Is it any wonder GM announced another deadbeat deal and cash incentives the day after they reported their long-delayed fourth quarter and year end financial results? Whatever else you can say about GM, you can’t fault their news management skills. If the automaker had revealed the package before the accounts were released, the discounting would have [rightly] be seen as a sign of desperation. Coming hard on the heels of a fourth quarter profit and a reduced year-on-year financial loss, the sale seems part of a successful turnaround strategy. Only it isn’t.
March madness: zero percent financing for up to 36 months and reduced-rate financing for up to 72 months, plus $1k in “customer cash.” The “Spring Sales Event” (for Chevrolet and Saturn) and “Upgrade Event” (for Buick, Pontiac and GMC) excludes Hummer, Caddy and Saab. More importantly, it includes all GM’s GMT900 SUV’s and pickups. In other words, the marketplace has ruled that GM’s Hail Mary pass is unintentional grounding.
On the macro level, the financial experts are beginning to lose faith in GM’s game plan. "For the first time in a long time, I am questioning their strategy," BNP Paribas analyst Brad Rubin told The Detroit Free Press. "The results aren't that great considering everything. It still isn't enough."
True dat. GM has cut its costs to the bone. They’ve sliced an astonishing $6.8b from their expenses. They’ve also butchered their GMAC cash cow (for a paltry $5b initial payout) and sold off everything that isn’t nailed down, including their Arizona proving grounds. The company’s launched a slew of new products. And they’re still losing money in North America.
Forget smoke and mirrors accounting: “special charges” and “net profit.” Don't forget: (especially?) with its former CFO at the helm, General Motors filed its SEC paperwork si x weeks late AND restated its accounts all the way back to January 2002 AND admits that its internal controls on financial reporting are "currently ineffective.” So look at the cash flow.
Scanning backwards, GM’s burned through $3.8b in cash in 2006 and $8.2b in 2005. Scanning forwards, GM CFO Fritz Henderson said his employer would experience “negative cash flow” for the rest of 2007. Looking backwards, GM’s “first quarterly profit since 2004” masks the fact that the North American market didn’t even break even in the fourth quarter, and lost $779m for 2006. Looking forward, the company has, um, shot its wad.
Despite the arrival of the Tahoe, Yukon, Aura, Acadia, Outlook, Silverado and Sierra, GM NA’s fourth quarter revenues fell by $1.2b, while market share slipped to 23.2 percent. U.S. sales tumbled six percent through February ‘07. GM’s CFO says the company has “some impressive models coming,” but does anyone really think that the Astra (imported at a loss), Vue, Malibu, G8, restyled CTS and hybrid versions of the Yukon and Tahoe will be enough to turn around GM’s U.S. fortunes?
“GM’s automotive results are anemic at what we still believe is the peak of the company’s product, pricing and cost reduction cycle,” Banc of America Securities analyst Ronald Tadross told his clients.
So the light at the end of the tunnel is the headlight of an oncoming train. Although it’s increasingly clear we can’t depend on GM for an accurate picture of its cash reserves, even if we accept their $26b figure, that hoard is under mounting pressure. Take off $10b for float just to keep the doors open. Remove $6b – $7.5b for the Delphi payoff. Peel off another bil for the GMAC blowback. And then watch the burn.
The truth is GM has depended on asset sales to maintain its liquidity over the last year or so. That gambit is just about played out. GM can off-load the rest of GMAC, sell its Allison Transmissions unit, and, um, that’s about it. While GM’s overseas operations are the only bright spot in an otherwise bleak picture, the General’s foreign profits can’t save the domestic troops from an ignominious defeat.
Simply put, GM’s North American operations are not sustainable. According to the mavens over at Fitch ratings, “Despite profitability on a reported basis, GM's margin levels remain insufficient for long-term viability given the economic and product cycles inherent in the industry.”
If the United Auto Workers agree to a massive roll-back in their pension and health care benefits this summer, if gas prices slide to the point where GM’s high margin pickup trucks and SUV’s experience an enormous sales surge, if the competition takes a major hit (safety, reliability, something), GM could, conceivably, live long enough to turn itself around. That’s just about as likely as it sounds.
Meanwhile, GM is rolling out its latest national sales campaign, sealing its reputation as the K-Mart of cars. It could be US car buyers’ last chance to pickup a bargain– before all Hell breaks loose.
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While the results were not great, or even good, they were better then last year. If they go at this pace a couple years from now they will be turned around, and I do think they have a couple years left in them, even at this pace.
No “Gem” bargains wanted (by myself). Lost confidence in them 8 years ago, won’t go back. Besides, who wants a car from a company which may well end up being out-of-business? Like in, the warrantee is already worthless enough (prior experience / straw the broke the camel’s back) so why would I buy a car with a better than even chance of not having ANY warrantee when the company finally does a stern-up sink-fast?
I wouldn’t.
Bye bye GM.
Jalopnik has a QOD with choice quotes from GM's 10-K filing today. Here are some of the best:
"A decline in consumer demand for our higher margin vehicles could result in diminished profitability."
"Shortages and increases in the price of fuel can result in diminished profitability due to shifts in consumer vehicle demand."
"The financial distress, bankruptcy, or insolvency of a major competitor could have significant adverse consequences for us."
"GM's significant investment in new technology may not result in successful vehicle applications."
"Further reduction of our credit ratings, or failure to restore our credit ratings to higher levels, could have a material adverse effect on our business."
"The federal government is currently investigating certain of our accounting practices. The final outcome of these investigations could require us to restate prior financial results."
"The federal government is currently investigating certain of our accounting practices. The final outcome of these investigations could require us to restate prior financial results."
"We are subject to significant risks of litigation."
“Continued failure to achieve profitability may cause some or all of our deferred tax assets to expire.”
The results were better, but sales were not better. Sales = Profit. They can not sell GMAC again, even if they really really wanted to.
Maybe the play is to “survive” until the UAW can be defeated. Maybe even hold on to some bad news until negotiations begin, then point the finger at the UAW. Its clear to me that GM can not sustain it production numbers and variety of vehicles. Its also clear GM can not currently afford to reduce production do to the current UAW agreement. Once the UAW has been neutered the plants will go away or go overseas, and serious, realistic decisions can be made about product lines. Besides, by the summer or early 2008 MY it will be clear which brands will be strong enough to complete and which must die. Readers of TTAC already know, of course, which ones will stick around…
Also isnt Toyota offering incentives on the “perfect” all new Tundra?
Glenn A, you think the company is going to go bye bye? Delphi is still around and Chrysler is too (no idea why.) They file for bankruptcy and nothing will get voided besides UAW contracts. I am sure they could void warranties but i dont think GM is even dumb enough to do that.
“given the economic and product cycles in this industry” That says a lot, because GM’s new product “avalanche” is going to start petering out soon.
I am increasingly convinced that domestic cars buyers have ADD; they’ll get excited about the next hot new product being marketed to death (literally), and a year or two later, those cars languish away.
That’s the real difference between the 2.5 and Hondota: people want Accords, Camry’s and Civics all the time.
Paul not according to a recent article on Autoweek. Honda dealers are upset because they have been advertising Accords to much and Civics arent selling well…everyone makes mistakes, some just do it more often then others.
GM is like the building that is being demolished with explosives and the charges have just blown out the ground level structure. For a moment in time the building is still there but soon the structures weight causes the implosion. If you break thru all the wordsmanship in the filing you will see that their gross profit and cost structure are at odds with each other. They don’t have enough margin to cover their enormous debt load much less all the many legacy costs they have. Without GMAC’s revenue this year will be worse. All the large public dealership groups are and have been taking measures to reduce inventorys and sell off poor performing dealers, almost all of them domestics. This does not bode well for GM to sell more vehicles. I know of many GM dealers for sale as many are unprofitable.
Robert, I have to give you credit – no matter how good the news out of GM, you can always find a way to make it sound rotten as hell, and the company is only minutes away from permanent collapse.
Let’s see, we’re on GM Deathwatch . . . . . 114? At this rate, GM is definitely going to die. Of old age.
Vetteman:
Video to accompany your entry:
http://www.youtube.com/watch?v=fiNrzmbdC1Q
time is everything. If all the ifs turn out positive they might make it…but how often doees that happen?
Obligatory disclaimer – yeah, i hope they make it.
The missing link here is to the economy itself, and the fact is that the economy has been very, very good for some 4+ years now (the dot-com debacle bottomed by late 2001), and yet somehow GM has avoided positive cash flow the entire time. What if the economy declines to mere W. European levels, the mid 1’s rather than staying in the plus 3’s quarter after quarter? Under the usual rules, the economy is pretty much at full employment right now. Needless to say if the economy actual jerks into negative for a couple of quarters expect to see Ricky in the Bahamas on pretty much a permanent basis. The key to cyclical companies is always that they are cyclical, but if a company can’t get its’ head above water when times are good, uh, uh, uh, oh, shucks.
Thanks Starlightmica not the collapse I see but a collapse none the less.
sykerocker:
Don't take my word for it.
Look at the numbers. Read the financial papers.
And just think what number Death Watch I'd be on if I'd begun chronicling this sad saga when it started in the 70's.
Glenn, I’m with ya 100%.
I will not buy a vehicle from a company whose PAST PERFORMANCE with me has been dismal.
sykerocker:
“…no matter how good the news out of GM…find a way make it sound rotten…”
Here’s a bit more of the truth:
Pre-tax profit per vehicle, 2005:
Chrysler: $223
Ford: -$590
GM: -$2,496
It’s 2007, so perhaps we can assume GM cost-cutting has brought that 2005 figure down. Even if the loss per vehicle sold is $100, how long can such GM sales “sucess” go on with no impact?
For the average person, if monthly debt exceeds monthly income, how long can they hang on? Truth is, for a while, but not forever.
Imagine my credit cards are maxed out; I’ve burned through the cash from my second mortage; and borrowed all I can from relatives; and have a second job. Yet my debit continues to exceed my income. Trouble ahead? You betchya.
Might take longer for that to happen to a global enterprise, and hey, they may pull it off. I’d be nice to see the domestics build vehicles that sell better than Honda, Toyota and others. Really.
If things continue as is, however, and the cash burn continues, the day of recconning will come.
starlightmica: I think that video shows GMs current state – the bottom’s blown out, but the top hasn’t quite toppled yet. Don’t worry, though, the troops are on it, another couple of swift kicks to the shins (poor quality, heavy reliance on trucks & rebates, pick a couple more), and down she’ll go.
Tones03:
“Paul not according to a recent article on Autoweek. Honda dealers are upset because they have been advertising Accords to much and Civics arent selling well…everyone makes mistakes, some just do it more often then others.”
Check the numbers yourself. Record sales in 2007 topping record sales in 2006 seems pretty good to me. And by what standards do you say Civics aren’t selling well? I’m happy to see them on the dealer lot (finally)! Just need the Fit to follow suit.
Link:
http://www.hondanews.com/categories/1090/releases/3901
Well some one is lieing…
http://www.autoweek.com/apps/pbcs.dll/article?AID=/20070315/FREE/70312012/1528
tones03: “Honda dealers are upset because they have been advertising Accords to much and Civics arent selling well…”
American dealers. Japaneese company.
Short-term verses long-term outlooks.
Typo: Should be “Japanese”
Edit button, please. :-)
I believe Autoweek intended to be truthful. But sales drops from scorching levels doesn’t warrant a crisis. More likely, with Honda building to consumer demand, the drop in sales is needed to boost production to meet CR-V demand (39.2% higher this year), which is also built at the same East Liberty, Ohio plant.
Looks like things are running well at Honda.
While I enjoy reading the GM Deathwatch series, I think most of them will be filler until Septmber 14th of this year. That’s when the current UAW contract expires.
It’s because of this that I disagree with Roberts assesment that “GM has cut its costs to the bone.” We will not know if the cuts have been to the bone until the contract is renegotiated.
At least Wagoner realises all is not well: “there is still a lot more work to do to achieve our goals of steady growth, solid profitability and positive cash flow generation.” Ofcourse recognizing a problem and being able to do something about it are two totally different things.
I laugh whenever I see someone question the validity of Deathwatch because there are over 100 editions of it.
A dam of water doesn’t begin to collapse two minutes before the flood. It starts with a small leak, that water slowly erodes into a bigger leak. Eventually, the hole causes a structural weakness. The damn, no longer able to support the water, then collapses.
The collapse of an empire appears gradual to the keen observer, if one knows when to start looking for its genesis.
GCI: I am not saying they are in trouble, just saying they arent as big of a hit as they used to be. As is with everything.
Good news out of GM? Don’t kid yourselves.
GM lost 2 Billion in 2006, and that includes all the “special items” and “one time costs”, as it should. GM is hoping they don’t have to restate anything further, with the SEC going through all of their accounting at the moment.
GM also ended the year with about 26 Billion cash on hand … this includes the cash they got for selling their GMAC chunk.
Cash burn will continue through 2007. GM’s GMT-900 SUVs have not been the savior that GM was convinced they would be. GM’s GMT-900 trucks aren’t likely to change that very much. If the trucks don’t save GM, and they likely won’t, GM is already putting it’s eggs into another basket … crossovers. Good old GM, always looking for the “next great thing” that will save them, but never looking within the company or within themselves to find the real problems.
Oh, and the “March Madness” incentives include the Cadillac Escalade in there.
Investors are finally starting to see clearly through all the smoke, and realize that GM’s great “turnaround” strategy is highly questionable.
When Toyota overtakes GM for the top spot in worldwide sales (very likely it will happen this year) it will be a huge blow to GM psychologically and will only further damage GM’s reputation.
The oncoming train at the end of the tunnel is blowing it’s horn, but it’s being heard by deaf ears.
RF: Despite profitability on a reported basis, GM’s margin levels remain insufficient for long-term viability
Vetteman: They don’t have enough margin to cover their enormous debt load much less all the many legacy costs they have.
These two statements are key. I dont know how GM will remain a viable enterprise producing automobiles. GM needs to get into a more profitable line of work…Say…Drug running.
RF: They’ve also butchered their GMAC cash cow
The GMAC cash cow was running out of milk anyway. GM is working hard to find a better cash cow replacement with zero risk and guaranteed milk-flow like all large and failing/politically-connected companies do… Taxpayer teat sucking.
Samir,
An empire, like a person, begins to die the moment it begins.
So with all this “good” news from The Ren Cen what is the likelihood of GM buying Chrysler or a piece thereof?
The answer is scary….
Yesterday was the good news day,today we are back to doom and gloom.
I still have faith that GM is on the comeback trail The scary thing is fuel price On full size pick ups and SUVs GM can blow the Toyota and Honda vehicles away.
I havn’t checked US fuel prices but in Canada its obscene roughly 4.30 in US funds a US gallon.I just put 50$ of gas in friggen Grand Am!
Unless your rich or you really need to drive a big honkin truck/suv you gotta be nuts to buy one
2 or 3 year old Yukons are selling at1/2 the original cost.
Now after reading the latest Death Watch and knowing full well that GM can’t beat HONOTA in a head to head small car battle,its time to be scared again
Cowbell, that is a very semantic sort of statement.
Though the analogy isn’t perfect, if I extend yours (a person), one who is healthy will live to an average age expectancy. One who has, say AIDS, will not.
Of course, in the early stages (HIV) AIDS doesn’t show much unless one knows where to look (lingering colds, lack of energy, etc.). In later stages, it begins to show with loss of weight, no immune system and physical weakness (kind of like how GM is losing assets!). Then in the terminal stage, everything goes to hell.
People only remember the terminal stage, but the evidence is there all along.
So yes, GM was beginning to die the day it was founded. Indeed, nothing lasts forever. Of course, its death was accelerated by its own “disease”, which we can all see quite plainly now.
It will take nothing short of a miracle for GM to pull out of this death dive it's in. When the shattered pieces of this corporation are recovered, I believe we will see a leaner, more focused GM emerge from the wreckage. Those pieces will be re-assembled in the CH11 hanger and GM will live to fly another day. Perhaps it will split up into individual car makers made up of the ones originally merged to form GM in the first place.
Either way, it will look a lot different from it's present form. I have read the DW series with interest and I think it really should be a suicide watch like the Chrysler one because the predicament that GM is in is largely one of it's own making. As RF has said, the genesis of this decline began in the 70's. GM is now at terminal velocity and now that most of the family silver has been sold well…..
The vultures will soon gather to pick the best bits. It's really sad because there is undoubted talent among the people in GM at all levels of the corporation and it's these people who will bear the brunt of the crash.
Regarding Accord/Civic sales: step back and look at their sales performance over the past 30 years. GM does not have ONE single model that has been continually on the market the past 30 years (except Corvette).
To be fair, the new GM crossovers and pickups are only now beginning to reach their full ship rates and inventory levels with the Buick Enclave still to arrive. The new incentives excluded the Outlook and Acadia for that reason. Pickups are already under duress from Tundra as well as huge discounts on the Ram and F150 so they were included in the sale. Rough road ahead to be sure.
No matter how they spin it selling off GMAC was the defining moment in GM's long decline. This to me was and is a very poor deal for GM but inevitable once their bond rating got to Junk status. They are moving further down the black hole with every decision they have to make. They are forced to make choices between bad and horrible in everyday operations.
Having worked for a GM dealer all my life and having a great deal of contact with the company thru the years the average person cannot imagine the anguish and sorrow for GM over selling GMAC. They were the crown jewel of a company that has been primarily a financial entity run by finance men(bean ciounters)
The ongoing accounting debacle is further evidence of disfunctionality at the highest level. Rick Wagoner was chief financial officer before being made ceo and this has happened on his watch. Not talked about very much is that now shareholder equity has gone negative.
One has to only look at all aspects of the business and you see deterioration in all things that matter. Negative cash flow. Selling off assets at fire sale prices. Consistent declining market share. Declining customer good will. Increased debt service expense as well as increasing debt levels. Exposure to GMAC subprime chargeoffs from rescap/ Di-tech.
I could go on and on there aren't many bright spots. As my daddy used to say if it weren't for bad luck they wouldn't have any luck at all. Alfred P Sloan must be spinning in his grave.
Glenn C,
The GM situation is, iam afraid, a small reflection of the US economy. If you believe that the USA economy has bottomed in 2001 you have either been living under a rock or are completly dillusonal. With more debt that all the other nations of the world put together the US-economy has not been healthy for the last 8 years… Somebody above was mentionning the demise of an empire, i am very saddened to tell you that that sounded more like the USA than GM!
Wow, Pessism really reigns around here today. Not disputing Robert’s analysis, and I agree that cashflow is the right metric.
Wagoner committed to taking $9B out of the cost structure, $6B of it in 2006. He got $6.8B out to date –ahead of schedule, which is a MAJOR achievement.
He clearly has further to go, but eliminating duplicate platform development teams in N.A. is another big step forward.
As far as incentives on the pickups go (from ALL manufacturers), I wouldn’t read in too much. This market follows the construction and housing markets, which are in the doldrums. Regardless of gas prices, roofers use pickups, so once that market is back, I’m sure pickups will follow.
Funny, Silverado becomes the best selling vehicle on the planet, and TTAC sees another sign GM is dying.
“Funny, Silverado becomes the best selling vehicle on the planet, and TTAC sees another sign GM is dying.”
Who says it’s the best selling vehicle on the *planet*? Last time I checked, that title belonged to the Corolla, when you look at worldwide sales.
Argh.
Anybody here play chess?
Seems like GM is in that awful position where you know like 10 moves out that you are going to lose, but you have to play it out.
fellswoop, interesting analogy, and it sure seems that way, although GM management seemingly refuses to accept the truth.
Most everybody has made good points and arguments above.
Mr. Farago’s logic and insights are well thought out – as usual.
However, as far as the GM Death Watch goes, at the end of the day all that really matters is whether GM survives or not.
If many years from now GM is still in business, then Mr. Farago’s reputation as a seer will be slightly diminished.
However, if GM officially goes bankrupt in the near/mid future, then Mr. Farago will be vindicated.
Personally, I hope GM pulls it off.
I can’t help but wonder what the impact of the current crisis will be on the company 3-4 years down the road (if they get there). The current product renaissance that’s underway (Saturn’s recent makeover, GMC Acadia, ‘08 Malibu and ‘08 CTS, Camaro) is encouraging, but the development of those vehicles started several years ago. What’s happening now? What corners are being cut? What R&D is being deferred? What can’t they afford? The long term outlook for GM remains very difficult indeed.
shabster, think of it this way. For GM to be competitive and profitable in the long-term future, they *need* to go to Ch. 11, so they can fundamentally and radically change the entire corporation.
If GM does not do this, then they risk going into Ch. 7.
Current Chevy 2007 offers for CA
$500-100 off Colorado
$1500 off Aveo, Cobalt, HHR, Impala
$1750 off Malibu
$2000 off Equinox, Avalanche,
$1000 off Silverado…
$3000 off suburban/tahoe
The Silverado I see as “No Big Whoop”, toyota is doing more on the tundra. But $2k on the avalanche? $3k on GMT900 SUVs?
And why did GM repeat the same @#$)*(@ crap with the Malibu. A “Silverado Classic” sale is a failed Silverado sale, but with $4k of discounting instead.
The shoe is dropping from the fuel side right now. This is curious because the new excuse for high gas prices is refinery capacity not middle east supplies. But it matters not one iota why someone needs $75.00 to fill his pickup or suv, it will kill the market. This 2007 fuel shock following so closely the last spike should put fear in anyones mind about buying a 12mpg anything.For gm there are two problems, one they make no money on small cars (the logical switch to product in times of high or limited fuel)the second problem is competitors like toyota can take a tundra (13mpg) hit and still make money on small cars, honda doesn’t even have anything bigger than a ridgeline truck (16mpg) and has always made money on smaller efficient products.
SS3, easy to say but when you know whats in the pipeline its very very promising, product looks great.
Boston Tea Party I hope you don’t invest in the stock based on GM having great product coming. I heard all the same hype back when the vega came out then the citation and the rest of the x cars arrived then the chevette and on and on. I have been to one too many GM dealer meeting where dealer concerns were dismissed with gotta have product is coming just be patient. Most of the smart dealers such as Carl Sewell ,Wrote the book customers for life, Penske ( Longo Toyota ) and many others long ago put the money they had made in their GM stores into buying import franchises. I know I sound pesimistic and I probably am but to get me to feel good about GM they have to produce a Hi volumn home run vehicle . They really have not done this in over twenty years.
Profit.Profit.Profit. It is not now well something sells, its about Profit.
Just think of the wonderful/optimistic news coverage GM would receive if they were in a more profitable line of work…Like illegal narcotics:
Amsterdam (Reuters) — GM posted a third quarter profit of $180B on revenues of $200B today due in large part to huge demand for the Cadillac Crack, Buick Qualude, Chevrolet Cocaine, and Saturn Pot. At the GM shareholders lovin-in fest at GM headquarters in Amsterdam, GM CEO had this to say about GM’s results “Duuuuude!!!”. When asked about future products, GM’s clear and out-spoken Product Director Bob Lutz stated “The high the fewer”. When asked about customer satisfaction, GM’s new Product Quality Czar, Kieth Richards said ” “. When asked to expand on Richards’s statement, Richard’s Personal Assistant/translater, Amsterdam-born, 63 lbs super-model Hagd Ojujt stated “Kieth said it all. Quite frankly, you asking me to expand on Kieth’s statement just makes me want to throw up”. When asked about accounting irregularities and a possible SEC investigation, GM’s CFO Cheech N. Chong stated “Restatement! We dont need no stinkin restatement”. GM shares rose 13% in after hours trading on news that the slow selling Hummer Heroin will recieve more power.
Fuel prices in California are now over $3.00 per gallon; the mortgage loan industry has hit the iceberg, GM is burning through its cash at a rapid pace, etc. etc. This is going to get much uglier for the Detroit boys.