By on July 15, 2010

After ending the first quarter of this year with $35.7b in cash and equivalents, GM was in the best position it’s enjoyed in decades. And yet, with an IPO prospectus looming, The General is seeking a $5b line of credit and trotting out EBITDAPRO as its in-house measure of financial success. Both of these tactics are hallmarks of companies that are doing poorly, and GM has already learned how problematic loading up on debt and sliced-and-diced financials can be. So why is The General inviting criticism from outlets like Edmunds Autoobserver, which characterizes GM’s push towards an IPO as the rebirth of old bad habits? The simple answer: “business execution.” In other words, GM may have a lot of cash, but it’s got nearly as many demands on its resources as well… and these cash drains hardly add up to a coherent strategy.

GM still has yet to announce its Q2 financial performance, but already it’s clear from anecdotal evidence that GM is spending a lot more money than it has in several years. Much of it is going to marketing, as GM sponsorships have re-emerged post-bankruptcy for everything from Public Broadcasting to the giveaway of Corvettes to baseball players and business leaders. With a new marketing boss, GM is also re-shuffling its ad agencies, and has been buying up ads for new products like the Buick Regal, as well as older products with sagging sales, like the Chevy Corvette. Add increases to R&D for a number of canceled powertrain programs ($42m of which had been written off as losses at the end of last year) and the development of a number of potentially expensive new products (more on this in a bit) and you’ve got a sure-fire recipe for rising costs.

Meanwhile, GM’s sales have remained relatively stagnant. “Core brands” were up nearly 32 percent in the first half of 2010, but overall GM is outperforming its H1 2009 performance in US-market sales by a mere 13.2 percent, as the economy falters mid-recovery. Against a backdrop of sharply-increasing costs in marketing and R&D, the underlying mechanics of GM’s business are a crunch that will eventually require either another cutback in long-delayed marketing or R&D spending, or a real turnaround in sales not driven by profit-sapping fleet sales.

And that’s just the background to GM’s real dilemmas. The General will need to spend about $6b on its Opel and Daewoo divisions in this year alone, a move that will cut its cash pile by at least a fifth. Since these divisions develop the platforms and products that have made GM competitive once again, The General can’t afford to not keep them open, and no government seems willing to step in and help out.

Meanwhile, The General needs to be saving cash for a rainy day as well: it will have to pay $5.9b in unfunded pension costs in 2013, and another $6.4b in 2014. That’s roughly $18b of GM’s $30b cash pile spoken for before a single new car is developed, not counting any operating losses accrued along the way.

And new car development is a must if The General’s turnaround is to stay rolling along. Powertrains are one area where GM is said to be spending big money, and a new generation of full-sized trucks and SUVs are also in the works. A whole new RWD platform, known as Alpha, is under development at Cadillac and is said to provide the underpinnings for Cadillac’s new 3-Series competitor (ATS) as well as the next-gen CTS and Camaro. Though the costs for these projects aren’t being released, it seems safe to assume that capital expenditures in Q2 and beyond should accelerate significantly from Q1′s $800m number simply on the strength of these investments.

And here’s where it gets interesting: with Chairman/CEO Ed Whitacre now running product planning, a RWD Cadillac flagship is coming back onto the table, backed internally by both Whitacre and GM NA boss Mark Reuss. Though a modified Zeta platform is under discussion for the range-topper, GM had previously declared the platform unfit for luxury car duty, and there are reports of a new RWD platform known as “Beta” under development at GM Shanghai. If a new platform is being developed, the cost could easily amount to another billion dollars (if not more), which begs the question: does GM need a full-blooded flagship? How this plan impacts the Epsilon II+ XTS “flagship” that is probably even further along in development isn’t clear; the XTS was supposed to be the cheap route to a Caddy flagship, but now it seems more likely to be canceled or become a hybrid-only model.

But while Whitacre dreams of a world-class RWD Cadillac (and purportedly fights for the Chinese-market RWD Buick Park Avenue to come stateside), yet another force is stirring beneath GM’s feet. With the election of Bob King, the United Auto Workers have taken a distinct turn towards the internationalist left, as the union struggles for relevance in the post-bailout environment. And with profits at Ford inspiring talk at the UAW of rolling back long-overdue concessions, any sign of consistent profits by GM by next year’s bargaining session will be seen as an excuse for King’s fired-up negotiators to put the squeeze on GM. Especially if the union is able to dump most of its VEBA account holdings of GM equity, it would have no compunction in once again bleeding the goose that lays golden eggs.

In short, GM’s expenditures are rising even as sales remain sluggish. After a solid five years of starving powertrain and platform development, GM conservatively faces $5b in annual capital expenditures, plus an additional $6b in annual expenditures for 2010, 2013 and 2014 to maintain its pension plan and overseas divisions. That accounts for The General’s $30b cash pile right there, before making the investments needed to fulfill Ed Whitacre’s desire to make Cadillac a world-class luxury brand, or accounting for demands made by a newly invigorated UAW led by Bob King’s firebrand vision. Either of these could add billions to GM’s survival bill, especially during the 2011-2012 respite from pension and overseas obligations.

And then there’s the final piece of the puzzle: what this all spells for the government’s 61 percent stake in GM. Because of political pressure to exit its unwanted investment as soon as possible, the Treasury’s priorities are last in the growing line for GM’s cash pile. This is hardly surprising given that the cash came from Treasury in the first place, but GM also can’t ignore the deleterious effects that a huge taxpayer bath would have on its image with consumers. GM doesn’t owe Treasury full payback out of a moral obligation, but because its potential customers are footing the bill for their turnaround. With King, Country and Cadillac all lining up for a piece of GM’s dwindling cash pile, someone is going to get left out in the cold.

So, what’s a bailed-out automaker to do? Holding a hard line on the union is crucial, as it’s the one component of this balancing act that can be taken for granted (on the other hand, British Leland). And as much as we disdain GM’s plan to saddle Cadillac with the mass-market platform-derived XTS flagship, there’s no guarantee that Whitacre’s cherished RWD flagship would be worth the $1b-$2b it would cost to develop. If anything, GM should prioritize taxpayer payback for the simple reason that its obligation to the taxpayer (rather than, say, the fact that the government controls its day-to-day decisions, which it doesn’t) is a significant factor in its sluggish sales relative to Ford.

But the fact that GM is pursuing a $5b line of credit and diving into an IPO indicates that GM is willing to take a hit on its initial valuation and let Treasury take the loss, rather than forgo a number of expensive new development programs. This will serve only to extend GM’s financial burden beyond the 2014 window for its pension obligations, further hurting its long-term investment value. And this debt also hurts its short-term value compared to Ford, because the Blue Oval’s overleveraged balance sheet is one of the only things that makes GM look good by comparison.

With King, Country and Cadillac all lining up for GM’s liquid assets, it’s too soon to abandon austerity measures in the RenCen. There are more than enough tough choices ahead for General Motors.

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25 Comments on “GM’s IPO: For King, Country, or Cadillac?...”


  • avatar
    NN

    Ed,

    if you’re not the most informed, in-depth, straightforward reporter on GM’s overall picture and financial situation, then I don’t know who is.

    When this IPO debuts, run for the hills. Those buying in will be the suckers holding the bag, allowing the UAW, the Treasury, and the executives to cash out, and leaving the shareholders with a company that still can’t pay it’s dues to international labor unions, and never will be able to.

    I sure hope GM is able to somehow get on with building good cars and trucks…

  • avatar

    well, nice, fine, and good…but the bottom line is that they still have no clue how to sell cars and are still doing many of the same things that bankrupted them.

  • avatar
    ajla

    I think the Alpha platform is a waste of money. GM isn’t going to dethrone the 3-series anymore than BMW is going to dethrone the Silverado. The money would be much better spent on a Northstar engine replacement.
    ______
    The Sigma and Zeta platforms both have lots of life left in them.

    The CTS needs to offer magneride and a V8 in non-Vseries trims. Switching it from Sigma won’t improve the car.

    Meanwhile, the problems with the Camaro stem from an unbelievably crummy interior, submarine visibility, and big weight. Unless GM absolutely can’t shave 250lbs off the current car, I see no problem with it staying Zeta.
    ________
    I do believe that the XTS will do damage to the Cadillac brand, and I hope it gets canceled. However, I also don’t know if now is the time to spend money developing a unique platform for just one car.

    The LWB Zeta probably can’t compete with the LS460 and S-class, but bringing over China’s SLS would provide a good brand faithful replacement for the STS/DTS. And, it would be a lot better than the Cadillac Lacrosse XTS.

    The LWB Zeta should be brought to the US, and given to either Buick (as the Park Avenue) or to Chevy (as the Caprice).

  • avatar
    educatordan

    Craig Ferguson would say; “Tu-si fruit-si!” This would be funny if it wasn’t our money.

    I think all those ideas are awesome but will they sell? And at what price/profit?

  • avatar
    geeber

    The new GM is starting to look and smell alot like the old GM…

  • avatar
    joe_thousandaire

    That’s one baseball player and one business leader as far as I know; don’t think thats gonna break GM’s bank. Otherwise good article though.

  • avatar
    GarbageMotorsCo.

    Hey mikey, still think GM is getting better? ;)

    http://www.thetruthaboutcars.com/gm-tops-june-incentive-spending/#comment-1641082

  • avatar
    philadlj

    A Beta Cadillac flagship could sell quite well, especially in China, and I love the idea of something returning the marque to excellence, but I also agree that now isn’t the time. GM isn’t even public yet and they’re already worrying about building competition for the BMW 7 Series and Mercedes S-Klasse? Just doesn’t seem right.

    Keeping their volume models competitive is far more important right now…Impala, Malibu, Cruze, Equinox, etc. GM has been notorious for unveiling a new model then never improving it over a five-plus year cycle. With Hyundai and especially Ford churning out new models and improvements at a rapid pace, that practice simply won’t fly any more.

  • avatar
    jpcavanaugh

    You did not mention the highest incentives in the industry right now. I would like to bet another $5 on Chrysler, please.

    • 0 avatar
      european

      i was thinking the same. well, chrysler got 1/2 of gm’s
      market-share (8-9% vs 18%), yet chrysler took only $11b while
      gm had taken $50b or so. makes me think chrysler is in much
      better shape.

  • avatar
    gslippy

    This gloomy picture is why the Volt program should have been abandoned at the time of bankruptcy. GM already acknowledges it to be a money-loser, and you’d need Prius-like volumes to ever dream of profitability.

    Its low volume will have negligible benefit for the planet, so its only reason to exist is for political appeasement and to serve as bait for the bailout votes in Congress.

    GM’s salvation must come through Chevrolet, which comprises 75% of GM sales volume. If not the Volt or the Cruze (yawn, and it only replaces Cobalt sales), then what, another CUV clone? I don’t think so. Malibu sales aren’t going to jump in a way to help turn the tide.

    • 0 avatar
      KixStart

      Qslippy: “Its (Volt) low volume will have negligible benefit for the planet, so its only reason to exist is for political appeasement and to serve as bait for the bailout votes in Congress.”

      Not necessarily… GM has proven capable of plenty of bad decisions without Congressional help.

      I think a more likely reason is Lutz’ unjustified faith in the halo effect. I think he still believes the Prius is nothing more than a halo car for Toyota, in spite of its regular, profitable 10K++/month US volume – and more worldwide.

  • avatar
    MikeAR

    Same old, same old. Even when they do something right it’s wrong. The new Regal is by all standards a good car but when I saw the tv ad for it, it just looks terrible, bland indistinguishable from two dozen or so other cars on the road and just dull. They haven’t learned anything from the last two years and they have no leadership to make changes. Whitacre is a clown who gamed the system at SWB/ATT to become the biggest player despite inferior service. At GM he needs superior product top to bottom, he has no idea about how to get there from here.

  • avatar
    Lokki

    Saddly I agree with all the previous posters.

    The IPO isn’t being done because the company or the markets are ready for it… the timing is being politically determined to allow the politicians a “success story”.

    Any profit will force Mr. King to try and get some of it for his minions/masters. The twin cries of “We’ve suffered enough”, and “The guys at Ford are doing it” will force his hand.

    And Cadillac doesn’t have the status yet to support a flagship. Hyundai’s Genesis is selling OK but even its level of sales wouldn’t justify a billion dollar investment by GM right now.

  • avatar
    KixStart

    Ed N wrote, “But the fact that GM is pursuing a $5b line of credit and diving into an IPO indicates that GM is willing to take a hit on its initial valuation and let Treasury take the loss, rather than forgo a number of expensive new development programs.”

    I think you’re right but surely Treasury has some people on the board to look out for Treasury”s interests? Of course, job creation is very, very low, so perhaps the powers that be in the Administration are also willing to take the hit to forego additional unemployment. It might be the best plan.

    As for what they’re doing with the money, I’m sure marketing, advertising and sponsorships pale in comparison with platform development. And you can turn off the tap on the marketing expenses but derailing a platform decision is going to be expensive.

    I also gave some passing thought to the $Billion to develop a new platform. I wonder how much money would be saved by developing it in China? Not that such a decision is congruent with any Administration goals of saving/creating jobs but it might be a defensible business decision, if they think the Chinese are up to it.

  • avatar
    John Horner

    “Both of these tactics are hallmarks of companies that are doing poorly …. ”

    Uh, no. Setting up a $5B line of credit is not at all a hallmark of a company which is doing poorly. Quite to the contrary, putting in place business lines of credit is part of what functioning large companies do as a matter of course.

    I didn’t get through most of the rest of the story because the opening thesis is fallacious. But, I did read the trashing of GM’s restarting development of a Cadillac flagship.

    Since when does an enthusiast site bag on GM for getting serious about developing a RWD flagship for the Cadillac brand? Would you rather GM announced that it considered the present Cadillac line up good enough, and all we can afford? I’m pretty sure that would be “wrong” as well.

    Perhaps wearing glasses heavily tinted with the idea that GM cannot possibly be doing anything right because the government is involved might be getting in the way of seeing clearly.

    • 0 avatar
      dhathewa

      I’d like to see a new Fleetwood, myself. But what if developing it re-bankrupts GM?

    • 0 avatar

      Perhaps wearing glasses heavily tinted with the idea that GM cannot possibly be doing anything right because the government is involved might be getting in the way of seeing clearly.
      This is exactly the response I’d expect from someone who didn’t actually read the piece.
      Since when does an enthusiast site bag on GM for getting serious about developing a RWD flagship for the Cadillac brand? Would you rather GM announced that it considered the present Cadillac line up good enough, and all we can afford? I’m pretty sure that would be “wrong” as well.
      Since when is pointing out that everything competes for resources “bagging on it”? Do I think Cadillac needs a “real” flagship to compete with the best in the luxury game? Yes. Can GM justify the (realistically) $2b needed to really do it right? Not when the UAW is acting as feisty as it is, or when the Impala won’t be replaced till 2014, or when pensions and faltering overseas divisions are sucking down the amounts of cash that they need.
      GM’s doing a good job with a lot of its bread-and-butter product right now, but it needs to save Opel and Daewoo and keep R&D spending on volume vehicles flowing. A “real” Cadillac flagship is a distraction, unless spending money on it keeps GM from being profitable, which would keep the union off its back, but at the expense of its stock price (and therefore, the government’s stake).
      No matter what strategy you recommend, there’s downsides… it doesn’t take “heavily-tinted glasses” to see that.

  • avatar
    mikey

    “Not when the UAW is acting as feisty as it is” Keyword would be “acting” Mr King is, and will continue to make a lot of noise. The fact of the matter is ,that the conditions that led to union concessions are still there. Mr King is painfully aware of that. Now
    he has to convey the facts to the rank and file. As a newly minted president, now is not the time or the place to voice such an opinion.

    The slippery slope of two tiered wages,coupled with the VEBA issues,not the least of wich, the fact that VEBA is funded with money that does not exsist. All of this is waiting to bite Mr King on his collective butt real soon.

    Of all the problems GM has to deal with right now,the UAW/CAW ain’t one of them IMHO.

  • avatar
    Lokki

    Mikey, I hope you’re right that Mr. King will ‘talk loudly and carry a small stick’ for a while.

    GM has some good product now in the LaCrosse and the Camaro and a friend of mine who is a GM Master Mechanic at a large dealership here tells me that GM is taking any quality problems very very seriously… any problems that the mechanics find in the new cars is being hunted vigorously – with input from the mechanics. He says that this is new for GM, and he views it as a good sign.

    If the UAW/CAW were to rock the boat right now it would be bad.

    Still, since you know that side of the company better than anybody here…. so I’ll believe you over the others here on that subject….

  • avatar
    ASISEEIT

    In my 30+ years with G.M. they have always been “Reactive” not “Proactive” to any situation. They’re either suicidal or addicted to reality/mind altering drugs! I tried to write and share opinions and observations from the inside with management as well as my union. This was not to create hatred or trouble but out of frustration with their “Brain Dead Apathy”. What this did do is create enemies from both the union and management!! Does “You can lead a horse to water but you can’t make him drink” ring a bell? I decided to take an early retirement and draw my pension until the fund is empty! That is exactly what’s going to happen. One last observation is most of the people who have recently left G.M. were the “Best” of the workforce whether it be management or labor!!!

  • avatar
    european

    i dont think the problem is in gm’s line-up, because they do
    have competitive product. and they do have the sales.

    i think it has more to do with gm having 2 seperate r&d centers (daewoo & opel). both develope small, compact and midsized platforms, so they overlap. basically, gm has double the costs. they should somehow converge it all.

    btw, a new cadillac flagship would be nice. make the xts.

  • avatar
    oboylepr

    GM’s turnaround is an illusion. The pressure is on Nobama to land on the aircraft carrier and announce ‘mission accomplished’. The rush to IPO is part of this. The attempted murder of Toyota is another. When the government divests itself of the millstone around it’s neck known as GM and Chrysler the UAW will be told, “you got your payback” now sink or swim. With all the NHTSA and the Whitehouse have done for the union, King has to keep the momentum up and not let the flames go out. Hence the farcical picketing of Toyota dealers complete with rodents and bad english. He’s wasting his time and union resources but he is a politician of the same ilk as Obama, all show and no go and as long as everyone thinks he is doing a great job he will be left alone. Even after all the ‘restructuring’ and bailout cash, GM is still not sufficiently changed to be competitive and as Buickman was said, they still do not know how to sell cars. They say that old habits die hard and some don’t die at all until the body they inhabit itself dies. Such is the fate of GM. This bailout has just postoned the inevitable. The next time it will be straight to CH 7, do not pass ‘go’ and do not collect bailout bucks!


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