General Motors Death Watch 73: Running on Empty

Ray Wert
by Ray Wert
general motors death watch 73 running on empty

As any good debt counselor will tell you, paying down your debt isn't enough. You need enough cash on hand to deal with ongoing expenses and extra funds for any major bills. Otherwise, you end-up scrambling to borrow more money and digging yourself into a deeper hole– until you can't. The same rules apply to General Motors. They need to pay their workers, dealers and suppliers on a regular basis, and they need extra money for large, one-time expenses (e.g. worker buyouts). Although GM claims to have enough money to stay the course, the truth is they are only one "exceptional expense" away from Chapter 11.

According to GM's recent quarterly statement, The General has $17.4b in cash, $1.4b in marketable securities and useable assets of $2.8b in their VEBA (Voluntary Employee Beneficiary Association) trust. That works out to $21.6 billion– an increase of around $1.2b from the prior quarter. The financial markets were heartened by the resulting black ink– even though the increase was more a reflection of accounting practices than a healthy increase in income. Despite this optimism, GM's situation is just as precarious as it was throughout '05; the Delphi dilemma remains dangerously unresolved.

The General's bean counters estimate that Delphi's Chapter 11 filing leaves GM with a contingent liability (a.k.a. a bill) between $5.5b and $12b. That's a pretty big range. It's also a curiously precise amount; why $5.5b? Why not $6b? The number reflects the amount of money GM has set aside to deal with their Delphi exposure. Why didn't GM set aside more money? According to the company's quarterly statement, "It is unlikely that a Chapter 11 process will result in both a termination of Delphi's pension plan and complete elimination of its OPEB (post-retirement health care and life insurance) plans."

There are two other possible reasons. First, GM doesn't want to provide an opening for Delphi and the bankruptcy court to raid GM's corporate larder. Second, they ain't got the dough. So, if GM has to shell out at an additional $6.5b to cover its Delphi liabilities, where will they get the money? According to GM, "If any [payments] are required under the benefit guarantees, GM would expect to make such payments from ongoing operating cash flow and financings…" In other words, GM asks us to believe it could finance any and all additional Delphi-related expenses above $200m per year out of its operating cash flow.

Discounting GM's health-care cost shift, GM earned $200m-plus this last quarter. Do the math: profit gone. If the worst case scenario occurs, if there's a mass retirement or layoff of pensioned Delphi workers, GM would be on the hook for far more than their estimate of $224m per year (the amount Delphi paid-out in fiscal year 2004). The $224m figure doesn't take into account the expenses GM would incur from the release of an additional 30,000 laid-off Delphi employees– each with benefits and pension liabilities. That would cost The General an estimated $2.1b per year.

Still, that leaves GM $21b and change to work with, right? Subtract $8b in operating expenses for the revolving fund (so they can continue to build cars), deduct $5.5 to $10b for the Delphi thing, remove $2b to $3b for debt payments (which look to be spiraling upwards after the Fed Reserve Board announced the up-tick in rates this week), take away $3b for the early retirements package, leave off the $3b – $4b in overseas funds (which GM can't bring over without tax repercussions) and you've got just enough money to pay for… well… nothing.

GM may soon find itself with zero cash reserves. In fact, there are some on this site who point to the recent sale of assets and change in GM's accounts payable policy (to 55 days) and suggest that the world's largest automaker is already running on fumes. In any case, there are plenty of ways GM could find itself with a big bill it simply can't afford: a sudden pull-out by the banks guaranteeing rental car sales, a Delphi strike, suppliers demanding cash up front, a continuing drop in SUV sales due to rising gas prices and more.

A careful reading of GM's quarterly report reveals that GM isn't sure that it can get any more money under its existing line of credit (which is currently being re-written as a secured line). If GM needs more cash… there might not be any. Meanwhile, GM can't afford to pay-off and shed excess dealers. It can't afford to invest heavily in new, domestically produced vehicles. It can't market its vehicles properly. If GM's income doesn't rise, it grows steadily, inevitably weaker. At some point, perhaps soon, one unforeseen bill may make Chapter 11 General Motors' best– if not only– option.

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  • Tassos If you only changed your series to the CORRECT "Possibly Collectible, NOT Daily Driver, NOT Used car of the day", it would sound much more accurate AND TRUTHFUL.Now who would collect THIS heap of trash for whatever misguided reason, nostalgia for a much worse automotive era or whatever, is another question.
  • ToolGuy Price dropped $500 overnight. (Wait 10 more days and you might get it for free?)
  • Slavuta Must be all planned. Increase price of cars, urbanize, 15 minutes cities. Be poor, eat bugs
  • Sid SB Not seen a Core without the performance pack yet. Prefer the more understated look of the Core vs the Circuit, but both are great fun to drive.
  • El scotto Tesla has one team making EV's because that is all Tesla does. Farley -rolls eyes- decided to split Ford into two huge warring factions: ICE vs EV. Hey Jimbo, it says "FORD" on the buildings.Lord only knows what GM did internally because it's GM. I'm betting it's like Ford pitting ICE vs EVs. With GM being GM every existing division will be divided.Stellantis will keep building Challengers and Rams. Someday they may figure out that Jeep is the fugu fish of the automotive sushi world and unload to some Chinese. EV's? no, not really.If this site was The Truth About HVAC (TTAH) some on here would tell us that central heating and air causes unknown illnesses, will be bad, and cause a degradation of our nation's moral fiber. By golly they shoveled coal and carry ash buckets and that shouldn't change.