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NEWS ANALYSIS

The Detroit 3 cash crunch: How bad is it?

Can the Detroit 3 hang on?

The startling collapse in sales since April means the three automakers are burning through cash reserves at a terrifying rate.

Suddenly they have far more urgent deadlines for fixing their businesses. And they are considering a new range of actions that a few months ago were not on the table.

Investors are voting with their feet. Share prices for General Motors and Ford Motor Co. plunged last week — in GM's case, to a five-decade low. And privately held Chrysler last week was forced to tamp down rumors that it is about to declare bankruptcy.

The desperate Detroit 3 need to come up with enough cash, or access to cash, to limp to 2010, when they realize a combined $8.5 billion in savings from new contracts with the UAW.

Here are the key questions:

How rapidly are the Detroit 3 burning cash? When might they run out?

GM will burn through about $1 billion a month this year and $6.3 billion next year, says Patrick Archambault, an analyst for the investment bank Goldman Sachs Group Inc. That would leave an anemic $8.7 billion in cash by the end of 2009 unless GM dumps assets or adds new debt, he said.

Ford is in better shape — about $29 billion in cash and $11 billion available through credit lines. Moody's Investor Service says Ford could exceed a two-year total cash burn of $14 billion by the end of 2009.

Chrysler, owned by New York private-equity firm Cerberus Capital Management LP, started 2008 with slightly less than $10 billion in cash. On June 18, Bloomberg News reported that Chrysler will burn through $2.5 billion this year and would end the year with $7.7 billion in cash. A Chrysler spokesperson disputed that estimate Friday.

"Chrysler has a stronger-than-planned cash position," said Chrysler CFO Ron Kolka. CEO Bob Nardelli said Chrysler will hold capital spending at current levels this year. Based on 2006 estimates, that would be $3.7 billion.

"Cerberus has a model that is buy, fix and hold," said Cerberus spokesman Peter Duda. "If someone comes along and offers us a great price, we would, of course, consider it, but we are not under pressure to sell any time soon."

Chrysler last week drew down a $1.5 billion credit line from former owner Daimler AG. The credit line was set up last August when Cerberus bought 80.1 percent of Chrysler from Daimler.

Which company is most at risk?

Chrysler. Cerberus says the company is meeting financial targets, but Chrysler relies on slow-selling light trucks for about 66 percent of sales. Edmunds.com predicted Chrysler will suffer a 31.2 percent drop in North American unit sales this month compared with June 2007.

General Motors CEO Rick Wagoner says GM has enough cash for this year and numerous options after that. GM spokeswoman Renee Rashid-Merem said GM can preserve cash by cutting structural costs, selling noncore assets such as Hummer and retiming or changing production plans.

Rashid-Merem said GM could go to the capital markets with a debt or equity offering. But she added that the company has nothing to announce and that GM has untapped lines of credit.

In May, Ford CEO Alan Mulally said the company has enough cash to get through the next two years even if industry light-vehicle sales fall below 15.0 million units for both years.

Ford has a potential investor in the wings in Kirk Kerkorian. The billionaire has scooped up about 6.5 percent of Ford's common shares in the past few months. Ford could offer him preferred stock or other equity to raise money in a pinch.

Will Chrysler declare bankruptcy?

Rumors were so rampant last week that Chrysler was compelled to deny them. "This rumor is false and without any merit whatsoever," a Chrysler statement said Friday. "It is not reflective of the facts of our financial situation, nor is it a measure we are considering."

Cerberus has deep pockets. But will the private-equity firm put more money in?

With its puny stock market value, is GM a takeover target?

The stock price fell below $12 a share last week, and its market capitalization is nearing $7 billion. Eight months ago it was over $20 billion. So GM might seem ripe for a hostile takeover. But analysts have said GM's costly restructuring makes it unattractive.

In an interview with The Wall Street Journal last month, GM director George Fisher cited GM's debt load as a barrier to takeovers.

How can GM and Ford leverage their profitable and rapidly growing international operations?

Dave Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., says General Motors is exploring an initial public offering to sell a piece of international operations to investors.

"Cash is the big problem right now," Cole said. "They all have to explore anything to generate enough to keep their businesses running."

On Friday, a GM source said the company is not considering that move. A source said Ford has no such plans for its overseas units.

What brands can the Detroit 3 sell to raise money?

At Chrysler, that would be Jeep. In early 2007, when Chrysler was still part of DaimlerChrysler, London-based auto analyst Adam Jonas of Morgan Stanley estimated the Jeep brand could fetch $5.3 billion.

But Jonas said those estimates no longer apply: "Obviously, the world has changed too much over the past 18 months. Chrysler is smaller and worth far less."

In a June 10 CNBC interview, Nardelli said Chrysler will not sell Jeep, calling it "a crown jewel" of the company.

India's Mahindra & Mahindra Ltd. was interested in buying Jaguar and Land Rover but lost that race to Tata Motors Ltd. Mahindra, which wants an SUV brand, could be a buyer for Jeep or GM's Hummer, which GM has said it might sell.

Some inside GM would like to sell Saab, but that brand likely has little value. Mark LaNeve, GM's sales and marketing boss, recently said Hummer is the only brand GM is considering selling.

European news media last week reported that Ford was in talks to sell Volvo to a Chinese buyer. But Ford leveraged Volvo to get its $23.4 billion financing package. The company would have to use proceeds of a sale to pay back the obligation tied to the Volvo assets. So a sale price would have to be large enough to justify that payback and still give Ford significant additional cash. 

Amy Wilson contributed to this report

You can reach David Barkholz at dbarkholz@crain.com

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