As the financial turmoil that erupted in the United States spreads around the globe, the already depressed U.S. auto industry and its counterparts in Europe, China and India are bracing for the worst.

“While the global automotive industry is clearly experiencing a slowdown in 2008, the global market in 2009 may experience an outright collapse,” Jeff Schuster, executive director of automotive forecasting for J.D. Power and Associates, said in an Oct. 9 statement. “While mature markets are being impacted more severely than emerging markets, no country or region is completely immune to the turmoil,” he said.

Rescue by merger
With a deepening credit crunch, rising gas prices and a too-late response to consumer demands for more fuel-efficient cars delivering hard blows to the Big Three (Chrysler L.L.C., Ford Motor Co. and General Motors Corp.), for the first time staying liquid is a major concern at the world’s biggest carmakers. “Some of the domestic manufacturers are burning through cash at a rapid pace and may possibly be forced to file for Chapter 11 bankruptcy protection,” says Anthony J. Pratt, an analyst at PricewaterhouseCoopers in Detroit.

To prevent that from happening, GM and Chrysler began discussions in August for a possible merger, after GM’s merger talks with Ford were rebuffed in July. Private-equity firm Cerberus Capital Management purchased a majority stake in Chrysler from Daimler AG in 2007 and a majority stake in GMAC L.L.C., GM’s finance arm, in 2006. It is also courting Nissan Motor Co. Ltd. (Japan) and Renault S.A. (France). “While a merger may be more desirable than bankruptcy protection, in this credit market the likelihood of a merger of this type would be very difficult,” says Pratt.

GM certainly would benefit by gaining Chrysler’s entire market share, but it would also acquire Chrysler’s bloated dealership network and plants that produce redundant items, which would mean plant closings, says Pratt. Ford, on the other hand, will have to make some drastic cuts if it intends to remain solo.

Crying foul
The Big Three’s freefall in the U.S. auto market was foreshadowed years ago. Like aging quarterbacks resting on their laurels, the Big Three ignored Toyota Motor Corp.’s entry into the U.S. auto market in the mid-1980s and stuck to the “go-long, go-deep” formula that had made them MVPs in the industry for decades. “Go long” meant continuously oversaturate the market with gas-guzzling pickup trucks and SUVs, despite consumer trends toward smaller, fuel-efficient cars; “go deep” meant overrun production lines until dealership showrooms were bursting at the seams.

A nimble and formidable upstart, Toyota steadily gained dominance over its domestic competitors. It also led the charge to “go green” when it introduced the Prius Hybrid to the U.S. consumer market in 2000, after selling the line successfully in Japan for three years. (Although Honda released the Insight in 1999, the Prius became more popular.) The Big Three lumbered behind, introducing hybrids in 2004 and 2005.

In the meantime, tired of the country’s dependence on foreign oil and its mercurial impact on gasoline prices, President Bush in September signed an energy bill into law that contains the controversial Corporate Average Fuel Economy, or CAFE, requirements. Originally created in 1975 in response to the 1973 Arab oil embargo, CAFE requires all domestic and foreign manufacturers to improve the fuel economy of their cars and light trucks (vans, trucks or SUVs) to 35 miles per gallon by the year 2020.

The Big Three cried foul. They were already strapped for cash and would need financial assistance to ramp up their facilities to meet the CAFE requirements. In response to the outcry, a $25 billion low-cost loan package was added to the bill to help auto manufacturers and their suppliers in the U.S. to modernize their plants.

Toll on dealers
In the true spirit of trickle-down economics, the Big Three’s fight for survival is taking a severe toll on their dealers.

“The three top issues facing auto dealers overall are access to capital, lack of credit for customers and dealers, and not having the correct inventory due to steep fuel costs,” says A.V. Fleming, executive director and CEO of Ford Motor Minority Dealers Association in Southfield, Mich.

Damon Lester, president of the National Association of Minority Automobile Dealers (NAMAD) in Lanham, Md., was far more blunt. “Having access to capital is a key component to dealers’ success and survival and they will run out of cash by year’s end,” he says. NAMAD lobbied unsuccessfully for $500 million of the $25 billion loan package be earmarked to assist minority auto dealers who have been severely impacted by the market conditions.

According to NAMAD’s annual census, in 2007, there were 391 African American-owned auto franchises of both domestic and foreign brands, down from 738 in 2006, and 751 in 2005 — a 48 percent drop in the two-year period. These year-end numbers alone do not fully reflect the rapid changes occurring in the market.

“When I first got my dealership in 1990, there were over one hundred African-American GM dealers. Now we’re down to thirty-eight and falling,” says Michael Johnson, owner of Michael Chevrolet, in New Baltimore, Mich. “[GM’s financing arm] GMAC is pulling our revolving lines of credit, so it’s every man for himself. I have gone through three recessions and have never seen it this bad,” he says.

The National Automobile Dealers Association in McLean, Va., estimates that 700 dealerships — majority- and minority-owned — may close their doors by year’s end. A few perceptive dealers saw the storm clouds on the horizon and prepared for the worst.

“We’re actually doing well because we made some major adjustments a year ago when I saw how things were going,” says Johnson. “People thought I was crazy.”

Johnson let go of excess employees and nixed external advertising. “We now market to our internal database by creating a system where I know who walks in our stores and why they walked out without buying a car. This way I have a more accurate count of our business,” he says.

Having an accurate account of his business at all times is a habit Bill Perkins has honed in his 15 years as an auto dealer. “I open my own mail every day,” says Perkins, principal of the Bill Perkins Automotive Group in Detroit. “I see all the bills and all the checks, so I know what’s coming in and going out of my business. It’s really simple.”

Perkins owns three dealerships in the Detroit area and is in the enviable position of being able to obtain credit for his dealerships and customers from the 15 financial institutions he works with, mainly banks and credit unions. He does steady business with seven or eight of these institutions. “Our reputation has helped us a lot, and we’ve worked very hard to build trust with these financial institutions,” he explains. “If there is an issue with the deal or a customer, we go to work on the issue. We’re very proactive, not reactive.”

Perkins owns the land on which his dealerships sit, as well as the stores themselves — precious collateral other dealers don’t have. “I am a very conservative operator and whatever money I’ve made, I put back into the operation rather than spend it,” he says.

Unfortunately, these conservative practices will mean very little if the manufacturers continue to be on shaky ground.

Ample opportunities
Pratt of PricewaterhouseCoopers believes the U.S. auto industry won’t rebound until 2010, but there are ample opportunities in emerging markets such as China, India and Russia.

“While the downturn will be painful and may result in consolidation, the global auto industry will not collapse. The middle class is growing in emerging markets, which will boost sales of light vehicles, and GM and Ford are well positioned because they have manufacturing plants in these markets. Chrysler, on the other hand, will likely need a partner to expand in emerging markets,” he says.