General Motors Death Watch 134: How Do I Do It? I'm in Debt up to My Eyeballs!
GM had an excellent May. Despite the title of this series, I’m not going to dwell on the fact that The General’s ten percent year-on-year sales increase is actually a rebound from a disastrous May ’06 (overall sales are still down 3.2 percent compared to the first five months of last year). And I won’t bother pointing out that the majority of GM’s one percent market share gain came out of Ford’s two percent market share loss. Or that GM’s “rising tide lifts all boats” progress pales in comparison with the sales tsunami that Toyota’s [still] riding deep into the American heartland. No I want to focus on debt.
GM is carrying a monumental amount of debt. Forbes pegs the stat at $445b, against a market capitalization of $17b. General Motors has so much debt that even their high-flying foreign divisions know it’s hammer time (“You can’t touch this”). Only a major recovery in the black hole known as GM’s North American market can hope to pay off the interest on the company’s loans– never mind reduce the principal, break even or, Heaven forfend, bank a surplus.
Less than fifty years ago, General Motors had no such burdens. It was one of the world’s largest multi-national, multi-industry conglomerates. The company was so big and so rich it spent all its energies extending and embellishing its status. GM had so much money swilling around its corporate coffers it made money loaning its money to other people.
Those days are long gone. While auto industry pundits focus on the fading fortunes of GM the carmaker, it’s important to remember that virtually all of GM’s ancillary businesses– from refrigerators to airplanes to defense research to locomotives– have been de-acquisitioned. More recently, GM's been jetisoning bits of its core business, from shares in foreign automakers to the entirety of their [now bankrupt] parts provider Delphi.
The full list of items included in GM’s epic family silver sale is too long to provide here. Suffice it to say, in the 15 months to January 2007 alone, GM shed $17b worth of assets. Last month, the corporation hocked their remaining 49 percent share of their GMAC financial unit for $4.1b. Allison Transmissions is next to go. Aside from a few under-the-radar bits and bobs, there’s literally nothing left to sell. (Would YOU buy Saab?)
So it’s on to the plastic! Last Wednesday, GM replaced $1.1b in convertible securities with new unsecured convertible notes. As we reported previously, GM plants and machinery have also been “monetized.” Not to put too fine a point on it, the quintessential American automaker has reacted to the violent contraction in its Empire by going into eyeball level debt. Their dynastic dreams are history (literally). Servicing the debt is Job One.
In the last decade, only two profit engines have been able to perform that life-sustaining task: North American truck sales and GMAC. Now that GM’s pawned its remaining piece of GMAC, the golden goose is dead. High margin pickup trucks and SUVs are the last great hope for bailing out the artist once known as the world’s largest automaker.
While GM's PR machine trumpeted May’s rise in full-sized truck sales, America’s once profitable pickup truck and SUV market continues to contract. Last month, for the first time since 2002, U.S. dealers sold more cars than trucks. Cars accounted for 51.4 percent of all new vehicle deliveries. Aside from the $5k+ incentives GM’s piling on its slow-selling vehicles to staunch the truck-shaped wound, here’s the really scary bit: transplants scarfed-up 61.4 percent of last month’s 804,196 car sales.
Strangely, the Dallas News reports that GM is planning to increase production of the Chevrolet Tahoe, GMC Yukon and Cadillac Escalade at their Arlington, Texas plant in August. Either GM’s planning a major new incentive campaign in July or they’re stockpiling product for a United Auto Workers’ strike. No matter; there’s little expectation that SUV sales can generate the gi-normous profits that management squandered to get them into this mess.
On the face of it, everything’s going to be all right. GM will use the debt/cash to complete its turnaround plan, and then reduce its debt. But first it's got to placate (i.e. pay off) its former workers over at Delphi. And do something about (i.e. pay off) that union guy in Canada who’s watched too many episodes of Dallas ("I’m gonna bring Ricky down, if I have to destroy GM to do it!"). And fund their on-again, off-again, on-again, off-again, on-again range of rear wheel drive-cars. And, perhaps, pony-up a bil or so for the new “Beta” small car platform.
GM’s “We Heart Debt” strategy has topped-up their bank account to git ‘er done (even if it don't). But here’s the problem: they’re tapped out. If there’s a cash-related setback– be it a union strike, gas price spike or a big rise in interest rates– that’s it. Chapter 11. What are the odds?
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