capital gives the Big Three the opportunity to move from SUV production to fuel-efficient sedans. The theory is sound. Gas prices will stay high from here on out. Competing using a line of 15 MPG pick-up trucks is out of the question.

September domestic car sales could hit a 15-year low. That would put the industry’s annual run rate at or below 14 million vehicles. In 2007, the number was 16.1 million. About $50 billion of car sales have come out of the US market in one year. And the home team is still losing market share to Japanese companies, especially Toyota (TM) and Honda (HMC).

The unit sales picture is likely to get worse next year. Tight credit means car loans will be expensive and harder to come by. A recession means that a lot of people will be out of work and riding bicycles. The Japanese have a huge lead in sales of hybrids, selling over one million models of the environmentally friendly Toyota Prius so far.

GM, Ford, and Chrysler are running out of money. Even with loan guarantees, should car sales move to the 13 million unit per year level in 2009 and 2010, the losses out of Detroit will swamp their cash positions. The day that the three companies go to Hades may have been pushed out 18 months or so, but it has only been pushed out. The way it can be avoided is if cars sales rebound sharply, and there is no reason to believe in that miracle

Detroit hoped that emerging markets would help shore up earnings. Evidence from China, Russia, and India is that car sales are slowing. GM has lost market share in China this year.

Toyota has won the car World Series two years in a row. At some point the Detroit car firms won’t be able to field a team.

Douglas A. McIntyre