Detroit Three under the gun to restart

By Jamie L. LaReau - Detroit Free Press

DETROIT — The Detroit Three are running out of time.

Auto industry experts say the companies must restart their North American assembly factories in the next month as costs mount with each passing day the lines remain idle.

“The cost of staying closed is immense and eventually they will run out of time and die without new capital,” said David Whiston, equity strategist for U.S. Autos at Morningstar Research Services. “That’s why getting restarted even in late May or June is important.”

The Detroit Three have not declared a restart date, though some reports suggest they are targeting May 18.

In the meantime, General Motors and Ford Motor Co., the two companies Whiston covers, are each burning roughly $130 million to $150 million of cash a day even as their assembly lines are stagnant, he said. There are costs such as plant security, cleaning personnel, utility expenses to keep certain machines running, labor costs and so on.

And, with many states still under stay-at-home orders amid the coronavirus pandemic, new vehicle sales are way down. Cox Automotive’s forecast for total April new light-vehicle sales volume is 620,000 units sold for the month, down 53% compared with last April and down 37% compared with last month.

It gets worse. After incorporating seasonal adjustments, the annual vehicle sales pace in April is expected to finish near 7.5 million vehicles, down significantly from last month’s 11.4 million and far below last April’s 16.5 million level.

Still, the automakers and the UAW are exercising caution over reopening plants, which idled in March to protect the workforce as COVID-19 swept the nation.

Financial costs aside, the health and safety of workers comes first. All three have said they are putting added safety measures in their plants and designing new safety procedures to ensure workers stay healthy.

So, until it is safe to bring workers back into the plants, the carmakers have stockpiled cash to get through the turbulence the pandemic has brought to production as well as to sales as consumer demand for new cars has disintegrated.

Last month, Fiat Chrysler Automobiles secured almost $3.9 billion in additional credit. GM has drawn down about $16 billion from its revolving credit facilities. Ford said it will borrow $15.4 billion in unused amounts against two credit lines.

All three have also announced some cost-cutting measures, including white-collar pay deferrals and executive pay cuts.

Ford raised an additional $8 billion in new debt securities and GM suspended its dividend, a savings of about $2 billion a year. Ford had cut its dividend in March, representing an annual cost to it of $2.4 billion.

“If plants don’t restart I think GM has enough cash to get to roughly October maybe late September while Ford, thanks to its $8 billion bond deal last week, can probably get to nearly Christmas,” Whiston said.

But it could be rough. Ford reported it lost $2 billion in the first quarter, Ford’s first quarterly earnings net loss since the Great Recession in 2009. GM reports its earnings May 6 and FCA May 5.

Ford ended the quarter with $34 billion in cash on hand and $35 billion in liquidity. A year ago, Ford had $24 billion in cash on hand and $35 billion in liquidity.

But the longer the three live off their credit lines, the deeper into debt they fall and the higher their interest costs climb. Capital investment in research and development and new product launches could tighten, too.

By Jamie L. LaReau

Detroit Free Press

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