GM’s Board of Bystanders just voted to allow its top execs to resume trading their company’s shares. GM’s big dogs have until May 21 to buy, sell, or buy and then sell their company-subsidized stock. According to Bloomberg News, it’s “another sign of confidence at GM.” Viewed another way, it’s a sign of impending doom. This fall, after GM fails to wrest any significant concessions from the United Auto Workers (UAW), after the full extent of GM’s cash conflagration becomes apparent to the Street, bankruptcy will once again loom large and GM stock will tank.
Looking at General Motors’ inflated stock price, I reckon Wallace Hartley’s band could have taken a few anti-anxiety tips from GM’s spinmeisters. GM’s PR machine has successfully focused the minds of both the press and the investment community on cost cutting, union buyouts, new products, theoretical new products, Chinese Buicks, carbon cap groups, anything and everything save the only thing that really matters: cash.
In its last quarterly statement, GM reported that it has $24.7b in the hopper. It’s generally accepted that the automaker needs $10b to keep the lights on (i.e. pay suppliers). So General Motors is $14.7b away from filing for Chapter 11 protection. Of course, that’s the best (worst?) case scenario; if General Motors has any sense, they’ll declare bankruptcy before hitting the wall and save some much-needed cash for restructuring. Anyway, they’re headed in that direction.
Last quarter, GM reported that it had immolated $1.7b of its cash hoard. All things being equal (i.e. no turnaround), the company’s coffers will be lightened by $6.8b this year. If GM’s cash burn continues at that rate, the company has a little over two years before bumping-up against the 10 bil barrier.
But all things are not equal– even without supposing GM’s turnaround turns into a nose dive. For one thing, the first quarter’s results are not the harbinger of things to come.
Last quarter, GM’s accounts payable rose by roughly a billion dollars. It’s entirely possible that the extra bil represents the current state of pay and belongs on the cash burn side of the ledger. If so, that would raise the [artist formerly known as the world’s largest] automaker’s quarterly cash burn to $2.7b per quarter. At that pace, General Motors could only evade bankruptcy for another year and four months.
At the same time, GM’s also declared that it will spend between $8b and $9.5b on capital expenditure (i.e. developing new products) this year. In the first financial quarter, GM spent just $1.2b of that total– some $800m to $1.17b less than one quarter of the total amount of their planned “cap ex.” If they spread the rest of the expense evenly over the last three quarters, that’s an additional $277m to $392m heaped onto GM's quarterly cash burn.
There’s one reason and one reason only why GM’s feeling the burn: the North American market. This quarter, GM North America (GMNA) posted an adjusted loss of $85m. This after selling the family jewels, cutting structural costs to the bone, trimming production and, most importantly, introducing a raft of new products. If GMNA’s not making a profit now with their new metal glittering in the marketplace, how will they do so in the short to long-term future?
There’s only one answer to that vexing conundrum: drastically cut the UAW’s wages, health care and pension costs. As we’ve said before, there’s not a hope in Hell that’s going to happen. For one thing, unions are in the business of increasing wages and benefits. For another, CEO Rick Wagoner’s $10.2m smash and grab compensation package has destroyed management’s bargaining position. But most critically, GM is profitable.
Although GM’s European operations are flat, GM Asia Pacific (GMAP) is on fire. Low-cost (non-union) labor and hot products have increased the unit’s sales by 20 percent, boosting revenue by 35 percent to $4.6b. GM Latin America, Africa and Middle East (GMLAAM) is also cranking. First quarter net income tripled to $201 million in the first quarter of 2007. Russia, India, China– the rest of the world is GM’s oyster.
This international dichotomy plays straight into the union’s hands. As long as GM’s foreign relations are banking bucks, their American and Canadian unions are happy to tough it out, take Johnny Foreigner’s money and keep on keeping on. If GM somehow turns its North America operations around, great! If not, so what? Let it limp.
Which brings us to the end game.
GM’s foreign operations can’t grow quickly enough to damp down the flames of GMNA’s cash burn. And even if they did, GM’s Board of Bystanders would eventually recognize that GMNA is a bottomless pit. GM’s foreign ops will need every dollar they make to compete against cash rich Toyota. One way or another, GMNA’s going down. GM execs are banking on it right now.
Funny, didn’t CNBC just have an exclusive with Warren Buffett the other day where the thought Wagoner was on the right track? Then again, if Buffett really likes a company, he usually buys its shares, as in all of them.
Say, shouldn’t there be a GMDW pool? 1st prize wins a CSV, 2nd prize wins two Aveos.
* starlightmica:
May 9th, 2007 at 12:21 pm
Say, shouldn’t there be a GMDW pool? 1st prize wins a CSV, 2nd prize wins two Aveos.
More appropriately, that would be 1st prize is a Cadillac, 2nd price is a set of steak knives.
The upcoming contract negotiations has to be the checkered flag they are looking for.
That should be “1st prize is a set of steak knives, 2nd price is a Cadillac”.
Look for SAIC (Shanghai, GM’s partner in China – along with VW’s partner in China) to buy up the post-Chapter 11 General Messup, mostly to get the GMDaewoo operations, but also enabling it to capture a large dealer network throughout North America, and Europe, through which to sell it’s (Chinese made) wares.
Ironic that GM’s most valuable asset was one passed over by Ford (I’m speaking of Daewoo).
I bet not only are Alfred Sloan and Billy Durant rotating at high speed in their graves, but also Henry Ford and Walter Chrysler. (Durant started up GM, Sloan made it successful, hope I don’t need to explain who the other 2 are to anyone).
Democrats will control the executive branch by GM’s B-day, and I think it’s not likely they’ll approve of a Chinese buyout of GM.
I guess I still fail to understand what any western corporation thinks they’re doing in China. There is no long-term profit potential for the non-Chinese.
“I guess I still fail to understand what any western corporation thinks they’re doing in China. There is no long-term profit potential for the non-Chinese.”
The answer is Short term profit.
Add the possibility of $4/gallon gas this summer to the sales situation….
@whitenose
China helps the management of bad Western companies look good until they can unload the responsibility on someone else. China is going to blow up big-time in the faces of corporate management – quality issues, outright criminal fraud, the fact that China is a military dictatorship with slave labour wages for regular workers — where to begin?
While firing the workers at home that would buy their cars, the car makers are surging to China, looking for a quick fix, and probably hoping the Chinese will keep them in profit – forgetting that they can’t pay them what it takes to help them make a profit, since that would make going to China in the first place a stupid move …
Go figure.
This is just a hunch, but the fact that we are already in the midst of the next presidential election phase, leads me to believe that if GM North America actually came out and said, “We’re sorry, but we have to close up shop” the Democrats and Republicans in Congress would be all over themselves to offer some sort of bail-out plan. No, the president we have wouldn’t support it, but the honchos in his party might lean on him by letting him know that the so-called Grand Old Party would lose the White House, if the television crews went to food banks in Michigan and did some footage.
Similar dynamics were at work the last time there was a bail-out in 1979.
Admittedly, with the occupation in Iraq being the political football of the moment, this is really not on anyone’s radar screen running for president – except maybe Joe Biden, who had a Duragon plant in his home state. But if the lead story on all televsion networks was “GM has announced it is filing for bankruptcy,” that would change in short order.
Last night, I went to the monthly meeting of the Seattle Electric Vehicle Association (SEVA). The president of that organization, Steve Lough, who had been a featured speaker at a discussion and presentation on plug-in hybrids at Microsoft on Monday, sponsored by the Discovery Institute of Seattle (a “conservative” think tank) took the General to task – specifically, Nick Zeilinski, an engieer with GM in attendance.
SEVA’s member seemed to believe that the Telsa is too expensive and that the long-term solution to GM’s woes is to make a plug-in hybrid ASAP. The scenario I see if GM files for bankruptcy is the Feds put together some sort of bail-out program, only if GM goes “green.”
Would that save GM? It’s probably the longest of long shots.
I think that the dealer network would be of value to a lot of people, not just the SAIC. I’d be curious to see what happened, if it ever came to it.
An Iaccoca-style buyout may yet happen…
Talking about gm gives most of us a case of good cop bad cop. On the one hand we hear that gm is further ahead than it’s rivals in restructuring (code for becoming half size) and that some of it’s new models are taking off. Then the bad cop, they still lose money in the US. and the profits have to come from suv’s and full size pickup trucks (called 900’s)all This in a $3-4.00 gas economy. So the incentives go on the new 900’s after they are out 4 months and the dealers have 85 days worth of them to discount with. This is not what the formula called for. With no newly designed dodge and ford pickups this was to be a full year of near list price for the got to have new models. GM, Ford, and Chrysler have not made money for so long on autos that it is difficult to see how any of them can replace fleet sales of cars with retail purchases (sans year end fire sales which negate any profit). I have seen all the reviews, and coupled with the bad resale value of any domestic car, it is just a non starter that this year will see a turnabout for GM in the car or truck business.
You self-entitled far-east auto experts’ just killing me. Did you guys set your foot there? Oh maybe in your dictionary China’s still equal to Cambodia.
Shanghai is more prosperous than NYC, go figure. And I’ll tell you guys a little secret nobody know in NA. It’s upon China auto market that Mazda and Mitsubishi can be back on track now. Truth is always beyond ignorant guys’ wildest imagination.
The factor is, IF China stop buying US DOLLARs, your guys legacy pension will be all at stake. IF Jap corporate kills NA auto industry, 1/4 American will be deeply influenced. That’s called world economy.
GM will be on a drift that will be similar in some ways to the one they experienced back in 1992.
In 1991, GM released a slew of new models. However the rise in gas prices, labor and pension costs, and the overall lackluster nature of it’s cars resulted in $6+ billion in losses.
However, this time around it will be the Chrysler spin-off that will largely dictate the labor cost structure of GM.
I don’t see the value in the GM dealer network. New brands with a compelling product don’t have any trouble signing up dealerships. Most of the volume in this country is now done by large multi-brand, multi-storefront dealerships. Any company which has the product line isn’t going to have trouble signing up franchises and can pick and choose who and where they want.
Hyundai hasn’t had a problem building a dealer network and a chinese supplier would have trouble either if they had a worthwhile product line. Many of the existing GM dealerships in the US are struggling businesses in aged facilities.
This should have gone in the TBAG thread – but that would disrupt things, since the car must be available in the US. But the nomination also serves its purpose in GMDW land!
I nominate the car that could have been – the Saab performance automobile based upon the new Premium platform co-developed by Saab and Alfa Romeo. Alfa, Saab, Holden and Opel developed the gasoline engines that were to be used in the range of cars. Alfa created a separate line of diesels, which were also going to find their way into Saabs, though with unique Saab performance tweaks.
All looked good to go, and while the US is still an Alfa-free zone, there could have been a return to Saabs you bought not to “find your own road” but to peel the asphalt off said road.
Alas – not to be. GM, in its infinite wisdom, pulled out of the collaboration with Fiat, and let Alfa have the by then completed Premium platform all to its lonesome. GM also handed a nice chunk of moolah to Fiat, in order to be able to split Torino – and some of that money got spent on the new unique to Alfa diesels: high torque, fast response, snappy performing engines. And if you’re not an oilman and prefer your fuel providing more of the vapors – then you can consider the 24 valve, six cylinder, 3.2 liter gasoline engine Alfa has been fiddling with after the Aussies at Holden did their bit.
260bhp? Anyone?
Yes, sadly, in order to get the pre-GM Saab experience today, you must drive an Alfa Romeo. And with Alfa’s second coming to the US having been postponed as many times as there are valves in that 3.2 … this nomination is made in the vain hope that GM, at some point down the road, will start doing the sensible thing again – then they would have more product in the final tally of the TTAC TBAGs!
I may very well be wrong, but I don’t believe GM filing for bankrupcy means the company closes its doors for ever or is parcelled out to the highest bidder. While bankrupcy would void all current shareholder value and is for this reason only a last resort, bankrupcy would allow GM to escape is untenable labor deals, legacy costs, shutter additional plants and abandon dealer franchises. Witness American, Delta and Northwest Airlines. The GM that would emerge from bankrupcy would be much better prepared for both global and NA markets than they can ever hope to realize under the most optimistic reorganization plans.
GM’s cash is rapidly shrinking yet Toyota’s reserves are continually expanding (last count was about $100 billion, can anyone confirm this?). At this level, Toyota could afford to run their operations without selling a single car just by the interest on the cash reserves alone! By my calculations….ahem.
Therefore, if Toyota carry on at that rate, then GM’s problems are going to compound. The sad matter of fact is that GM didn’t plan for the future. The SUV profits were always going to roll in and petrol was always going to stay under $2.50 a gallon. So GM’s sales will have to soar in order to get their cash reserves back to a level which won’t jeopardise their operations. So let’s take the assumption that GM’s sales plateau out and don’t rise or fall, the profits will roll in slowly, maybe in 6 and a half years’ time they’ll have about $2 billion extra in reserves (assuming that they continually earn $65 million per quarter and hoard ALL of it away!). In 6 and half years, how much will Toyota’s cash reserves will be? And how much damage will they do to GM’s markets? They’re already launching a full on assault on GM’s last bastion, the pick up markets. What can Toyota do in 6 and half years?
So I think it’s fair to say, that GM will need a small miracle to in order to keep their books in check. Maybe they could conduct the union talks in december? I’m sure the UAW might have some christmas goodwill towards GM……?
In 6 and half years, how much will Toyota’s cash reserves will be?
Are you sure you want to know?
If they keep the reserves in U$S and ol’ Bernanke starts the helicopters maybe enough to buy a loaf of bread.
Lichtronamo:
May 9th, 2007 at 6:26 pm
I may very well be wrong, but I don’t believe GM filing for bankrupcy means the company closes its doors for ever or is parcelled out to the highest bidder. While bankrupcy would void all current shareholder value and is for this reason only a last resort, bankrupcy would allow GM to escape is untenable labor deals, legacy costs, shutter additional plants and abandon dealer franchises. Witness American, Delta and Northwest Airlines. The GM that would emerge from bankrupcy would be much better prepared for both global and NA markets than they can ever hope to realize under the most optimistic reorganization plans.
100% correct!
I can only see the cash burn rate escalating (Escalading?). You see…now that they have backed up their junk with 100K warranty’s , the rooster really WILL come back to haunt them.
It’s a shame they just didn’t build a car/truck that would run flawlessly for 100K miles, …you can be sure if they DID, the word would be out. IE, no NEED for a ridiculous sales strategy.
Word of mouth is priceless. The junk they peddle with their Blue Light Special warranty is fit for one thing…ballast.
Maybe GM, now that they are ever so Eco Friendly can create an artificial reef down in the Bahamas of all their unsold GMT “900”.
But hey, PLEASE BE SURE TO DRAIN THE E85 corn fuel before you dump them….ummmkay???
Stein X,
I thought GM pulled out of Alfa’s premium platform because it was so overweight? Looks like the right call to me, as the CTS and Holden platforms appear superior.
Anyhow, I think Robert is right to focus on cash. Two years goes by fast in the car business.
I might be missing something, but…
“if General Motors has any sense, they’ll declare bankruptcy before hitting the wall and save some much-needed cash for restructuring”
This is something that’s bugged me for a while. GM’s executives, Delphi’s executives, etc., all legally owe a fiduciary responsibility to shareholders. But almost the first casualty of a corporate bankruptcy is the shareholders who tend to lose everything. Which is as it should be…after all, it’s *their* company that’s not paying it’s bills (and if it can pay them then why should creditors be asked to contribute anything?).
Delphi rushed to court to avoid a tightened bankruptcy law (which largely targeted individuals rather than corporations, but still…). How does this agree with the fiduciary responsibility of Delphi’s executives or board? In fact, why should any publicly-traded corporation voluntarily file bankruptcy if the first result is to screw the shareholders to whom the corporation’s management owes fiduciary responsiblity? Why not wait for creditors to force the question, since the certainty of being screwed is worse for shareholders than the extreme likelihood of being screwed at a later date?
And if the answer is that management has other incentives…if GM survives they might survive even if current shareholders don’t…then that’s as good as an admission that management didn’t fulfill their fiduciary responsibility to shareholders. For which they should be personally sued.
Unless I’m missing something.
ttilly,
The answer lies in Lutz’s famous “So What” comment.
You see….”Management”…when they are paid in the 10’s of Millions of dollars….they don’t have any obligation to anyone except themselves.
Can it be any other way???
GM makes a profit abroad? They build cars in non US based factories and they are profitable?
Foreign manufacturers build cars in the US and they are profitable?
Where’s the intersection? Unions?
I know, as you said it, the UAW is in the business of maintaining wages no-matter-what. But seeing the law of unintended consequences, they may be in the business of pushing production over (non-unionized) borders.
Seeing that union voice is strong and manufacturers management are, say, non-confrontational, each job removed in the US could be one or more created in Mexico, Korea, Thailand, Vietnam, Hungria …
“I can only see the cash burn rate escalating (Escalading?). You see…now that they have backed up their junk with 100K warranty’s , the rooster really WILL come back to haunt them.”
Nope. I disagree. This was actually one of their more intelligent decisions. Most GM powertrains can last over 200k, or even 275k with proper care. There are also a lot of risk-averse folks that weigh warranties quite heavily in their buying decision. That variable is what helped put Hyundai back on the map… and VW back in survival mode.
“It’s a shame they just didn’t build a car/truck that would run flawlessly for 100K miles, …you can be sure if they DID, the word would be out. IE, no NEED for a ridiculous sales strategy.”
Really??? Hmm… I never knew that Suburbans, Silverados, and Acadias had low quality powertrains. Can you site any recent studies?
“Word of mouth is priceless. The junk they peddle with their Blue Light Special warranty is fit for one thing…ballast.”
Strange. I thought GM actually had the strongest truck lineup in the North American market and the most competitive car offerings amongst the domestics as well.
“Maybe GM, now that they are ever so Eco Friendly can create an artificial reef down in the Bahamas of all their unsold GMT “900″.”
Didn’t Chevy overtake Ford recently in this market segment? If you’re looking for artificial reef material I can recommend some leftover Bajas, Ridgelines, and Frontiers. Unfortunately I don’t think the cheap plastics they use for those vehicles are biodegradable. A Trabant would be a better choice if you want to be eco-friendly.
Unfortunately, no one in the truck market is doing well these days. Not even the Tundra that was relegated to also-ran status in a recent C&D comparo.
If I’m not mistaken, wasn’t the Silverado the top rated full-sized pickup in that article?
The cash burn is the key element.
Mr. Lang. I agree gm’s new stuff is not junk. However, the other writer gave a perception that people have after 30 years of building a mixed bag of dubious products. As for the warranty, it would have been better if gm introduced it before kia & huyndai instead of after. (the original always gets the credit and sales) Now the great “900” trucks. The issue is that gm is beating a failing ford with it’s F-150 going down. To win in a dissapearing market is not a victory. It is this shrinking market for large V8 powered 5000lb liners that has ford, gm, & chrysler in the drink, not the quality of these products. It’s the gas price nothing more.
It’s the perfect storm: gas prices are rising, potential purchasers are less liquid due to softening housing markets which have also caused new home construction to dry up thus shrinking the market for work trucks, and the unions aren’t budging. And why should they? The little guys and gals always get the blame but it’s the suits in the ivory towers that are manipulating the numbers (remember Enron?).
GM’s TV advertising stinks. It doesn’t evoke any emotion nor pique interest. Where is their answer to Toyota’s (albeit, rigged) Tundra feats of strengths series? I’m still seeing their powertrain warranty flying cars ads; but whom are they kidding? Sure their robust powertrains are covered longer, but the crappy electronics, poor seals and gaskets, and interior trim bits are covered by the shorter 36K warranty.
If I were interested, I would scrutinize GM’s accounting, looking for signs that they are offloading additional losses to their overseas operations. An $85 million loss seems too little after quarters of low interest financing, cash on the hood deals, no curtailing of wages or health costs, and the spectacular losses of GMAC. In the case of Enron, when the ship was sinking, the execs were painting rosy pictures while offloading millions of shares and using creative accounting to hide their misdeeds. May 21 will be a very interesting day, indeed.
Re: politics in the near future
Erskine Bowles was added to the GM BoD last year anticipating a Hillary win in 08.
also expect GM to receive some spending money when Allison is sold off later this year:
http://ftalphaville.ft.com/blog/2007/05/04/4302/blackstone-eyes-gms-allison-as-gm-profits-dive/
Generous Motors should go for the whole bank and pour almost all of it`s cash herd into new product development. drop saab, drop daewoo, drop anything that is alien.
buick- add a new 2 door luxury coupe ( riviera replacement) a retractable hardtop suggested,add a next gen rendezvous, make a large rwd sedan based on caddy sts, but not sharing exteriors. add a new minivan- a spin off of gm next gen minivans, but sharing no exteriors.
chevrolet- new minivan ( spread among divisions, but not sharing sheetmetal), add all new cavalier based on a new small car platform.make a wagon version for malibu. introduce next gen small SUV equinox . introduce all new large tahoe/ suburban that would veer away in sheetmetal from caddy. next gen hhr, introduce new luxury suv spin off the buick enclave, sharing no sheetmetal.
cadillac. next gen xlr, a complete escalade redo- veer away from chevy sheetmetal. introduce a new category- a luxury minivan. add the v12 large sports coupe.
pontiac- introduce new camaro, with retractable hardtop introduced later.add g6 replacement. a new sporty minivan arrives based on gm next gen minivans, no sharing exteriors.add a new SUV sharing no exteriors with other units.add a smaller sports coupe sunfire/ or cobalt replacement. add a new version of hhr , sharong no exterior with chevy.add all new g3 econobox.
saturn- drop all opel versions, introduce all new minivan based on gm next gen minivan platform, share no exterior, add new coupe. add a new sportster coupe , lightweght, right under camaro.
an all new large sedan introduced, based on new sts/buick, but sharing no exterior.
hummer- a new h4 small size suv introduced. a new near luxury h5 introduced sharing underpinning with new tahoe, but no exterior.
gmc- all rebadge trucks dropped. a new gen chevy express version built only for gmc, new heavy duty trucks only under gmc brand sold.
oldsmobile division revived- an all new ultra luxury car offered coupe version added based on caddy v12, sharing no exteriors. that totals- 31bn dollars for next 5 years .
new engines- 1.8, 2.5, 3.5, 5.0, 7.0
new gearboxes- 6 speed auto, 6 speed m, 8 speed manual,a cvt, a robotized automatic/ manual 8 speed. cash flow-10bn.
new platforms- a new minivan platform.
a new large rwd platform.
a new large truck platform
a new medium suv platforma
a new midsize rwd platform.
a new small fwd platform.
cash- 6bn
a new material durability facility, a new quality survey standartization, new fit and finish protocols- cash 3bn.
grand total—50 billion dollars. in next 5 years. roughly 10 bn annually—- and GM could be saved.
Ask and you shall receive: http://www.pistonslap.com/
jurisb, nice dreams, it will cost more than that though.
Allison won’t bring enough cash to make a difference, and GM loses the profits contributed by Allison. GM is dead, management is lining their pockets getting ready for B day.
Yes their new pickups are nice, but within a year the competition strikes back.
Not enough competitive cars, far too much debt, 10 years too late.
Jurisb:
Why drop Daewoo? They make money in one of the fastest growing markets. Compare to NA.
DDL
Not only that, you’d be surprised how much inexpensive engineering work Daewoo provides the rest of GM. Daewoo is a part of the solution.
daewoo is not a solution, because it is a korean one. you represent the star speckled banner. so take it as a man, and create your own cars. this is how you get september 11- faking achievements, spreading artificial art and flavours, and being the world police using chinese and japanese bank money. i bow in front of korenas because their minds created these affordable cars, it is their sweat and sleepless night in cracking up us car market. GM is likely to turn into britsh style companies. now it has entered 2 phase heavily basing cars on foreign platforms. phase 3- selling foreign cars under gm brand names, slowly pushing out of production line their own cars.
phase 4- no domestic cars left, only names and brands. the company goes extinct.
GM Canada is again asking Ontario Taxpayers to fund the expansion of the St. Catherines Ontario plant so that it can make transmissions for there new rear wheel drive vehicles, the first one being the new Sports model, I thought that GM decided not too build rear drive Cars?
JurisB:
You’d probably be surprised at how much of your plan corresponds with GM’s actual strategy to revive a strong NA market based on US products. But it’s pernicious to think that GM can return to being only-US oriented. Toyota’s ascendance has been built on globalism (and lots of Japanese government help), and GM’s job is to compete in the current world, not 1967.
As to GM executives, this is a tlatented group that “gets it,” and is working hard to navigate out of nearly 30 years of mismanagement beginning in 1964, followed by ten years of desperate bumping around in the dark, and finally discovering a true path only since 2004. Even more than you, they wish it were easy and fast and could be resolved in an internet forum post.