The questionable future of US automakers

What would a Big Three bailout or bankruptcy mean for Asia?
The big three US automakers have requested a $34 billion bailout from the US government to survive. Detailed in their restructuring plans are cost cuts, including staff and debt reductions, for their North American operations, while Asia gets few, if any, mentions.

Chrysler, Ford and General Motors (GM), which together encompass the ôbig threeö, employ over 60,000 people in Asia through a network of manufacturing, sales and management offices. GM and Ford both have dominant market positions in China û in 2007, GM sold over one million vehicles to ChinaÆs consumers and Ford sold 440,000 vehicles. All three companies posted growing sales in the region from 2006 to 2007.

ôIn our Asia-Pacific region, we continue to see very strong growth in sales and solid profitability,ö Rick Wagoner, GM's chairman and CEO, said in the company's 2007 annual report. His upbeat statement on the company in Asia contrasted starkly with the situation in the US where GM has been losing money and is in the process of a corporate reorganisation. For the year, China stood out as a bright spot on GMÆs balance sheet.

Standard and PoorÆs has downgraded all three automakers to a CCC+/Negative rating, adding to their gloomy outlook. Analysts give Ford and GM primarily neutral and hold recommendations. Chrysler is wholly owned by Cerberus Capital Management and unlisted.

Now, with the future of GM and the other big automakers in question, their Asian operations hang in the balance.

A bailout would ôdefinitely boost Chinese consumers' confidence with the big threeö, says JD Power Asia-Pacific automotive research general manager Songlin Mei. ôOne of the bright spots for GM and Ford is their sales growth in the Chinese market. The estimated growth rate for GM in China is 10%, compared with its overall decline in the rest of the world.ö

In its reorganisation plan, Ford cites separate management structures in Asia, Europe and Latin America as being an ôunnecessary and inefficient duplicationö of resources. The company indicates it plans to consolidate its global management operations to eliminate these redundancies. FordÆs Asia-Pacific headquarters is in Bangkok, Thailand.

Chrysler and GM lack any specific mentions of Asia in their reorganisation plans.

Without a bailout, at least one of the big three automakers is expected to declare bankruptcy. If this happens, most analysts say the company would be quickly liquidated, potentially bringing down at least one of the other two carmakers. Such a collapse could result in the loss of at least 40,000 jobs in Asia associated with GM and 15,000 jobs associated with Ford.

Chrysler does not have any manufacturing operations in Asia.

On top of job losses and factory closings, both Ford and GM have received project financing and working capital from local banks in Asia. A bankruptcy would likely result in the carmakers defaulting on loans that could further upset local banksÆ balance sheets.

ôIt'll be very bad, but I cannot foresee how bad it'll be,ö says Mei on the situation in Asia if the big three are denied a bailout.

A saving grace to employees at any of the big three in Asia is the popular use of joint ventures (JVs). JV partners would likely be able to find new partners or transition to manufacturing their own brands, especially in China, in the event of a bankruptcy at one of the big three. The automakersÆ assets in the region would likely also be of interest to competitors should one of them enter liquidation and need to raise capital.

Still, AsiaÆs automotive market has not been untouched by the global economic crisis. In November, South Korea saw a 22% drop in car sales and Japan an 18% drop, according to Global Insight. The growth centres of China and India are expected to post double-digit declines in sales for the month.

GM Daewoo, GM's South Korean subsidiary, has already shut its Bupyeong manufacturing facility outside Seoul for a month, citing a slump in demand.

ôInitial estimates for November combined with actual reported figures indicate a widespread and systemic collapse of car sales around the world,ö said Global Insight analyst Paul Newton in a report. ôThe forecast for global auto production in 2009 now makes grim reading as six million units are expected to be wiped from the 2007 total, adding to the industry-wide issue of production-side overcapacity.ö

NewtonÆs outlook for global car sales does not bode well for AmericaÆs big three as they try to make the case for a bailout. And while Asia remains a bright spot on their balance sheets, it may not be enough to save their operations in the region.
¬ Haymarket Media Limited. All rights reserved.
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