The Federal Government’s car assistance package is an example of wasteful pre-emption of far more important decisions in the US. Mr Rudd and his industry minister, Victorian Senator, Kim Carr, should keep our cash in our pockets until the Americans decide on how they will support their imploding car sector.

Too big to fail is usually applied to big banks in the US, UK and Europe that have been rescued or bailed out, or had a capital injection from the Government. Now we are about to find if a company with annual sales of over $US120 billion and hundreds of thousands of employees and worldwide operations is considered redundant to American business, or will be saved in someway.

In short, will the incoming Obama administration (or in a final act from the Bush Administration) decide to come to the aid of General Motors? Or will it be allowed to follow the likes of United and Delta Airlines (giants in their own respect) into going into bankruptcy protection? We are about to find if the “Too Big To Fail” mantra applies to industrial companies like the tottering General Motors.

Without extra cash, which could come from a US Government loan, GM could very well reach the point by the end of next month that sees it start thinking about when it files for bankruptcy, not if.

The red warning light is flashing faster as GM, Ford, and Chrysler burn through their cash reserves and get close to just the fumes left in the bank account. Ford reckons that with more than $US29 billion in cash and credit lines, it can survive until the end of 2009 and look then to 2010 and the recovery. That’s despite another $US2.9 billion loss and burning through $US7.7 billion in the September quarter.

No one knows Chrysler’s position exactly, but it is known to be in the worst shape of the three.

Now the impending failure of one, two or all three US domestic companies, is shaping up as the biggest and most immediate test for the new president and his administration. The way GM in particular is burning through its cash reserves, it could be on the verge of bankruptcy early at New Year.

GM said it had a $US4.2 billion third- quarter operating loss and that its available cash reserves fell to $US16.2 billion on September 30 from $US21 billion at the end of June. Merger talks with Chrysler LLC were suspended.

Based on the cash spend in the September quarter of $US6.9 billion, GM will be close to tipping over into bankruptcy by early 2009 because it has to keep between $US11 and $US14 billion in cash on its books as working capital.

On top of this, GM had slumping sales; off 21% for the quarter as a whole (and down 33% in the first month of the current quarter), is adding enormous pressures on all three companies, and on the US Government to bail them out. Ford and Chrysler’s sales also slumped in the worst month for car sales for 26 years.

GM’s quarterly revenues fell $US5.8 in the quarter, to $US37.9 billion from $US43.7 billion as sales fell in the US, Europe, Australia and other markets, and the company also slashed prices to try and cut stocks of unsold vehicles. Ford’s revenues fell by around $US9 billion to $US31 billion. These giants are bleeding cash at both ends of the business.

President-elect Barack Obama on Friday has indicated that help may be on the way.

He told a Chicago news conference (after meeting his group of economic advisers Friday) that the Congress must pass an economic stimulus measure either before or just after he takes office in late January, and he mentioned aid for the auto industry. Work is underway on merging packages in the House and the Senate and there’s talk the new houses will meet in early January, pass a stimulus bill, which will be the first thing President Obama will sign.

All this news is bad for the Ford and GM businesses in Australia. It’s the last thing HQ would want to have to deal with: red ink in a small and not so important market like Australia.

We should abandon our “car plan” and withhold any “aid” until the US sorts out the future of its car companies.

The greater the pressure on GM and Ford, the greater the pressure on their businesses here and even if the US Government throws a lifeline, that will be to help the US companies stay afloat, not outriders here.

GM says it will boost its cash reserves by $US5 billion by the end of next year through reduction of sales promotions and further production cuts in the first quarter.

That will be bad news for the media and advertising industry and for suppliers, like tire, steel, autoparts, plastics and other services. News Corporation blamed the cuts in advertising by the car giants, especially GM for the first half earnings fall, and the revised 2009 forecast for the company of a drop in profit in the “mid-teens”. It’s going to get worse.

Peter Fray

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