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Detroit's War of Independence
MARKETWATCH 7:44 AM ET 3/24/2020
Symbol Last Price Change
GM 17.6down 0 (0%)
QUOTES AS OF 06:30:00 PM ET 03/23/2020
The auto industry, and Detroit in particular, has been diligently preparing for a downturn for years. What it got instead was something altogether less manageable: a shutdown.

Most car assembly lines across the Western world have stopped running over the past week in response to the Covid-19 pandemic. In the U.S., the moves were prompted by union pressure (https://www.wsj.com/articles/detroit-car-makers-to- temporarily-shut-u-s-plants-over-virus-concerns-11584551324) as staff started to worry about catching the virus in an environment where social distancing is near impossible. Given the slump in dealership traffic, though, it was only a matter of time before manufacturers might have had to stop production anyway. The U.K. joined Italy, France, Spain and U.S. states including California and New Jersey in mandating the closure of car showrooms from Tuesday.

That leaves investors with one burning question: How long can auto makers survive without selling cars? Ford, the only Detroit auto maker to make it through the previous crisis without public funds, suspended its dividends (https:// www.wsj.com/articles/ford-nixes-dividend-suspends-guidance-11584627239) last week to conserve cash.

After years of strong sales and--at least at General Motors(GM) and Fiat Chrysler--cost-conscious management, Detroit is a much flusher place than it was when the 2008 crisis triggered an $80 billion government bailout (https://www.wsj.com/ articles/SB10001424052702303745304576359530678869402). An analysis of available liquidity by RBC analyst Joseph Spak, including cash plus undrawn bank facilities, suggests that GM can survive without revenue for at least 20 weeks and Ford for 18 weeks. Even Tesla, which has a poor record of cash generation, is in good shape after a well-timed stock sale last month.

So a scenario in which social distancing measures aren't relaxed for three or even four months might be just about manageable. Anything more--by which point much of U.S. industry might be on its knees--could require another round of bailouts.

Some companies may find an alternative purpose, and source of funds, by manufacturing essential medical supplies. President Trump tweeted Sunday that GM, Ford and Tesla were being "given go ahead" to make ventilators and other metal products after all three said last week they were exploring the possibility.

In China, car plants are ramping up production again after roughly two months of down time, including the Lunar New Year break. Even if this relatively benign scenario plays out in the U.S. and Europe, though, it could leave lasting damage. Small suppliers are unlikely to have cash to ride out even a month of production stoppages. If they go under, the likes of GM and Ford won't have parts necessary to restart assembly. Small car dealerships are equally important links in the chain. How effectively small businesses are protected by the fiscal stimulus currently under negotiation in the U.S. Senate is one thing for auto investors to watch closely.

Another thing to monitor globally is any announcements around subsidies for car buyers. Scrappage schemes helped trigger the economic recovery in 2009 and may be necessary again to counter rising unemployment. Vehicles are big- ticket, easily deferred purchases that households only undertake when they are either confident or well incentivized.

The only certainty in this situation is that companies with stronger balance sheets can survive for longer without support. Stock-price moves since Covid-19 went global in late February reflect this to some degree. Japanese manufacturers, which tend to be well funded, have done best. There are some oddities, though: There is no good reason why shares in overstretched Daimler have (slightly) outperformed GM's.

Then again, perhaps investors are right not to distinguish. The most dispiriting aspect of the current economic standstill is how indiscriminate it is. After a few months, even good companies won't stand a chance.

Write to Stephen Wilmot at [e-mail] (mailto:[e-mail])

-Stephen Wilmot; 415-439-6400; [e-mail]


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