General Motors Death Watch 121: On the Fritz
"We have a continued sense of high urgency." Last Sunday, I ressurrected auto industry analyst Mary Ann Keller’s 2005 call to GM to face its problems with “a sense of urgency.” Yesterday, GM’s CFO reassured analysts and reporters by seeing Keller’s heightened mental state and raising it a Mel Brooks. High urgency? What the bleep is that? Whatever it is, it better be the management equivalent of Viagra.
"Our business is not generating the kind of returns we expect,” Fritz Henderson told the money men and journalistic jackals, announcing a 90 percent drop in GM’s first quarter earnings (from $602m to $62m). Ya think?
At the risk of overthinking this, I find it a bit strange that Fritz said GM’s not getting the returns they “expect” not “expected.” I take that to mean there’s an ongoing discrepancy between management expectations and market reality, in a “what the Hell do we do now?” kinda way.
Just in case we hadn’t quite grokked the overarching irony of GM’s circumstances, while Fritz was busy yap dancing, Car Czar Bob Lutz told a hack that GM’s on-again, off-again, on-again, off-again Zeta platform cars are on again. Maybe. Meanwhile, GM's [theoretical] world-beating small car is still stuck in global limbo.
Despite ongoing product confusion, results from GM's overseas operations (net income up $264m to $304m) indicate that it would be relatively smooth sailing for the corporate mothership if it weren’t for the gaping hole in its side known as the North American automotive unit (GMNA).
Although GMNA's first-quarter net losses narrowed from $292m to $46m, Fritz [rightly] credited structural cost savings. In other words, we’re cutting our way to prosperity! Only, you know, not. But hey! GMNA's revenue per vehicle (RPV) rose by $1,064!
Yes well, in a perfect world, an uptick in small car sales would have lowered the number. While GM is selling larger, more highly contented vehicles, they're flogging fewer of them (sales down 9.5 percent in April, 100k fewer vehicles sold during the quarter). And the revenue figure doesn’t include the cost of the additional content. In fact, the actual cost per vehicle could well be rising faster than the RPV.
Addressing the subject of sinking sales, Fritz flagged the fact that GM’s rental fleet cutback accounted for 60 percent of the automaker's reduced throughput. U.S. retail sales were “only” down four percent. Yes but– sales of the vehicle carrying the hopes of [s]a nation[/s] the company– the refreshed Chevrolet Silverado pickup– tumbled 7.2 percent.
And things are about to get even trickier. GM’s urgently high— I mean “highly urgent” CFO acknowledged the United Auto Workers (UAW)-shaped storm clouds gathering on the increasingly bleak horizon. Fritz played the “we’re all in this together” card.
“We have to continue to make significant improvements,” Henderson admitted, continuing the automaker’s unspoken policy of not speaking about long- or short-term targets. “That is on our minds as we go into collective bargaining, as well."
As predicted, GM’s almost about to gonna sort its union problems at its Lordstown and Fairfax factories. This proto-success returns the Delphi UAW UXB (unexploded bomb) to its rightful position under the Chairman’s chair.
To prepare for a UAW payoff at their bankrupt former subsidiary and mission-critical parts supplier, GM's allocated an additional $100m (up to $500m) for the first year of any Delphi deal. They've also increased the ongoing estimated cost of a Delphinian solution by an additional $100m per year (now $100m – $200m per year). And they still insist they're going to save $2b on parts costs over the next five years. (Someone should tell Delphi's private equity owners.)
Short term, the Delphi problem pales in comparison to the ongoing disaster over at their GMAC finance unit. Thanks to sub-prime loan implosion, their former cash cow has turned into a vampire bat.
This quarter, GM’s 49 percent share "earned" it a $115m loss. (GMAC dividend RIP.) Fritz took a stab at singing the sun will come out tomorrow, but his heart wasn’t in it. ”When you're in the midst of the kind of maelstrom we're in with nonprime, I think it's important to take it quarter by quarter.” And take it like a man.
Bottom line: with its continuing cash conflagration, GM needs to start selling a whole bunch of profitable vehicles in North America, and soon. Goldman Sachs analyst Robert Barry isn’t optimistic. He told Automotive News that GM’s NorAm results were weak "given that we are at the peak of GM's product cadence."
Barry may not know the half of it. According to TTAC’s Deep Throat, as bad as GM is doing overall, it’s far worse on the coasts. In particular, California is becoming more and more of a GM-free zone. That situation needs sorting now, in a super highly urgent way.
But how? As long as Toyota is the price leader and GM has to discount its vehicles to sell, GMNA can only hope for breakeven or slightly better. And face much, much worse.
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Sherborn, I have been short GM common since Q4 of 2005. I am down 50% on the position. Not good. I also own a bunch of the Jan 09 puts with a strike price of 10. I am down 25% on that position. Not good. However, I expect both of these positions to be ultimately profitable. The positives you cited in your laundry list are all just soundbites. The soundbites need to translate into positive cash flow for GM on a consolidated basis. Per GM's own earning's release slide show(found on the GM website), GM ended Q1 07 with $1.7B less cash than it started the quarter with. And one of the call in questions from an analyst was asking why GM's accounts payable were up $3B from yearend. Fritz did not have a very convincing answer. If you subtract cash infusions from asset sales, GM has been burning cash to operate the business for two years. Just watch the reported liquidity figure each quarter and that will tell you whether or not any of the soundbites are actually translating into increased survival odds for GM. GM has some foreign business units that are growing and generating profits and cash flow. At some point GM is going to have to decide whether the next $1B of available is going to fund ongoing negative cash flow at GMNA or going to fund the necessary capital budget for one of these foreign businesses that is actually succeeding in its market. I don't see GM allowing GMNA to drag these other successful business units down into the same sinkhole that GMNA is in. At that point, GM will file GMNA and restructure the business. GMNA is hopeless as a stand-alone business unit given its liability load (think retiree healthcare) and cost structure (think UAW wages, benefits and work rules). A bad economy and continued high gas prices will only speed up the cash burn at GM. I predict right now that cash burn in Q2 of for GM on a consolidated basis will be worse than the $1.7B cash burn from Q1. Let's talk again when the slides come out at the end of Q2.