General Motors Corp. and Chrysler LLC technically are bankrupt and Chrysler is a step away from death, said Sean McAlinden, chief economist for the Center for Automotive Research in Ann Arbor.
"GM and Chrysler are insolvent. Without federal funding they are bankrupt," McAlinden said at a conference today at the joint office of The Detroit News and Detroit Free Press. If the government took half of all of the bailout money away, they would go back to being bankrupt, he said.
"GM will not meet the initial conditions of the loan. But the conditions will change so GM can keep them," McAlinden said.
His prognosis for Chrysler is not as rosy.
"Chrysler will go away," he said. "Most cats don't have that many lives."
McAlinden described the company as being in hibernation, operating at a "one beat per minute level." Chrysler idled all North American manufacturing plants this month and entire floors in its Auburn Hills headquarters are empty in the wake of recent 5,000 white-collar buyouts.
The company has been, for some time, working to consolidate staff from other locations in Auburn Hills and continues to do so, said spokeswoman Shawn Morgan, who took exception to comments that the purchasing department has all but been eliminated.
McAlinden said Chrysler needs $6 billion to pay its suppliers for last quarter's parts and he suspects the full $4 billion loan went towards these payments. Chrysler initially sought $7 billion from the government.
McAlinden said Chrysler may threaten to keep its factories closed longer as a bargaining tool in negotiations with the new Obama Administration.
Morgan declined to comment on whether negotiations to change conditions are being sought or how they might be handled. Chrysler continues to work hard on its plan to return to profitability, she said.
The situation for Chrysler dealers is also dire.
The current throughput numbers (vehicles sold per dealer) for Chrysler is 415. Ford is at 490, GM is 440.
At less than 40 vehicles a month, and assuming $1,000 profit per sale, the average Chrysler dealer is trying to pay staff and costs while only pulling in $40,000 a month, said Sheldon Sandler, CEO of Bel Air Partners, which provides financial services to dealers. "That's just not sustainable."
Those numbers have worsened since 2007 when the average Big Three throughput was 577 compared with 1,313 for the Japanese automaker dealer body.
There is a great imbalance as the Big Three have 64 percent of dealers but only 47 percent of the market, Sandler said.
And while reducing the dealer body is part of the cost-cutting plans for GM and Chrysler, they still are up against state laws preventing the arbitrary closing of a franchise. Dealers also are not likely to go away quietly, as most own their facilities and the real estate, and rely on them for their livelihoods.
Manufacturers must buy dealers out, but they don't have the money to do so. When GM eliminated the Oldsmobile brand, it cost about $1.2 billion to settle with the dealers. "Dealers are deer in the headlights right now," Sandler said. "They're trying to figure out how they are going to stay in business knowing no one will buy them out. They will either make it or fall off a cliff and lose everything."
They must all, not just the domestic carmakers, find a way to make money selling cars, which will lead the recovery. "The truck movement is clearly over," McAlinden said. He thinks an ideal mix for the domestics would be 60 percent car and 40 percent truck sales.
As for the United Auto Workers, McAlinden said what the automakers really need from them is relief from the huge payments into the health-care trust fund, which can be achieved by accepting equity instead of cash. The union fought that proposal during the 2007 contract negotiations that created the trust fund. The UAW represents about 33,000 active workers and 95,000 retirees at Chrysler. McAlinden forecasts the Chrysler work force to be reduced to 17,000 by 2012 -- or says 17,000 is the number of Chrysler workers that will be absorbed by GM in the event of an acquisition by the larger carmaker. But he recommends potential buyers wait until after Chrysler has gone bankrupt, shed its liabilities, and can be bought for fire sale prices.
