Name: Ford, GM and FCA under gun to restart, rebound before cash dries up
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Ford, GM and FCA under gun to restart, rebound before cash dries up

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Detroit Free Press The Detroit Three are running&nbsp;out of time.Auto industry experts say the companies must&nbsp;restart their North American assembly factories in the next month as&nbsp;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&nbsp;U.S. Autos at&nbsp;Morningstar Research Services.&nbsp;"That’s why getting restarted even in late May or June is important."The Detroit Three have not declared&nbsp;a restart date, though some reports suggest they are targeting May 18.More:In the meantime, General Motors and Ford Motor Co., the two companies Whiston covers,&nbsp;are each&nbsp;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.&nbsp;And, with many states still under stay-at-home orders amid the coronavirus pandemic, new vehicle sales are&nbsp;way down.&nbsp;Cox Automotive's forecast for total April&nbsp;new light-vehicle sales volume&nbsp;is&nbsp;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&nbsp;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.&nbsp;So, until it is safe to bring workers back into the plants,&nbsp;the carmakers have stockpiled cash to get through the turbulence the pandemic has brought to production&nbsp;as well as to sales as consumer demand for new cars has disintegrated.Last month, Fiat Chrysler Automobiles&nbsp;secured almost $3.9 billion in additional credit. GM has drawn down about $16 billion from its revolving credit facilities.&nbsp;Ford said it will borrow $15.4 billion in unused amounts against two credit lines.&nbsp;All three have also announced some&nbsp;cost-cutting measures, including white-collar pay deferrals and&nbsp;executive pay cuts.Ford raised an additional $8 billion in new debt securities and&nbsp;, a savings of about&nbsp;$2 billion a year. Ford had 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&nbsp;be rough. in the first quarter, Ford's first quarterly earnings net loss&nbsp;since&nbsp;the Great Recession in 2009.&nbsp;GM reports its earnings May 6 and FCA May 5.&nbsp;Ford ended&nbsp;the quarter with $34&nbsp;billion in cash on hand and $35&nbsp;billion in liquidity. A year ago, Ford had&nbsp;$24 billion in cash on hand and $35 billion in liquidity.But&nbsp;the longer the three live off their credit lines, the deeper into debt they fall&nbsp;and the higher their interest costs climb. Capital investment in research and development and new product launches could tighten, too.But key components in&nbsp;a restart are the parts suppliers, especially in Mexico.“We need all the parts coming all at once," said&nbsp;Kristin Dziczek, vice president of&nbsp;Industry, Labor &amp; Economics&nbsp;at the Center for Automotive Research in Ann Arbor.&nbsp;"About 40% of imported auto parts come from Mexico.”The virus hasn’t taken extreme&nbsp;hold in Mexico yet, she said, but in places where there’s population density and poverty, "this disease wreaks havoc and lots of places where we make cars in Mexico have those situations."There is some inventory in the pipeline to get auto production started, Dziczek said. Likewise,&nbsp;the draw on inventory will be half as much to start off because of&nbsp;slow consumer demand.But then there is the&nbsp;worry of&nbsp;a supplier cash crunch. If they can no longer afford to operate, it could disrupt&nbsp;automaker production, said Dziczek."Suppliers&nbsp;still have some revenue coming in from the deliveries they did before March 15 due to their contract terms, which&nbsp;usually takes them to two months out," Dziczek said. "So after May 15 or so, they will have no more revenue."Fortunately, the automakers&nbsp;won't necessarily have an urgent need for new inventory once they do restart, said Whiston,&nbsp;given&nbsp;the expected low sales in&nbsp;April. That allows for a gradual reboot of production and for suppliers to catch up.But there is uncertainty around getting inventory levels right.At the end of March, Cox Automotive&nbsp;counted 3.74 million vehicles in industry inventory, with the&nbsp;Detroit Three accounting for 1.88 million. In days supply, which is the measure based on the daily sales pace in the previous month, it breaks out this way:"If sales stay very slow, most brands will be OK for a while, but if demand comes back quickly, they will run low of inventory, particularly GMC and Chevrolet, for example, as both were already relatively low on full-size pickups before the troubles," said Mark Schirmer, Cox Automotive spokesman.In terms of raw inventory, all three automakers had lower inventory in early April 2020 than they did in early April 2019, Schirmer said.&nbsp;And even though sales will be poor in April, Cox is predicting&nbsp;500,000 retail sales across the country.&nbsp;"If that happens, and no new inventory is added in April — which is likely as production has mostly stopped — industry inventory will be at a one-year low," Schirmer said in an email to the Free Press. "That’s the worry right now. Or that’s the giant bet everyone has to make:&nbsp;How do you manage inventory?"There are some who say production isn't the car companies' problem;&nbsp;it is sales that will remain depressed for many months."Why would you rush to crank out more inventory," said&nbsp;Erik Gordon,&nbsp;professor at the University of Michigan Ross School of Business. "What they need is the dealerships open and selling cars and that won’t happen quickly."In Michigan, new and used for three weeks from late March through mid-April. They are now just coming back online.&nbsp;But since the pandemic hit, millions of workers have been&nbsp;laid off or taken some form of pay cut or furlough as their companies' revenues stopped. That means&nbsp;a boon in new-car demand is unlikely, Gordon said."People who have lost their job or taken pay cuts aren’t going to buy a new vehicle and even those who might buy a vehicle, they may buy a used vehicle instead," Gordon said. "Showrooms likely won’t be packed. It’s not toilet paper, part two."As new-car demand pauses, the carmakers’ fixed costs carry on.“Only 5% to 8% of their costs are in labor, but it still amounts to billions across all three companies,” said Marick Masters, business professor at Wayne State University.Then there are the billions of dollars the car companies spend on future product and electric vehicle development. Those investments&nbsp;must continue, Masters said.“If they stay behind, as China ramps up production of EVs along with other competitors, all three will lose market share and they can’t afford to lose market share,” Masters said. “This shutdown is a situation that is intolerable for the long term and the long term is three months or longer.”As it is,&nbsp;Tuesday, Ford and Rivian put&nbsp;their plans on ice indefinitely to&nbsp;jointly develop a . Ford said the current economy has created new and unexpected challenges, so the project was canceled.&nbsp;CAR’s Dziczek said automakers have enough cash now to not need to rush into restart. It is critical they do it right.“They must have a steady sustained return&nbsp;to production because a start-stop, start-stop pattern eats capital and that’s mainly felt in the supply chain,” Dziczek said.And while new-car sales will be down and there are some challenges ahead, Dziczek foresees ultimately a recovery in revenues.“Our average car buyer makes more than $100,000 a year and a lot of folks in that income bracket have been working from home and isolated from layoffs,” Dziczek said. “And, there are a lot of deals out there. It may hold up better than we think.”More:An earlier version of this story had Ford's liquidity figure incorrect for 2019, this version is now correct.Staff writer&nbsp;Phoebe Wall Howard contributed to this report.

Detroit Free Press The Detroit Three are running&nbsp;out of time.Auto industry experts say the companies must&nbsp;restart their North American assembly factories in the next month as&nbsp;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&nbsp;U.S. Autos at&nbsp;Morningstar Research Services.&nbsp;"That’s why getting restarted even in late May or June is important."The Detroit Three have not declared&nbsp;a restart date, though some...

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Jamie L. LaReau

The Detroit Free Press is the largest daily newspaper in Detroit, Michigan, US. The Sunday edition is titled the Sunday Free Press. It is sometimes referred to as the Freep (reflected in the paper's web address, www.freep.com). It primarily serves Wayne, Oakland, Macomb, Livingston, Washtenaw, and Monroe counties.  The Free Press is also the largest city newspaper owned by Gannett, which also publishes USA Today. The Free Press has received ten Pulitzer Prizes and four Emmy Awards. Its motto is "On Guard for 189 Years".

Ford, GM and FCA under gun to restart, rebound before cash dries up

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