General Motors Death Watch 122: Burn Baby Burn

Robert Farago
by Robert Farago
general motors death watch 122 burn baby burn

GM’s Board of Bystanders just voted to allow its top execs to resume trading their company’s shares. GM’s big dogs have until May 21 to buy, sell, or buy and then sell their company-subsidized stock. According to Bloomberg News, it’s “another sign of confidence at GM.” Viewed another way, it’s a sign of impending doom. This fall, after GM fails to wrest any significant concessions from the United Auto Workers (UAW), after the full extent of GM’s cash conflagration becomes apparent to the Street, bankruptcy will once again loom large and GM stock will tank.

Looking at General Motors’ inflated stock price, I reckon Wallace Hartley’s band could have taken a few anti-anxiety tips from GM’s spinmeisters. GM’s PR machine has successfully focused the minds of both the press and the investment community on cost cutting, union buyouts, new products, theoretical new products, Chinese Buicks, carbon cap groups, anything and everything save the only thing that really matters: cash.

In its last quarterly statement, GM reported that it has $24.7b in the hopper. It’s generally accepted that the automaker needs $10b to keep the lights on (i.e. pay suppliers). So General Motors is $14.7b away from filing for Chapter 11 protection. Of course, that’s the best (worst?) case scenario; if General Motors has any sense, they’ll declare bankruptcy before hitting the wall and save some much-needed cash for restructuring. Anyway, they’re headed in that direction.

Last quarter, GM reported that it had immolated $1.7b of its cash hoard. All things being equal (i.e. no turnaround), the company’s coffers will be lightened by $6.8b this year. If GM’s cash burn continues at that rate, the company has a little over two years before bumping-up against the 10 bil barrier.

But all things are not equal– even without supposing GM’s turnaround turns into a nose dive. For one thing, the first quarter’s results are not the harbinger of things to come.

Last quarter, GM’s accounts payable rose by roughly a billion dollars. It’s entirely possible that the extra bil represents the current state of pay and belongs on the cash burn side of the ledger. If so, that would raise the [artist formerly known as the world’s largest] automaker’s quarterly cash burn to $2.7b per quarter. At that pace, General Motors could only evade bankruptcy for another year and four months.

At the same time, GM’s also declared that it will spend between $8b and $9.5b on capital expenditure (i.e. developing new products) this year. In the first financial quarter, GM spent just $1.2b of that total– some $800m to $1.17b less than one quarter of the total amount of their planned “cap ex.” If they spread the rest of the expense evenly over the last three quarters, that’s an additional $277m to $392m heaped onto GM's quarterly cash burn.

There’s one reason and one reason only why GM’s feeling the burn: the North American market. This quarter, GM North America (GMNA) posted an adjusted loss of $85m. This after selling the family jewels, cutting structural costs to the bone, trimming production and, most importantly, introducing a raft of new products. If GMNA’s not making a profit now with their new metal glittering in the marketplace, how will they do so in the short to long-term future?

There’s only one answer to that vexing conundrum: drastically cut the UAW’s wages, health care and pension costs. As we’ve said before, there’s not a hope in Hell that’s going to happen. For one thing, unions are in the business of increasing wages and benefits. For another, CEO Rick Wagoner’s $10.2m smash and grab compensation package has destroyed management’s bargaining position. But most critically, GM is profitable.

Although GM’s European operations are flat, GM Asia Pacific (GMAP) is on fire. Low-cost (non-union) labor and hot products have increased the unit’s sales by 20 percent, boosting revenue by 35 percent to $4.6b. GM Latin America, Africa and Middle East (GMLAAM) is also cranking. First quarter net income tripled to $201 million in the first quarter of 2007. Russia, India, China– the rest of the world is GM’s oyster.

This international dichotomy plays straight into the union’s hands. As long as GM’s foreign relations are banking bucks, their American and Canadian unions are happy to tough it out, take Johnny Foreigner’s money and keep on keeping on. If GM somehow turns its North America operations around, great! If not, so what? Let it limp.

Which brings us to the end game.

GM’s foreign operations can’t grow quickly enough to damp down the flames of GMNA’s cash burn. And even if they did, GM’s Board of Bystanders would eventually recognize that GMNA is a bottomless pit. GM’s foreign ops will need every dollar they make to compete against cash rich Toyota. One way or another, GMNA’s going down. GM execs are banking on it right now.

Join the conversation
2 of 39 comments
  • Gentle Ted Gentle Ted on May 17, 2007

    GM Canada is again asking Ontario Taxpayers to fund the expansion of the St. Catherines Ontario plant so that it can make transmissions for there new rear wheel drive vehicles, the first one being the new Sports model, I thought that GM decided not too build rear drive Cars?

  • GM Philosopher GM Philosopher on May 17, 2007

    JurisB: You'd probably be surprised at how much of your plan corresponds with GM's actual strategy to revive a strong NA market based on US products. But it's pernicious to think that GM can return to being only-US oriented. Toyota's ascendance has been built on globalism (and lots of Japanese government help), and GM's job is to compete in the current world, not 1967. As to GM executives, this is a tlatented group that "gets it," and is working hard to navigate out of nearly 30 years of mismanagement beginning in 1964, followed by ten years of desperate bumping around in the dark, and finally discovering a true path only since 2004. Even more than you, they wish it were easy and fast and could be resolved in an internet forum post.

  • Dusterdude @El scotto , I'm aware of the history, I have been in the "working world" for close to 40 years with many of them being in automotive. We have to look at situation in the "big picture". Did UAW make concessions in past ? - yes. Do they deserve an increase now ? -yes . Is their pay increase reasonable given their current compensation package ? Not at all ! By the way - are the automotive CEO's overpaid - definitely! (That is the case in many industries, and a separate topic). As the auto industry slowly but surely moves to EV's , the "big 3" will need to be producing top quality competitive vehicles or they will not survive.
  • Art_Vandelay “We skipped it because we didn’t think anyone would want to steal these things”-Hyundai
  • El scotto Huge lumbering SUV? Check. Unknown name soon to be made popular by Tiktok ilk? Check. Scads of these showing up in school drop-off lines? Check. The only real over/under is if these will have as much cachet as Land Rovers themselves? A bespoken item had to be new at one time. Bonus "accepted by the right kind of people" points if EBFlex or Tassos disapproves.
  • El scotto No, "brothers and sisters" are the core strength of the union. So you'll take less money and less benefits because "my company really needs helped out"? The UAW already did that with two-tier employees and concessions on their last contract.The Big 3 have never, ever locked out the UAW. The Big 3 have agreed to every collective bargaining agreement since WWII. Neither side will change.
  • El scotto Never mind that that F-1 is a bigger circus than EBFlex and Tassos shopping together for their new BDSM outfits and personal lubricants. Also, the F1 rumor mill churns more than EBFlex's mind choosing a new Sharpie to make his next "Free Candy" sign for his white Ram work van. GM will spend a year or two learning how things work in F1. By the third or fourth year GM will have a competitive "F-1 LS" engine. After they win a race or two Ferrari will protest to highest F-1 authorities. Something not mentioned: Will GM get tens of millions of dollars from F-1? Ferrari gets 30 million a year as a participation trophy.