American autos

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The U.S. auto industry resembles a game of musical chairs with the song about to stop. Already running around in circles, it looked earlier this year like big reductions in overheads had bought Detroit’s Big Three time to emerge in 2010 as smaller, leaner companies. But the tune has changed. A plunge in sales amid the credit freeze has put Chrysler, controlled by private equity firm Cerberus, into play. A deal may be weeks away.

Chrysler’s preferred suitor, General Motors, also does not have the luxury of time. With the credit crunch possibly pushing annualized U.S. auto sales to a multi-decade lows, GM could burn through enough cash to breach minimum working capital levels by next spring. Existing plans for raising $15 billion, which include selling Hummer, now appear unrealistic, which is why it covets Chrysler’s $11 billion cash pile. A deal could save billions more in the long-run, but it would also have high upfront costs for redundancies and dealer compensation. Banks, the government, Cerberus or some combination of the three would have to stump up the cash to make a deal possible.

A deal with Renault/Nissan has more obvious synergies but also requires cash to keep Chrysler viable. The Japanese end of the alliance already has agreements to provide small cars to – and source large pick-ups from – Chrysler, so Renault/Nissan may not buy the cow when it has the milk already.

Meanwhile, Ford is the least distressed of the Big Three due to massive secured debt issuance before the credit crisis began. That casino mogul Kirk Kerkorian has taken his chips off the table at a steep loss, together with departures in the executive suite and boardroom, do not necessarily presage a near-term crisis. Ford may even benefit from its rivals’ shake-out. This is not the end of the road for the U.S. auto industry, but it may look very different by Christmas.