General Motors Death Watch 85: The Calm Before the Storm

Robert Farago
by Robert Farago
general motors death watch 85 the calm before the storm
According to GM, happy days are here again. Profits are up, costs are down and the company’s turnaround plan is on track. The automotive media have swallowed The General’s spiel hook, line and sinker. The financial markets are ready, willing and able to view The General’s second quarter losses through the automaker’s prism of perpetual positivism, sending GM’s stock price to its highest level since last October. Well folks, it ain’t necessarily so…

First, let’s not forget that a $3.2b dollar loss is a $3.2b dollar loss. Sure, if GM hadn’t bought out 34,410 UAW workers’ contracts, it might’ve made a $1.2b profit. And if my grandmother had wheels, she’d be one of those trolley cars that GM removed from city streets in the 40’s. More to the point, GM’s US market share is still in decline, down 3.1% from last year, to 24%. Until and unless that changes, the “one time charges” related to production downsizing won’t be enough. Or, if you prefer, they signal the beginning of a trend, not the end.

So if things are so bad for GM, where did all the profit come from? As TTAC’s Deep Throat has pointed out, GM’s public promise to wean itself off fleet sales, to boost residuals and transaction prices, isn’t being born out at the sharp end. In the second financial quarter, GM sold at least 120k high content units to rental fleets. The General also sold their new LWB GMT-900 SUV’s to dealers, which carry fat margins. [NB: In this case, “sold” means shipped to dealers.]

And then there’s accounting. For the second financial quarter’s statement, GM made some pension calculation adjustments, reduced their warranty charge (lowering their warranty reserve fund on the supposition that their vehicles are getting better), booked some workers costs (which previously appeared as expenses) against previously charged restructuring costs and benefitted from a strengthening Canadian dollar.

In fact, if not for the GMAC dividend of $900m, GM’s cash position wouldn’t have changed. So while it looks like The General’s making earnings, cash generation from operations isn’t getting better. GM still has an inventory problem at its dealers, which isn’t going to go away without massive incentives. And thanks to hundreds of thousands of “zero percent financing for anyone with a pulse” deals, the loan rate buy down is probably on the order of several thousand dollars per vehicle.

Pistonheads have a better grasp of the situation than the bean counters. They know GM has failed to produce a runaway best seller (or sellers) to replace their [once] hugely profitable SUV’s. They know that it’s business as usual down at their local Buick, Chevy, Cadillac, Saab, Saturn, GMC and Pontiac dealer— at least from a product point of view. From a financial perspective, there’s been a huge change. Again, GM’s dealers have been writing bad paper; lots and lots of bad paper.

It’s Mitsubishi redux. The Japanese manufacturer’s US fortunes foundered on the rocks of easy credit, when hundreds of thousands of borrowers defaulted on their loans. There is every reason to believe GM’s bad paper will also spontaneously combust, leaving dealer lots stuffed with vehicles no one wants and a big old hole in their accounts receivable. The practice may appear better than offering large discounts on slow selling GM products. But if you think about the implications of writing bad loans in the medium to long term, it isn’t.

There are other dark clouds on the horizon. GM watchers seem to have forgotten about bankrupt auto parts supplier Delphi. While most industry wonks discount the possibility of a strike– now that GM’s paid thousands of Delphi’s UAW workers not to work– there’s still an August drop deadline for union – management agreement, and no agreement. At the same time, we hear ominous rumblings that other GM suppliers may not make it out of Chapter 11. And while analysts have hip-hip-hoorayed GM’s job cuts and plants closures, they would do well to remember that reducing production in the third financial quarter will create a significant drop in revenue.

Meanwhile, the list of assets GM put on the line for its new secured credit facility should give GM boosters pause for thought: “certain” North American accounts receivables, unspecified vehicle inventories, the entire Saturn brand, its Canadian operating unit (plants and property) and 65% of GM de Mexico. In short, The General has wandered into the pawn shop with a large list of assets to secure credit it once enjoyed on the back of its income. Add GM’s dicey cash position and the situation doesn’t fill me with $30 a share confidence in the company’s future. But hey, that’s me.

The real bottom line is that GM is a car maker. There’s only one way out of their current death spiral: produce enough vehicles that people want to buy at a price that makes the company enough profit to stay in business. It still ain’t happening.

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  • Dhathewa Dhathewa on Aug 03, 2006

    Strangely, no one here (or anywhere else that I've noticed) has recommended GM put more resources into building trucks. Which, of course, is just what they've done. GM is rushing their new Silverado/Sierra trucks into production to get them on dealer lots this year. Wagoner and a few other execs talked at the product intro (which was webcast) yesterday and three things occurred to me: 1. Sure. Accelerating large truck to market. This will help. Not. 1A. And it will probably do wonders for the build quality. 2. The sucking-up should never be done on-camera or at least not broadcast to the public. 3. Wagoner should stop talking about their "hybrids" as though they are actual hybrids. Is it time for Death Watch #86?

  • Gardiner Westbound Gardiner Westbound on Jan 27, 2009
    Meanwhile, the list of assets GM put on the line for its new secured credit facility should give GM boosters pause for thought: “certain” North American accounts receivables, unspecified vehicle inventories, the entire Saturn brand, its Canadian operating unit (plants and property) and 65% of GM de Mexico. In short, The General has wandered into the pawn shop with a large list of assets to secure credit it once enjoyed on the back of its income. - GM Death Watch 85, 7-27-06 I doubt creditors with first call on Canadian assets will roll over and play dead if a Canadian government attempts to step in front of them. There's no need for U.S. creditors to institute a court fight. They will run to Uncle Sam for political muscle.

  • Denis Jeep have other cars?!?
  • Darren Mertz In 2000, after reading the glowing reviews from c/d in 1998, I decided that was the car for me (yep, it took me 2 years to make up my mind). I found a 1999 with 24k on the clock at a local Volvo dealership. I think the salesman was more impressed with it than I was. It was everything I had hoped for. Comfortable, stylish, roomy, refined, efficient, flexible, ... I can't think of more superlatives right now but there are likely more. I had that car until just last year at this time. A red light runner t-boned me and my partner who was in the passenger seat. The cops estimate the other driver hit us at about 50 mph - on a city street. My partner wasn't visibly injured (when the seat air bag went off it shoved him out of the way of the intruding car) but his hip was rather tweaked. My car, though, was gone. I cried like a baby when they towed it away. I ruminated for months trying to decide how to replace it. Luckily, we had my 1998 SAAB 9000 as a spare car to use. I decided early on that there would be no new car considered. I loathe touch screens. I'm also not a fan of climate control. Months went by. I decided to keep looking for another B5 Passat. As the author wrote, the B5.5 just looked 'over done'. October this past year I found my Cinderella slipper - an early 2001. Same silver color. Same black leather interior. Same 1.8T engine. Same 5 speed manual transmission. I was happier than a pig in sh!t. But a little sad also. I had replaced my baby. But life goes on. I drive it every day to work which takes me over some rather twisty freeway ramps. I love the light snarel as I charge up some steep hills on my way home. So, I'm a dyed-in-the-wool Passat guy.
  • Paul Mezhir As awful as the styling was on these cars, they were beautifully assembled and extremely well finished for the day. The doors closed solidly, the ride was extremely quiet and the absence of squeaks and rattles was commendable. As for styling? Everything's beautiful in it's own way.....except for the VI's proportions were just odd: the passenger compartment and wheelbase seemed to be way too short, especially compared to the VI sedan. Even the short-lived Town Coupe had much better proportions. None of the fox-body Lincolns could compare to the beautiful proportions of the Mark was the epitome of long, low, sleek and elegant. The proportions were just about perfect from every angle.
  • ToolGuy Silhouetting yourself on a ridge like that is an excellent way to get yourself shot ( Skylining)."Don't you know there's a special military operation on?"
  • ToolGuy When Farley says “like the Millennium Falcon” he means "fully updatable" and "constantly improving" -- it's right there in the Car and Driver article (and makes perfect sense).