How Likely Is A Bailout For The Auto Industry?

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The traditional American auto industry is on the brink of a collapse. Ford Motors says it lost $129 million in the third quarter. We explore how the government is likely to aid automakers.


From NPR News, this is Day to Day. Ford Motors today posted nearly a $3 billion operating loss, and that's after burning through more than a quarter of its cash reserves. GM isn't doing any better. It lost more than $4 billion. This news highlights just how close American automakers have come to an all-out collapse. Marketplace's Sam Eaton is here now. And Sam, an all-out collapse?

SAM EATON: Yeah. Burning through nearly $8 billion of cash reserves over a four-month period as Ford did isn't exactly what you call a sustainable business plan. That now leaves Ford with about $19 billion to get it through the slump, and if the economy continues to go south, could run dry sometime after 2010. For GM, it's even worse. The company says its liquidity has dipped to the bare minimum to get it through the rest of the year. I talked to Tom Libby - he's an auto analyst with J.D. Power - and he says, compare a U.S. automaker to any of the struggling American households right now, and it isn't so different.

Mr. TOM LIBBY (Senior Director, Industry Analysis at Power Information Network, J.D. Power & Associates): They still have expenses like electricity and food and gas for the car and heating bills and so on. But their cash inflow from employment is much less than the outflow. So, basically, their balance continues to go down.

EATON: So, if you're a homeowner, that eventually means foreclosure. But if you're someone like Ford or GM or Chrysler, that could eventually lead to bankruptcy.

BRAND: Well, is bankruptcy actually an option for any of those?

EATON: Well, Madeleine, it all depends on how bad things get. Many say we're at the bottom right now of the economic hard times and predict things could begin to pick up again later next year. But economists and forecasters seem to be taken by surprise a lot these days, and if they're wrong and the industry does collapse, the economic ripple effects would be huge. One study says that if all three U.S. automakers suddenly shut down, three million jobs would be lost in the first year. And that's unlikely to happen, of course, but it does demonstrate how integrated the car industry as with the rest of the U.S. economy. The auto industry, of course ,says bankruptcy is not an option, and that's why their CEOs were in Washington yesterday with hats in hand, hoping to drum up support for about $50 billion in federal aid.

BRAND: And is the support there?

EATON: Well, some argue that it shouldn't be, that Industrial Darwin should be allowed to prevail here, and that the U.S. economy should be able to weather a few failing car companies. But the political backlash of that failure would be huge. So, bailout of some kind is probably likely, and today's news has evidence that the timing of that bailout may need to come sooner rather than later. GM's financial woes have led it to suspend talks to acquire Chrysler for the moment, and that puts Chrysler on the path toward a breakup. That is, unless the government steps in. On the bright side here, Madeleine, analysts say the car companies that do come out on the other side - on the other end of this economic downturn will be much leaner and meaner.

BRAND: Well, thank you Sam. That's Sam Eaton of public radio's daily business show Marketplace.

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