General Motors Death Watch 82: Cut and Run

Robert Farago
by Robert Farago
general motors death watch 82 cut and run

Ron Tadross. Say it softly and it’s almost like crying. If you’re GM that is. The Banc of America Securities analyst isn’t exactly what you’d call bullish on GM. Unlike his evil twin, analyst John Murphy, Tadross sees GM heading for a cash burn flame-out. "We believe GM management is glossing over the current and future cost of rightsizing the business," Tadross declared. More to the point, he recommended that investors sell their GM stock, with a target that’s literally half of its current price. In other words, when Merrill Lynch talks, nobody should listen.

Although the media types persist in calling GM plant closures and worker buyouts “rightsizing,” there is nothing “right” about the amount of debt GM is piling onto its bottom line. GM reported today that 35k workers are heading for the exits. The severance checks for these soon-to-be ex-employees will cost The General a net, after-tax charge of $3.8b. At the same time, 12,600 Delphi workers are heading for the hills. GM’s down for half, so that’ll add another $1b or so to the tab. Remember: many of these workers will continue to receive pensions, only 4600 lose their health care benefits, and shuttering factories incurs some pretty heavy additional expenses.

Clearly, GM CEO Rabid Rick Wagoner has decided that he can pay off tomorrow the costs of trimming production today. Tadross doesn't share Rick's belief that GM's tomorrow never dies. The analyst points to GM’s newly arranged $4.5b secured credit line as a sure sign that the company is cash-strapped– at a time when the demands on GM’s hoard are mounting like a tsunami nearing land. Tadross predicts "serious cash burn" at the end of the year, as GM’s production drops an estimated eight percent and its “product pipeline peaks.” In other words, GM can’t make money now, won’t make money later, and its bills are about to come due.

Rick Wagoner insists that the cuts have put GM on the right track. In a statement issued today, The General’s General declared "These moves have given us a fast start toward achieving our stated objective of reducing GM's global structural cost from approximately 34 percent of revenue in 2005, to 25 percent of revenue by 2010, and setting us up to be successful for years to come." That’s great news for people who forgot the old maxim that the secret to business is to take in more than you spend. GM may end-up spending less, but it won’t mean anything unless it starts making more money.

GM’s earnings situation is both dire and deadly. In a note to his clients, Deutsche Bank analyst Rod Lache estimated that every point of market share GM surrenders to its competitors equals roughly $1.3 billion in lost [pretax] earnings. In May, the world’s largest automaker’s US market share fell three percentage points to 22.5%. Using Lache’s calculations, if GM’s market share doesn’t recover, the world’s largest automaker is looking at $3.9b in lost income AND $3.8b for its worker buyouts. No wonder they’ve announced a fire sale.

Wait; it’s worse than that. It isn’t a fire sale. Instead of launching an employee discount program to match Chrysler’s, instead of slapping cash on the hood, GM has decided to offer potential customers zero percent financing for 60 months. The deal reflects GM’s desire to maintain its “value pricing," GM's attempt to bring its vehicles' manufacturer’s suggested retail price (MSRP) closer to the dealer’s invoice. (Translation: the advertised price is closer to the actual sale price, and no funny business.) But here’s the problem: because of falling demand for trucks and SUV’s, the vast majority of GM’s (and everyone else’s) truck and SUV buyers are thousands of dollars backwards on their loan. They owe more on their vehicle than it’s worth.

Traditionally, GM dealers have used rebates to pay off the difference between what their potential customer owes on their old vehicle and what it’s worth in trade. Now that there’s no cash on offer, now that there’s a smaller difference between MSRP and invoice, dealers won’t be able to bail out customers who are “underwater.” Zero percent financing is wonderful (for those who qualify), but it maxes-out at 100% of a new car’s price. So anyone who’s backwards on their current vehicle is going to have to reach into their own pocket to pay off most of their old debt. No doubt dealers will call it a “deposit,” but the fact remains: a lot of customers will drive away in the same truck they drove in.

But zero percent allows Rabid Rick’s mob to maintain appearances. See? We stayed the course. Once these ‘06’s are clear, once our new vehicles hit the dealer lots, once we’re right-sized, we’ll be back in the black. Yes, well, there are an increasing number of well-informed GM watchers who believe that the black in question will be funeral attire.

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  • Dean Dean on Jun 29, 2006

    Montess: You say you bought a brand new Monte Carlo and have had no problems with it. I believe you. Unfortunately you couldn't pay me to drive that car. It has one of the ugliest ass-ends ever to be rendered in sheet metal, and one of the most hideous profiles my poor eyes have ever had the misfortune of witnessing. It looks like it should come with a mullet wig as standard equipment. I'm happy for you that you like it, however. To each his own. But I would suggest that if GM offered compelling vehicles more people would give their quality a chance. Regarding your sinister oil company/hydrogen comment: don't confuse "emission-free" with "efficient."

  • Montess Montess on Jun 29, 2006

    Glenn- So what's the problem then, quality or looks? We should stick to the facts here, looks are a subjective trait. Quality, however, is objective and to me a car that has no major mechanical problems is a far cry from a "lemon" or a "dud". Just because you don't like the looks of the car doesn't mean that other people won't like it, and to think otherwise is to be guilty of the same arrogance that you and others accuse GM of. Hmmm p.s. Everyone that has seen my car loves it, even those people who have sworn off GM.

  • Alan The Prado shouldn't have the Landcruiser name attached. It isn't a Landcruiser as much as a Tacoma or 4 Runner or a FJ Cruiser. Toyota have used the Landcruiser name as a marketing exercise for years. In Australia the RAV4 even had Landcruiser attached years ago! The Toyota Landcruiser is the Landcruiser, not a tarted up Tacoma wagon.Here a GX Prado cost about $61k before on roads, this is about $41k USD. This is a 2.8 diesel 4x4 with all the off road tricky stuff, plus AC, power windows, etc. I'm wondering if Toyota will perform the Nissan Armada treatment on it and debase the Prado. The Patrol here is actually as capable and possibly more capable than the Landcruiser off road (according to some reviews). The Armada was 'muricanised and the off road ability was reduced a lot. Who ever heard of a 2 wheel drive Patrol.Does the US need the Prado? Why not. Another option to choose from built by Toyota that is overpriced and uses old tech.My sister had a Prado Grande, I didn't think much of it. It was narrow inside and not that comfortable. Her Grand Cherokee was more comfortable and now her Toureg is even more comfortable, but you can still feel the road in the seat of your pants and ears.
  • Jeffrey No tis vehicle doen't need to come to America. The market if flooded in this segment what we need are fun affordable vehicles.
  • Nrd515 I don't really see the point of annual inspections, especially when the car is under 3 years (warranty) old. Inspections should be safety related, ONLY, none of the nonsensical CA ARB rules that end up being something like, "Your air intake doesn't have an ARB sticker on it, so you have to remove it and buy one just like it that does have the ARB sticker on it!". If the car or whatever isn't puking smoke out of it, and it doesn't make your eyes water, like an old Chevy Bel-Air I was behind on Wed did, it's fine. I was stuck in traffic behind that old car, and wow, the gasoline smell was super potent. It was in nice shape, but man, it was choking me. I was amused by the 80 something old guy driving it, he even had a hat with a feather in it, THE sign of someone you don't want to be driving anywhere near you.
  • Lou_BC "15mpg EPA" The 2023 ZR2 Colorado is supposed to be 16 mpg
  • ToolGuy "The more aerodynamic, organic shape of the Mark VIII meant ride height was slightly lower than before at 53.6 inches, over 54.2” for the Mark VII."• I am not sure that ride height means what you think it means.Elaboration: There is some possible disagreement about what "ride height" refers to. Some say ground clearance, some say H point (without calling it that), some say something else. But none of those people would use a number of over 4 feet for a stock Mark anything.Then you go on to use it correctly ("A notable advancement in the Mark VIII’s suspension was programming to lower the ride height slightly at high speeds, which assisted fuel economy via improved aerodynamics.") so what do I know. Plus, I ended a sentence with a preposition. 🙂