Howes: Automakers hold financial heft to weather viral storm
As United Auto Workers leaders intensify their push for a two-week production shutdown to protect jittery members and as would-be buyers begin to shun dealerships amid a coronavirus outbreak, Detroit’s automakers are girding for massive hits to their balance sheets.
The good news when we could use some: General Motors Co., Ford Motor Co. Fiat Chrysler Automobiles NV have a lot more financial heft “in the tank,” says a leading Wall Street analyst, than they did when the global financial meltdown pushed GM and the former Chrysler Group LLC into federally induced bankruptcy 11 years ago.
“We believe the” automakers’ “balance sheets are categorically in a strong position to absorb several months of a near shut-down… giving the market enough time to address other actions to either stimulate demand or to ensure openness of key capital markets,” Morgan Stanley & Co. Inc.'s Adam Jonas wrote in a note to investors Tuesday.
Detroit’s automakers “have stated they each can remain profitable” in a U.S. market running between 10 million and 11 million units a year — far below the annual run rates of roughly 17 million cars, trucks and SUVs in recent years. “Now may be the time where they prove it.”
Under a "draconian" worst-case envisioning a 90% decline in revenue over three months, Morgan Stanley projects GM and Ford would each burn $4 billion per month in their bleak scenario. And the firm calculates that GM and Ford would have five months and six months, respectively, of gross cash to navigate a massive decline in business.
Yes, this falls into a very special "be careful what you wish for" category. The reinvention of Detroit's auto industry is poised to face its biggest challenge since the bailouts and bankruptcies of 2008 and 2009. North American plants generally continue to run, despite increasing resistance from union members manning assembly lines, and customers continue to buy in markets around the country.
How long will that last as coronavirus cases rise, as state and local political leaders issue increasingly harsh containment measures, as business activity beyond vital grocery stores and pharmacies conclude it's wiser to close than spend additional revenue to stay open?
The honest answer: it depends. The virus that originated in China creamed the auto industry there in February, with sales plummeting some 90%. But production is recovering in March — down just 30% from a year ago, according to an industry executive familiar with the numbers — with the second half of the year expected to return to trend.
Ford and Fiat Chrysler have shuttered production in their European plants in response to lockdowns in Italy, Spain and France, the European Union's decision to close national borders between member states, and interruptions in the complex supply chains serving plants.
Whether the industry's actions in Europe are a harbinger of what could happen in the rich U.S. market depends on efforts to "mitigate" spread of the virus and the mounting consequences of a steady wind-down of the world's largest economy. In the meantime, automakers will remain tightly focused on bolstering their "liquidity," namely cash on hand and established lines of credit they can tap when needed or even pro-actively.
A ranking industry executive familiar with the situation says managing liquidity is "absolutely critical" in such a fluid situation, predicting automakers will squeeze spending to preserve cash — going so far as to consider whether to cut dividend to weather the financial storm.
There's no established playbook for this. Not the 9/11 terrorist attacks. Not the auto bankruptcies. Not hurricanes. No, the real and imagined threats of coronavirus are taxing leadership in business and politics in ways arguably not seen since World War II, when FDR mobilized industry in general and Detroit in particular for a years-long battle.
Yes, this is different. But the good news for the state that builds more cars, trucks and SUVs than any other in the nation is that its bedrock industry is in better financial shape going into this mess than anytime in the past 50 years. That's not nothing.
Daniel Howes’ column runs most Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN. Or listen to his Saturday podcasts at detroitnews.com or on Michigan Radio, 91.7 FM.