It was worse than Wall Street expected. General Motors (GM) lost a colossal $4.2 billion. But more dire is the company's cash burn of $6.9 billion, which has GM delaying some new models, cutting deeper into costs and—most important—putting a possible acquisition of rival Chrysler on the back burner.
The dismal results, which were driven by plummeting sales amid a recession and credit crunch (BusinessWeek.com, 11/3/08), show just how precarious GM's financial position is. Without an injection of funds or a bridge loan from the government, GM's $16.2 billion in cash could shrink this year to the minimum the company needs to run the business, which analysts estimate to be between $10 billion and $12 billion.
And the picture could get even uglier. GM announced a series of cuts to save $5 billion in cash, but even with those moves the company could run short in the first half of next year. Standard & Poor's cut GM's credit rating (BusinessWeek.com, 11/7/08), to CCC+ from B- on Friday, citing the company's accelerated cash burn rate. "We expect cash outflows to quickly reduce the company's liquidity during the next few quarters, perhaps to levels that would force GM to consider a financial restructuring, even if it does not file for bankruptcy," said S&P in a statement.
If GM can't complete asset sales, raise money in the financial markets, or get government assistance, the company will be short next year. A financial collapse isn't out of the question.
GM's Top Priority
CEO G. Richard Wagoner Jr., said boosting liquidity is the company's top priority, so GM will at least temporarily drop talks for acquiring rival Chrysler from its owner, private equity firm Cerberus Capital Management. "At this time, it's important that we put our emphasis on liquidity," Wagoner said. "Carmakers can't get credit to complete restructuring actions, or develop advanced technology, or put new vehicles to market. Liquidity is a top priority for the company and the industry."
Sources inside GM say that the company also put Chrysler talks on the back burner because executives didn't want the potentially huge job losses the merger would require to stop some lawmakers from agreeing to a Detroit bailout.
Without any firm commitment from the federal government, GM is moving to save cash with what Wagoner called "self-help" measures. The company will save $5 billion in 2009 by cutting $2.5 billion from capital spending and reducing more salaried staff and benefits.
While GM is delaying several future models, President and COO Frederick A. "Fritz" Henderson said the Chevrolet Volt electric car and Chevy Cruze compact will remain on schedule to go on sale in 2010. GM had considered delaying the Cruze until 2011 (BusinessWeek.com, 10/23/08), sources said, but the new round of cash savings will enable the company to keep that vital car on track.
Detroit CEOs in Washington
GM's biggest problem remains its home market. Its car sales fell 19% in the quarter, and revenue dropped $4 billion, or 15%. The result was a $2.3 billion loss in North America. GM's European business lost $1 billion, while operations in Asia-Pacific broke even and the Latin American operations made $514 million.
GM's 49% stake in GMAC Financial Services (BusinessWeek.com, 11/5/08) (Cerberus owns the rest) added an additional pretax loss of $1.25 billion for the quarter.
The grim financial results—which were matched by a $3.3 billion loss from rival Ford Motor (F)—show just why Wagoner, Ford CEO Alan Mulally, and Chrysler CEO Robert Nardelli were in Washington on Nov. 6 talking to Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi (BusinessWeek.com, 11/7/08) and looking for government aid.
Massive Job Loss
Sources briefed on the meeting said that Detroit's three CEOs made the case that depressed auto sales and the credit crunch were pushing each company to the brink. They asked for $25 billion in bridge loans beyond the $25 billion credit line already approved by the Energy Dept. that is earmarked to retool factories that make more fuel-efficient cars. Since that money has specific uses—and since it isn't yet available—the U.S. carmakers want another assistance package that will see them through the tough times. And they asked that the help be delivered fast. The CEOs made the case that there would be massive job loss if one of them goes into bankruptcy and that the current loan package from the Energy Dept. simply won't be enough.
At the same meeting, United Auto Workers President Ron Gettelfinger asked for financing to make sure that a health-care trust set up for union retirees has enough cash to get started. Last year the UAW and Big Three automakers agreed to a deal that sets up a $75 billion Voluntary Employee Benefits Assn. (VEBA) trust that the union would take over to pay medical benefits to retirees and workers. The companies have to put in cash, but in their current condition they may not be fully able to seed the fund when it is scheduled to go into effect in 2010.
Reid and Pelosi were open to helping, but they didn't offer a specific aid package. Detroit lobbyists have been pushing for President-elect Barack Obama—who on Friday met with his economic advisers—to provide a loan package or some kind of assistance plan like the one the Bush Administration has for the nation's financial institutions. They even want Obama to urge the Bush Administration to do it before the new President takes office in January. If the Administration doesn't agree to it, Detroit will have to wait for Congress to take action in the lame duck session that starts on Nov. 17. "What would be helpful," says one Detroit lobbyist, "is having that signal sent before Obama comes into office."
Cheap Used Cars
So far, Treasury Secretary Hank Paulsen has rebuffed Detroit's requests. Executives at GM and Ford, who requested anonymity, say the Administration doesn't want to get on the slippery slope of helping one industry only to see many more companies line up for help.
Looking ahead, there are only more problems looming for Detroit. Mannheim Consulting, the analytical arm of used-car auction house Mannheim Auctions, said used-car prices took their steepest decline in 14 years last month. J.P. Morgan analyst Himanshu Patel said in a research note that lower used-car values could force more writedowns for the carmakers. If used-car values drop, auto makers can lose money when they take cars off lease.
GM's Henderson also has a dire forecast for auto sales. He said on a call with media and analysts that GM forecasts sales of 11.7 million vehicles next year and just 12.7 million in 2010. That's down from a pace of 13.8 million so far this year and 16.2 million last year. Said Henderson: "We don't understand the timing of the recovery."
That means GM, Chrysler, and Ford will almost certainly need government help to stay out of bankruptcy. And President-elect Obama will have to move to help them.