Even With a Bailout, Automakers Would Still Be Running on Fumes

Call it a starter bailout. And get ready for a second, a third, or even a fourth.

The $15 billion in emergency loans that the White House seems ready to approve for GM and Chrysler would extend their lifeline into the first weeks of the Obama administration. And by putting a "car czar" in place to oversee the companies, the bailout would create a new structure for forcing change in the beleaguered automakers.

But GM and Chrysler would remain very weak and continue to lose ground to the competition. Ford may, too, although it hasn't asked for any emergency cash just yet. Here are some problems that Detroit Bailout I doesn't address:

A desperate need for cash. The $15 billion for GM and Chrysler falls far short of the $28 billion the two companies say they need. And it's a good bet even that is a low-ball figure. Mark Zandi of Moody's Economy.com told Congress that if the Detroit 3, including Ford, maintain their combined market share of about 50 percent, then the car companies will require about $75 billion in government aid. If their market share shrinks to 40 percent and they sell fewer cars, it could cost $125 billion. It's extremely unlikely that GM and Chrysler will be able to stop burning cash anytime soon, especially with the car market expected to be even worse in 2009 than in 2008. That means the automakers will be back asking for more, probably a lot more.

[See why bankruptcy might be good for GM.]

Falling market share. It's also a safe bet that the Detroit automakers won't hold on to their 50 percent market share—so plan on Zandi's worst-case scenario. Fitch Ratings, in its forecast for 2009, points out that while domestic dealerships are losing sales because of tighter credit standards, foreign-based companies like Toyota and Nissan are still able to offer zero-percent financing and other enticements, which almost certainly means they'll take more share from the domestics in 2009. Any discount is good news for consumers, but it means the Detroit 3 will sell even fewer cars—and therefore require more money and more time to get healthy.

[See who might benefit from Detroit's woes.]

Damaged brands. Car-shopper data already show that GM and Chrysler are losing customers, as news of their problems spreads to showrooms and consumers. Sales of domestic brands are down this year more than twice as much as import brands. And in a recent study by CNW Marketing Research, 29 percent of buyers considering a GM vehicle said they fled to another brand because of fears that the company would declare bankruptcy. Of those, 19 percent went to fellow domestic Ford, but 15 percent went to Honda and 11 percent went to Toyota. That's one more reason GM and Chrysler sales are likely to tank in 2009, possibly coming in far below what the companies themselves predict.

[See why America is shunning GM.]

Time is working against them. All three Detroit automakers made favorable deals with their labor unions last year—but most of the concessions won't materialize until at least 2010. In its "viability plan" submitted to Congress, GM said it expects to lower labor costs to the point that they're about equal to those Toyota carries at its U.S. factories—but not until 2012. Ford said its labor costs are about 44 percent higher than at nonunion auto factories, with a goal to lower them to near parity by 2011. But it seems obvious now that we can't wait that long. The United Auto Workers has said it will make more concessions if necessary to keep the companies in business. But the union has also asked for a seat on GM's board, which isn't a concession: It's a demand.

[See how the automaker's bailout plans rate.]

Nobody ' s buying cars. No matter how much money Washington sends to Detroit, it won't give consumers a reason to buy cars. "Government mandates don't create market demand," says Jeremy Anwyl, CEO of Edmunds.com. Just a year ago, the automakers were preparing for Americans to buy about 16 million cars this year and next. Actual sales in 2008 will be fewer than 14 million, and sales could bottom out at 12 million in 2009. Nothing will boost that except for an end to the recession and a consumer-confidence revival. Unless, that is, the automakers go out of business and flood the market with fire-sale cars.