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That ’70s Show: Detroit

There’s a story about a man who encountered financial setbacks and went to see his priest. The priest advised him to seek guidance in scripture, and a year later the man was rolling in money. The priest asked what specific words from the Bible gave him guidance, and the man replied: “Chapter 11.”

Nobody seems to be laughing at bankruptcy jokes in Detroit right now, especially after Merrill Lynch used the “B word” publicly last week to describe what might happen to General Motors. Nor was it particularly reassuring when a GM official replied that the company has enough cash to last at least through the end of the year. It was like a doctor trying to assuage a sick man’s family by saying he’s sure to last until the end of the week.

Chad Crowe

Is the demise of GM, along with Ford and Chrysler, inevitable?

The answer is no, but neither is their survival. It all comes down to whether they’ll run out of money before they run out of time, and it’s going to be a close race.

Predicting the future of car companies can be about as accurate as political prognostication. Remember all of seven months ago, when Rudy and Hillary were their parties’ sure-fire nominees for president? While Detroit’s current picture looks incredibly bleak, history holds a slew of dramatic automotive turnarounds: Chrysler in 1982, Nissan in 1999, Fiat in 2006 and more. GM and Ford have large and profitable foreign operations, and also had cash kitties of around $25 billion at the end of the first quarter.

All three companies will benefit from new union contracts that relieve them of their crushing pension and health-care obligations to retirees. But these cost savings won’t start flowing until 2010. The Detroit companies’ challenge will be to survive until then, while also revamping their product lineups.

“It’s 1973 all over again,” says an executive at one Japanese car company. That was the year of America’s first oil shock, of course, when Detroit’s product lineups were burdened with gas-guzzling big cars that had been hugely profitable until, suddenly, nobody wanted to buy them.

So here we are in 2008, proof positive that history does repeat itself. GM, Ford and Chrysler were blinded by the huge profits from their SUVs and pickup trucks between 1995 and 2005, and not entirely without reason. These were the only vehicles on which they could make profits, thanks to the benefits owed to legions of retirees (three for every active employee in GM’s case) and their overall bloated cost structures.

Earlier in this decade, Ford even considered dropping cars and shifting its business entirely to trucks. The result: product lineups skewed toward an era of cheap gasoline, which might be compared to investment portfolios consisting mostly of Enron stock. The price of oil is far from the only issue. Steel, which car companies must buy in abundance, has doubled in price since the beginning of this year.

In last week’s report declaring that a GM bankruptcy is “not impossible,” Merrill Lynch analyst John Murphy also wrote that the company might need as much as $15 billion in new capital. To put that in perspective, consider that GM’s market capitalization, or total value, on the New York Stock Exchange now stands at only about $5.7 billion. So General Motors might have to raise an amount between two and three times the entire value of the company. Even more conservative estimates say GM must raise an additional $8 billion to $10 billion.

Just how is this supposed to happen? Banks have enough troubled loans on their books just now. It’s difficult to imagine investors wanting to buy much newly issued stock from GM, considering the track record of current management. GM shares have tumbled more than 80%, and its U.S. market share has dropped by more than 25% since CEO Rick Wagoner took over in 2000. In fairness to Mr. Wagoner, GM has been notably successful overseas, though that success has been eclipsed by tens of billions of dollars of losses in North America.

If GM can’t sell shares it will have to sell assets. The company recently announced that its Hummer brand will undergo a “strategic review,” which is French for an attempted sale. Better late than never. Former GM board member Jerome B. York, who oversees automotive strategy for investor Kirk Kerkorian, suggested selling Hummer more than two years ago, adding that without drastic action, “the unthinkable could happen.”

With eight brands and just over 20% of the U.S. market, GM should sell some other marques as well – starting with Saab, where sales are anemic. Kia – yes, Kia – sold as many cars in America as Pontiac last month. So Pontiac, too, might best be put on the block, along with ever-struggling Saturn.

Ford already has shed two of its biggest millstone brands: Jaguar and Land Rover. CEO Alan Mulally, who came to Ford from Boeing nearly two years ago, wasn’t bound by the emotional attachments that have handcuffed longtime Detroit executives. Such relative alacrity recently attracted a sizeable investment from Mr. Kerkorian, though he has lost nearly half the value of his investment in just a few months’ time. The stock plunged after Mr. Mulally, having declared that Ford would regain profitability in 2009, announced in May that all bets are off.

Ford has some spiffy, fuel-efficient cars overseas that would be ideal for the U.S. market just now, but the trick is how to get them here. Shipping in cars from Europe won’t work, because the strong euro would make their cost prohibitive. But Ford might be able to import some small cars from its Latin American operations. Better yet would be accelerating plans to build cars that Ford developed in Europe in the company’s U.S. factories, which isn’t supposed to happen until 2010. Stay tuned.

Then there’s poor Chrysler, acquired a decade ago by Germany’s Daimler, which then sold it last year to private-equity firm Cerberus for less than a quarter of the original purchase price. Amazingly, the fire sale now looks like a better deal for Daimler than for Cerberus – which also has the misfortune of owning 51% of GM’s loss-laden financial arm, GMAC.

Courtesy of Daimler, Chrysler has an outdated product lineup that won’t include any hybrid vehicles until late this year. Even those will be big SUVs that are falling out of favor. But Jeep is a viable, valuable global brand, as are Chrysler’s minivans and Dodge trucks – which can be sold in smaller volumes even with high gas prices. Chrysler likely will wind up as a subsidiary of another foreign car company, hopefully with better results this time around.

Detroit executives might drop by their favorite bookstore before their summer vacation and pick up a book published last year by Col. Thomas A. Koldtiz, head of the department of behavioral sciences at West Point. It’s titled “In Extremis Leadership: Leading as if Your Life Depended on It.” There are bound to be some applicable lessons.

Mr. Ingrassia won a Pulitzer Prize for coverage of GM’s management crisis in 1993. He is a retired Dow Jones executive who writes regularly on automotive matters.

Write to Paul Ingrassia at paul.ingrassia@dowjones.com¹