General Motors Death Watch 106: GM Unplugged

Last spring, reporters forced GM CEO Rabid Rick Wagoner to confront his company’s demons. At the opening of a Russian assembly plant, in the midst of US plant closures, sell-offs and buyouts; scribes raised the unholy specter of Toyota’s usurpation of GM’s “World’s Largest Automaker” crown. Wagoner told the assembled throng that GM would “like to stay number one” but it wasn’t the company’s "top priority.” New Year, new tune: "I like being number one,” Wagoner told Detroit auto show survivors. “I think our people take pride in it."

So Rick likes being number one. God knows he’s good at it; hanging onto power despite losing billions of dollars and overseeing a precipitous decline in the automaker's market share. And it's reassuring to hear that he “thinks” his people take pride in GM’s mantle (Vince Lombardi’s got nothing on Rick).

But RR's optimism couldn't counteract the bad news at yesterday’s automotive analyst hand-holding session. The beancounters had counted beans and concluded that the General's cash flow will remain negative this year– despite stripping out billions of dollars in fixed costs and plans to jettison sell even more of their remaining assets (e.g. $265m for GM's Arizona proving grounds).

Chief Financial Officer Fritz Henderson attributed some of the company’s predicted cash burn to a $1b increase in capital spending. The extra cash will pay for ongoing transmission upgrades (from four to six-speeds) and foreign expansion.

When pressed on the effect of this increased outlay on the company’s liquidity, Henderson said the company could take the hit, but admitted that GM’s cash flow was 'not anywhere near an adequate position’ (which is a bit like saying a person who’s lost is not as well-oriented as they could be). Equally ominously, Henderson spoke of “serious financial pressure” throughout ’07.

After this downbeat conclave, Rabid Rick launched yet another charm offensive. Schmoozing with Fortune Senior Editor Alex Taylor III, Rick revealed the home team’s latest defense: stop nickel and diming us! “People ask when is the business profitable and our objectives have to be much bigger than that. It is not an issue of can you make a nickel – that doesn't do anything for anybody. We need to get good profit and then it is very important that we generate good cash flow.” So now we know: making a nickel isn't much better than losing $10.6b.

Meanwhile, GM’s product mix continues its troubled evolution. While all eyes were on the plug-in Chevrolet Volt concept car, The Next Big Thing (Malibaura?) and the blingier Cadillac CTS, Henderson confirmed our suspicions that the the forthcoming US-spec Astra won't earn GM a single one of those not-so-precious nickels.

An unfavorable dollar – Euro exchange rate and European labor and transportation costs preclude the possibility of profit. Apparently, the Astra is merely a "bridge" product for Saturn, a temporary replacement for the Ion designed to "prove" Saturn’s new Euro-style handling/performance gestalt. Huh.

At the same time, Henderson said that GM’s recent sale of controlling interest in its GMAC finance unit was critical to lowering the subvention cost to GM. Translation: GM will probably use aggressive leasing tactics in the future– especially if it can boost residuals through lower rental fleet sales.

Of all its downsizing moves, the reduction in GM’s fleet sales is, perhaps, the most telling. It’s a sure sign that GM is fully committed to becoming a vastly smaller enterprise than it was at the beginning of Wagoner’s tenure. It’s a tacit admission that the company can no longer rely on sheer volume to make its crust.

In fact, it's increasingly clear that GM has a new, Delphinian survival strategy: stabilize the US market (at whatever percentage) and expand abroad. Even as it stands, GM sells more cars abroad than it does in the United States. Buick is dead here, thriving in China. GM is tightening its belt stateside, preparing to bid for Malaysia's Proton.

At this point, all Rabid Rick wants to do is stop the arterial spray on his home turf. That’s why he was so sanguine about Toyota’s rise back in June. He was breaking ground on the company’s best bet for survival: Russia, India and China.

Rick’s “bigger” vision could work– if GM has enough time. While GM may make some progress towards a healthier revenue stream in '07 with a better product mix and reduced incentives, the real gains will continue to be made on the cost side. And that’s just not good enough. GM’s weak balance sheet makes it highly vulnerable to setbacks and shocks, which are on their way.