Automakers are in much better shape to withstand a recession if the coronavirus pandemic tanks the US economy

• The COVID-19 coronavirus outbreak has sent much of the US into shutdown mode, but the Big Three Detroit automakers are keeping their factories running.
• General Motors, Ford, and FCA have each amassed huge war chests, following the financial crisis and bailouts and bankruptcies of GM and Chrysler.
• On Sunday, the Big Three and the United Auto Workers union (UAW) formed a task force to deal with potentially idling their factories in the US, which are currently still operating.
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The financial crisis hit US automakers hard, after years of struggle with legacy costs and businesses that had become bloated and complicated.

General Motors and Chrysler both needed government bailouts before entering bankruptcy. Ford avoided a bailout, but CEO Alan Mulally, sensing a downturn on the wind, effectively mortgaged all the Blue Oval's assets to borrow nearly $24 billion.

The rest is history. GM emerged from Chapter 11 and staged an IPO in 2010. Chrysler merged with Fiat, later becoming Fiat Chrysler Automobiles, with an IPO in 2014 and a lucrative spinoff of Ferrari in 2015. All three Detroit carmakers have enjoyed five years of record US sales and until recently, were looking to China to drive future growth.

The COVID-19 coronavirus outbreak threatens to end the run. The question this time, of course, is how well fixed the Big Three are to ride out a recession, if the pandemic tanks sales enough to send the auto industry into a money-losing phase.

The answer is that the Big Three are well-prepared. Mostly.

Cash, cash, and more cash

Ford is sitting a giant pile of cash - almost $40 billion - enough to ride out several routine business-cycle downturns.

GM has $24 billion, and FCA has $18 billion.

I haven't mentioned Tesla because although CEO Elon Musk's upstart electric carmaker is the largest US auto company by market capitalization (following a surge last year and early this year), it has just $7 billion in cash. That's a lot by Tesla's historic standards, and it should be enough to ride out a downturn of several quarters.

Last year, about 17 million passenger cars and light trucks were sold in the US, a robust figure. The automakers have set up their balance sheets to survive a downturn to below the so-called "replacement rate," of roughly 15 million. GM has also said that it can remain profitable at an 11 million annual sales level, which would recall the collapse of 2009, when sales dipped below 10 million.

The wildcard here is a total shutdown of manufacturing due to the coronavirus pandemic, something that didn't happen when the Great Recession hit. In some respects, a slowdown might help the Big Three better rationalize US capacity, idling some plants that are running at about 30%. The industry typically takes a breather for a few weeks in the summer, to run maintenance on facilities and provide some downtown for the workforce, so coronavirus could move up the schedule on that.

The automakers and their dealers don't want to miss out on the spring and summer selling seasons, but the past five years has shown that while external impacts - hurricanes hitting the South, for example - can affect sales, they tend to recover.

A potentially unprecedented supply shock

Making cars is a cash-intensive business, it's always said, so carmakers keep a lot of cash on hand, and they also make sure they have abundant access to debt and credit. They've outlasted numerous US recessions - both GM and Ford are over 100 years old - not to mention the Great Depression, world wars, the 1970s gas crisis, and of course the financial crisis.

But with the exception of World War II, when nearly all auto production in the US was shifted to the war effort, they haven't had to deal with a massive supply shock throughout the industry (GM did just have to manage a 50-day strike that shut down all its US plants).

To prepare for what might come, the CEOs of GM, Ford, and FCA and the president of the UAW on Sunday announced that they'd formed a task force to deal the coronavirus at their warehouses and factories; the industry employs around 150,000 hourly workers.

For now, the assembly lines continue to run. But if the outbreak isn't contained in the US governments institute broader restrictions on business activity, those lines could go silent. Fortunately, the automakers learned a valuable lesson a decade ago and have created war chests.

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