Ford

It is a sure sign of the times that the best news about the auto industry comes from a bankruptcy judge. Are we really that low? Unfortunately, yes. Both GM and Chrysler are doing their part to take attention away from the ludicrous spectacle the Treasury Department has put on during ‘stress test season’. More about that later, but first the auto industry.

The good news is that the judge presiding over Chrysler’s bankruptcy hearing stomped on a motion by the dissident creditors that would have prevented the sale of assets to Fiat. So it appears as if the message that we need a quick resolution to the company’s re-organization has been heard. The quibbling by the dissidents has been overridden at every turn so far. From the perspective of an interested party – you and I are now unwilling investors in the shambles that was Chrysler – it can only be good news when the judge orders the company’s plan to move ahead. The sooner it emerges from bankruptcy the sooner we find someone to take our shares off our hands.

And, frankly we need the money.

Why?

Because the real struggle in the auto industry will be fixing GM, and that lovable old elephant is lumbering right towards us.

Well, maybe not lumbering. Staggering might me a better description after this morning’s first quarter earnings release. Our erstwhile largest auto maker announced that it managed to lose $6 billion in the first quarter. As Oscar Wilde would say: that’s downright careless. At the same time it burned through over $10 billion in cash. There is no way it can keep this up. So buckle up. GM will certainly be bankrupt by the end of the month.

As seems to be the case with all our various crises the epicenter of the storm is a group of creditors who hold about $27 billion of unsecured bonds. GM has proposed swapping those bonds for equity, which would give the bondholders approximately a 10% ownership stake. So far they have resisted. Presumably because they feel they could get more through a bankruptcy or even a liquidation process. I don’t see how that could be, but there again I’m not sure I would have bought GM debt: it’s been a dying company for years.

Meanwhile the company’s management is aggressively pursuing its re-organization plan. It has put Saab, Saturn, and Hummer up for sale and will close Pontiac by year end. It speaks volumes about the state of GM when those brand names elicit not much but a yawn. The company had collected some dogs along the way, and ridding itself of them will be an uphill battle. Approximately $800 million of the first quarter loss comes from Saab’s effort to enter bankruptcy in Sweden.

It is also trying to eliminate over a third of its dealerships. This latter exercise will be difficult. The nature of American politics is the cause of that difficulty. Dealerships are very often significant local businesses. Most towns have one. The owner of a dealership is often a big player in local commerce and thus in local politics. So much so that most states now have laws preventing the arbitrary closing of dealerships by the car makers. So GM finds itself entangled in a morass of local and state level negotiations, which absorb management effort and take time. And, as the first quarter earnings report shows very clearly: time is something GM does not have much of.

So to sum up our auto industry report:

We have one company speeding through bankruptcy, so far at least. With another speeding towards bankruptcy. We have absolutely nothing to say about Ford at the moment. That’s a good thing.