General Motors Death Watch 100: Tag It and Bag It

In Friday’s interview with Automotive News (AN), Rick Wagoner snapped. When confronted with the fact that Toyota is set to overtake GM as the world’s largest automaker, the CEO stopped making sense and started talking to himself. “I can't argue that if you keep drawing the trend lines, your conclusion is correct. Is it inevitable? No. No it's not inevitable. If Toyota passes us, I guess they pass us. Do I like it? No. Am I willing to take us off our plan or to sacrifice our profitability or the implementation of our marketing strategy here? No, I'm not willing to do that. If we're going to stay ahead, we're going to stay ahead doing it the right way and a sustainable way."

So, here we are at Death Watch 100, and nothing much has changed. The good ship GM is still taking on water and it’s still steady as she goes. Rick’s turnaround plan– cut costs and build stuff people want to buy– remains unaffected. Don’t get me wrong: it’s a great plan, something along the lines of the classic “take in more money than you spend.” Only it’s not working. Quite aside from the fact that GM is still losing money, and has done so with remarkable consistency since we began the series (including a few truly spectacular financial quarters), Rick has failed to address the fundamentals dragging his employer into bankruptcy.

The General still has too many brands, models, dealers, legacy costs and overheads. Its UAW contracts and overcrowded smorgasbord of lackluster vehicles still make it a high cost automotive producer trying to sell heavily discounted products in a highly competitive market. And Rabid Rick is still talking as if simple persistence– rather than radical change– is the key to GM’s survival. Wagoner’s comments to AN about the infamous jobs bank– the ultimate symbol of GM’s management stupidity and union intransigence– tell you everything you need to know about Wagoner’s reformatory zeal.

"We'd like to reduce the cost of the Jobs Bank, yes. There are plenty of ways to do that… A lot of times people want to jump to the sort of extreme answer and that very well might not be acceptable to the UAW. If we've learned anything over the last decade, it's that if we sit down and work over the tough issues, most of the time we can make some progress."

He’d “like” to reduce the jobs bank? “Most” of the time we can make “some” progress? Methinks Rabid Rick may have learned too MUCH in the last decade; applying the rules of GM’s past labor negotiations (“give ‘em what they want”) to the current crisis. And make no mistake about it: GM is in crisis. The General has sliced production, sold off everything except GMAC, burned through the cash and still isn’t making enough money to stop the rot.

It can’t be that bad, can it? After all, Automotive News claimed that Wagoner is “unwilling to return to heavy incentives and fleet sales to stimulate sales.” So I guess GM’s just announced, much anticipated (by customers anyway) Toe Tag Sale– offering $5k discounts on selected ’06 vehicles and $3.5k on some ‘07’s– doesn’t count. And the same goes for the large number of generic GM vehicles that still find their way into fleets (roughly 25% of production). The truth is Wagoner has failed to reverse the increasingly accurate impression that GM is the overstock.com of cars.

For those who’re listening, the klaxons are sounding loud and clear. Check this excerpt from a GM press release regarding an upcoming $1.5b seven year secured loan (tied to machinery and equipment and special tools at US production plants).

"GM's ability under some of its existing bond indentures to pledge U.S. property, plant and equipment is likely to be affected in the future by new rules applicable to pension and OPEB accounting, which could cause GM's shareholders' equity in its year-end 2006 financial statements to be negative.”

In other words, the well has run dry. With 51% of its GMAC finance unit (a.k.a. cash cow) set for sale, GM can no longer borrow from this once dependable internal source. As of next year, GM still won’t be able to take out unsecured loans, while the terms of its bond indentures rule out secured loans. With a negative cash flow from its North American operations and no ability to borrow, with debt payments due AND the need to fund Wagoner’s turnaround plan (new products, severance pay, depreciation, etc.), GM’s cash crunch is going critical. The only money available: $8.5b (plus another $4b over three years) from the GMAC sale.

How long will that last? We’re going to find out. Or not. Rick says he’s “optimistic” that the GMAC sale will go through by year’s end. Should it fail, so will GM. In any case, watch GM’s dividend payments. If and when they’re suspended, that's it: the beginning of the end. Either that or just another stop along the way.