I was recently wondering why the Detroit car makers are so desperate to merge (see the recent talks between GM and Cerberus Capital Management, the saviour who 17 months ago bought Chrysler from Daimler Benz). Of course, their car sales are plummeting, especially the trucks and the leasing sales, who were the profit drivers of these companies. But this is not the first recession they went through, so why are they so desperate right now?
Again, recession and lower sales is not a new thing for the Detroit big three. It started more than 10 years ago when Toyota and Honda moved aggressively on the US market and culminated with the Asian producers holding a bigger market share than the US domestic car makers since 2006 (oh, what a historical day!). Since then their decline (spotted also by the author of this blog, doitinvest.com) has become quite obvious. yet, GM, Ford and Cerberus cry desperately for $25 billion in cash in order to survive. Why?
I already gave you a hint – cash. The amount of monthly cash burn (definition of the cash burn rate is the total money outflow from a company in a certain period) for General Motors is slightly below $1 billion per day whilst it has cash reserves of around $25 billion. In theory this should last for 24 months or so, but in practice, when the company turns out to be a loss maker, the lacking sales can push this at much higher.
Ford has a similar burn rate and even lower cash reserves, especially since the famous Kerkorian shares were sold this October at a big discount. And Cerberus is sitting on a $6 billion of cash whilst the burn rate is much lower, which might be the reason why GM hunts them down.
So, if they do not get some cash, they might get quickly to bankruptcy. Compound to this problem the famous pension funds (General Motors reckons that the pension costs per car are as high as $1,500 – more than double the profits they make on it!) and the incoming slow down in car purchases – you can always see that the odds are somehow against the big 3 car producers. The question is – will the government support them and lend them the cash balloon of oxygen they need, as they did in the past with the freeway-building policies? We’ll see. One thing is sure – that now it’s time for the republicans to return the lobby favors to some of their biggest contributors…