Filed under: Industry, Ford Motor (F), General Motors (GM), Financial Crisis

This is part of a weekly series about the car business. The auto industry plays an important role in the global economy, and record-high oil prices and a global slowdown have contributed to a crisis in the sector. This column will highlight some of the interesting stories that emerge as that crisis plays out.

And I thought things looked bad last week (Car Biz: Dark days in Detroit and beyond). The skies do indeed look dark in Detroit and the auto industry as a whole. But now instead of weak sales and slow growth, we are looking at plummeting sales and the very real possibility of bankruptcy and further consolidation throughout the industry.

Today, an S&P analyst quoted on Bloomberg said that the Big Three could face bankruptcy as macroeconomic factors "overwhelm them." This follows yesterday's comment from S&P that debt from GM and Ford Motor Company (NYSE: F) may have to be downgraded again, even deeper into junk status.

GM has replied to S&P's comments, saying that while it does indeed face "unprecedented challenges," it does not consider bankruptcy an option at this time. But then again, what else are they going to say?

As has been well documented, the problems at GM, Ford and Chrysler are legion. They are burning through cash at alarming levels -- GM spends more than a billion a month -- as demand for their bread and butter trucks and SUVs plummets. And now, as the economic slowdown spreads across the world, foreign demand, which had been growing, is dropping too. Financing is becoming both more expensive and more difficult to find, making it hard to make loans to scarce consumers and to keep dealers alive. All in all, a grim situation.

Underlying these problems is a more basic one: overcapacity in the industry. No automaker is doing well today, and that includes the Japanese Big Three, Toyota Motor Company (NYSE: TM), Honda Motor Co. Ltd. (NYSE: HMC) and Nissan Motor Company Ltd. (NASDAQ: NSANY). All have seen big declines in their valuations as the severity of the global slowdown becomes clear. Even though the Japanese firms make more efficient cars, that doesn't negate the fact that for the foreseeable future, there will be too many companies with too much production capacity in the face of falling demand.

One easy -- and all too likely at this point -- change that could improve the situation is to eliminate much of the industry's overcapacity. That means the weakest firms may be near the end. Unfortunately for Americans, the weakest players at this point are in Detroit.

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