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Fears Grow That Tight Credit Could Crush GM, Ford

The headquarters of General Motors in downtown Detroit. Standard & Poor's this week downgraded the credit of GM and its financing arm.
Jeff Haynes
AFP/Getty Images
The headquarters of General Motors in downtown Detroit. Standard & Poor's this week downgraded the credit of GM and its financing arm.

Two of the nation's big automakers, General Motors and Ford Motor Co., are at the center of attention on Wall Street as shares of the companies tumbled to new lows.

Many fear the automakers don't have enough cash to sustain their businesses during this downturn, and that if they falter, it could have widespread repercussions on the U.S. economy.

Standard & Poor's downgraded the credit of both GM and Ford on Thursday, placing each of them on "credit watch negative." The ratings agency also downgraded the companies' financing arms — GMAC Financial Services and Ford Motor Credit Co. — with the same designation.

GM has a 49 percent ownership stake in GMAC; the remainder is owned by a group led by private investment firm Cerberus, which also owns a majority stake in Chrysler.

GMAC and Ford Motor Credit Co. provide loans to consumers and help dealers buy inventory from automakers.

Falling Stock Prices

Over the past year, the stocks of both companies have fallen substantially. The peak of GM's stock this year came on Feb. 1, at $28.98 per share. At the market close on Thursday, when the stock closed at $4.76, it was down more than 83 percent, according to Morningstar.

Ford's stock has also experienced a similar decline: On May 1, its share price was at $8.48. On Thursday, its stock closed at $2.08 — down more than 75 percent.

"They're by far my biggest concerns," says equity analyst David Whiston, who covers the auto industry for Morningstar.

Whiston's concerns stem from the fact that GM and Ford are two of the biggest employers in the United States, and the potential for job losses extends to many other industries that supply materials and services to automakers. These include parts supplies, such as companies that produce safety equipment, engine systems and tires.

Job Loss Worries Grow

David Zoia, editorial director for, a Web site that covers the auto industry, says there is a "pretty high level of worry" over GM and Ford. Even before the financial crisis hit, the companies were "burning through close to $1 billion a month in cash." Now both companies are on a mission to build a "cash cushion" to allow them to survive.

There are also reports in the industry that GM may be exploring the idea of selling its world headquarters and leasing it back to generate more cash, something car companies have done in the past.

The companies have already made severe employee cuts, letting thousands of white-collar and blue-collar workers go in the past 18 months. Zoia agrees that there's the potential for more job losses in this sector if the economy continues to spiral downward.

"At the end of the day, the whole auto industry exists to move a product from a manufacturing plant to the consumer," says Whiston.

Auto Dealers Closing Their Doors

Auto dealers are also vulnerable. Earlier this week, Annette Sykora, chairwoman of the National Automobile Dealers Association, said in a speech in Detroit that "we're likely to lose up to 700 dealerships" in 2008. So far, 590 have closed this year. In 2007, there were 430 net closures, up from 295 in 2006.

The credit crisis is causing dealer financing to skyrocket, says Whiston. Normally, dealers turn to both car companies and banks for loans. But both sources are drying up.

Whiston says the survival of GM and Ford depends in large part on whether the credit markets "loosen somewhat." Many consumers remain afraid of spending money on big-ticket items like cars, and both companies face a tough road on this front because consumer perception of their brand "isn't very good," he says.

"As long as they can't get debt financing, the only thing they can do is cut costs and increase sales," says Whiston. He predicts that production cuts are the most likely step automakers are likely to take, but their options also include layoffs, selling assets and closing more plants.

Charles Territo, a spokesman for the Alliance of Automobile Manufacturers, says that it's "no secret that the economic vitality of this industry is based on consumers' ability to borrow money."

He says more than 90 percent of all vehicle purchases are financed through credit. The difficulty of securing loans has translated into "some of the lowest sales in 25 years for many of the manufacturers," he says.

Although GM still remains No. 1 in terms of sales of light vehicles (cars, pickups and SUVs), its market share has slipped 17.8 percent overall, to 22.5 percent, for the period from January through September, compared with 23.9 percent for the same months last year, according to

Ford's market share also slipped 17.2 percent, to 14.5 percent of the total U.S. automobile market, from 15.3 percent.

Toyota, Honda and Nissan have seen their market share grow in this segment of the market.

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