On the edge

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: If nothing else, the revelation by General Motors (GM) on November 7th that it is in danger of running out of cash before the end of the year has concentrated minds. The reaction within the embattled car industry, and in Washington, DC, has been the same: we knew it was bad, but we did not know it was that bad. Ford is in a similar position, although its cash should hold out for a few months longer.

As for Chrysler, the smallest and weakest of Detroit’s Big Three, the precise state of its finances are harder to gauge because it is privately held. But the increasingly desperate attempts by Cerberus Capital Management, the private-equity firm that owns 80% of Chrysler, to offload some or all of it to another carmaker (GM said on November 7th that it had walked away from such a deal) suggest that its future as an independent entity is all but over.

What will happen next? The shareholders have been more or less wiped out, the credit markets are closed and neither GM nor Ford has any non-core assets that anyone wants to buy, with the possible exception of Ford’s 33% stake in Mazda, a profitable Japanese carmaker. The North American car market should come back strongly in 2010 or 2011, but for all practical purposes, that is light-years away: North American sales are running at their lowest levels since the early 1980s, when the population was 50m smaller. There are just two broad options: either the federal government steps in to save Ford and GM (Chrysler is probably unsalvageable) or America’s two biggest car firms must seek Chapter 11 bankruptcy protection.

In many ways, Chapter 11 was designed for just such a contingency. For all their present agonies, both Ford and GM have good long-term prospects. They have relatively healthy businesses in Europe and have been doing well in emerging markets, such as China, where there is vast potential.