General Motors Death Watch 87: Dead Beat

Robert Farago
by Robert Farago

A few days after GM's vice president of vehicle sales, service and marketing assured auto industry analysts that his employer will maintain incentive-free “value pricing," General Motors announced two grand cash back on the 2007 Chevrolet Tahoe, Avalanche and Suburban and the GMC Yukon, Yukon XL and Denali. To be fair, nobody took LaNeve’s price promise seriously. By now, everyone knows GM’s new(ish) SUV’s are a drug on the market, and it ain’t Viagra. There’s only way to move the metal: lower the price. Either that or stop making the damn things.

Last Friday (always Friday), GM CEO Rick Wagoner announced that The General will curtail production of its GMT-900 based SUV’s. Rabid Rick tried to minimize the damage by asserting that GM was going to halt “some overtime” on SUV assembly lines and introduce “other products” into the production mix— as if to say demand for GM’s gas guzzlers was still hot, just not sizzling, and besides, we can make some other stuff instead.

Yeah right. At the end of July, in an industry where a 60-day supply is an acceptable maximum, GM dealers were stuffed to the gills with Tahoes (82 days), Yukons (89 days) and Chevrolet Suburbans (75 days). Although the figures are not far off last year's, these are GM's "new" trucks. August is going to be a bitch.

Meanwhile, Rabid Rick proclaimed that GM's share of the full-size SUV market has “boomed.” According to Wagoner, GM now “owns” 50 to 75 percent of various segments within the SUV genre— which is a bit like saying you’ve scored the best cabins on the Titanic after it hit the iceberg. The executive’s statement was a remarkable piece of spin, but it pales in comparison to GM’s creative accounting. Lest we forget, Rabid Rick ascended to his throne as GM Chief Financial Officer. Here’s a bit of what he’s learned…

Yesterday, The General’s GMAC finance unit signed a three-year, $10b funding facility with a Citigroup subsidiary. Four billion dollars of the money falls into a brand new category for GMAC: “unrated notes”. Unrated notes are papers representing loans that are so far outside traditional credit parameters that the vast majority oif insitutional investors are literally prohibited from buying them.

In other words, GM’s “Zero Percent for Deadbeats” summer blowout left GMAC with billions of dollars of risky loans. No surprise then that GM's finance arm reported that the unrated notes are backed by assets “not typically securitized by GMAC.” OK, here's the "creative" part…

Because the risk is so high, there's a gap between the money GMAC lent its less-than-perfect customers and the amount of money Citigroup paid for the loans. As part of the deal, GM has agreed to cover the shortfall (i.e. securitize the assets). It’s all a bit confusing (by design), but here’s the bottom line: GMAC carries little or no risk for the bad loans. GM buries a “charge” in its sales costs to cover the money paid to GMAC for the dicey loans.

The shell game maintains the illusion of higher average transaction prices, hides huge discounts/rebates and moves vehicles off the lot. Given that GM generates about $28b in North American sales per quarter, $4b in bad debt equals about 15% of sales (assuming 100% financing). Since most of this paper was written in 60 days, as much as 40% of GM's recent sales surge may be directly attributable to bad loans. Put that in your quarterly report and smoke it.

Just like last year’s “Fire Sale for All” program, the “Zero Percent for Deadbeats” program will eventually bite GM in the ass. Can you imagine what these vehicles will be worth when (not if) they’re repossessed? At the risk of sounding, um, deadbeatist, people with sub-basement level credit scores tend to smoke, spill beer, puke, rip up interiors, ding ‘em good and never fix a thing. And speaking of repairs…

In the second financial quarter, GM downgraded its warranty expenses per vehicle to $325 (compared to $523 for the same quarter in ’05). GM’s improving reliability record is admirable, but it doesn’t justify that kind of drop. The revised figure added $433 million (the equivalent of $0.67 a share) to GM’s second quarter “profits.” Clearly, GM is ducking and diving, window dressing its earnings to mask the company’s true performance, or lack thereof.

The truth is things are not going well at RenCen. While GM has finalized its new credit line of $4.5b (on onerous terms), the company still withdrew an additional $2b from its VEBA on July thirty-first to cover health care reimbursement. GM’s continual need to tap into the VEBA account suggests a cash shortage.

Now that the GMAC sale has been postponed until next year, the need for operating funds could well become critical. While the risk of a GM default may not be imminent, a strike at bankrupt auto parts maker Delphi would be the tipping point. In the event of a work stoppage, GM’s credit line would be reduced by a billion dollars.

Industry watchers still say it’ll never happen. Meanwhile, negotiations at Delphi are stalled and the most recent final deadline arrives in two days. If Delphi goes down, GM goes down. If it doesn’t, the company's descent into bankruptcy will merely be postponed.

Robert Farago
Robert Farago

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  • Glenn Glenn on Aug 21, 2006

    This Chinese market is all fine and good except for a couple of flys in the soup. GMs Chinese operations (as other non-Chinese companies) is only a 50/50 joint venture (in GMs case, with Shanghai aka SAIC, which also has a 50/50 JV with Volkswagen, and bought rights to the Rover designs before Rover imploded, also SAIC owns a portion of "GMDaewoo" and 49% of Ssangyong in South Korea). So, how "dedicated" is SAIC towards the GM JV? They are planning on building cars in COMPETITION with GM and VW for EXPORT soon. The other "catch" is that if GM thinks the 50% owned JV in China is going to carry the rest of their worldwide automotive operations when North American operations is sinking, sinking, sinking - they had better go back to Econ 101. Ain'tgonnahappen dot com. In case everyone's forgotten, the People's Republic of China is a communist state run by a few, and they can change anything on a whim. Like nationalize auto companies, or prevent profits from leaving from JVs, or raise interest rates (they just did that) to slow down the economy. Whatever. The GM guys and the rest of the western JV part-owners had better figure out that they can't simply control everything down at the Mason lodge any more. As in, the tiller isn't in their hands. So, they can join the rest of us, who've never had a tiller in our hands, controlling billions of dollars and millions of lives.

  • Chanman Chanman on Aug 23, 2006

    The China market in aggregate is still tiny, and is seeing even higher levels of competition. VW is the established player, and there was a boom in local manufacturing. Add to this FDI in factories (Buick, Toyota - Corolla and Camry are both now built in-country in China), and you come up with... a massive case of oversupply. The Chinese auto market, despite growing dramatically, is still growing slower than production capability - prepare for a winnowing ahead.

  • Dartdude Having the queen of nothing as the head of Dodge is a recipe for disaster. She hasn't done anything with Chrysler for 4 years, May as well fold up Chrysler and Dodge.
  • Pau65792686 I think there is a need for more sedans. Some people would rather drive a car over SUV’s or CUV’s. If Honda and Toyota can do it why not American brands. We need more affordable sedans.
  • Tassos Obsolete relic is NOT a used car.It might have attracted some buyers in ITS DAY, 1985, 40 years ago, but NOT today, unless you are a damned fool.
  • Stan Reither Jr. Part throttle efficiency was mentioned earlier in a postThis type of reciprocating engine opens the door to achieve(slightly) variable stroke which would provide variable mechanical compression ratio adjustments for high vacuum (light load) or boost(power) conditions IMO
  • Joe65688619 Keep in mind some of these suppliers are not just supplying parts, but assembled components (easy example is transmissions). But there are far more, and the more they are electronically connected and integrated with rest of the platform the more complex to design, engineer, and manufacture. Most contract manufacturers don't make a lot of money in the design and engineering space because their customers to that. Commodity components can be sourced anywhere, but there are only a handful of contract manufacturers (usually diversified companies that build all kinds of stuff for other brands) can engineer and build the more complex components, especially with electronics. Every single new car I've purchased in the last few years has had some sort of electronic component issue: Infinti (battery drain caused by software bug and poorly grounded wires), Acura (radio hiss, pops, burps, dash and infotainment screens occasionally throw errors and the ignition must be killed to reboot them, voice nav, whether using the car's system or CarPlay can't seem to make up its mind as to which speakers to use and how loud, even using the same app on the same trip - I almost jumped in my seat once), GMC drivetrain EMF causing a whine in the speakers that even when "off" that phased with engine RPM), Nissan (didn't have issues until 120K miles, but occassionally blew fuses for interior components - likely not a manufacturing defect other than a short developed somewhere, but on a high-mileage car that was mechanically sound was too expensive to fix (a lot of trial and error and tracing connections = labor costs). What I suspect will happen is that only the largest commodity suppliers that can really leverage their supply chain will remain, and for the more complex components (think bumper assemblies or the electronics for them supporting all kinds of sensors) will likley consolidate to a handful of manufacturers who may eventually specialize in what they produce. This is part of the reason why seemingly minor crashes cost so much - an auto brand does nst have the parts on hand to replace an integrated sensor , nor the expertice as they never built them, but bought them). And their suppliers, in attempt to cut costs, build them in way that is cheap to manufacture (not necessarily poorly bulit) but difficult to replace without swapping entire assemblies or units).I've love to see an article on repair costs and how those are impacting insurance rates. You almost need gap insurance now because of how quickly cars depreciate yet remain expensive to fix (orders more to originally build, in some cases). No way I would buy a CyberTruck - don't want one, but if I did, this would stop me. And it's not just EVs.
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