General Motors Death Watch 193: Rough Seas

GM’s North American Operations will go bankrupt. This statement will not come as a “revelation” to many TTAC readers. Of course, there are still some who will continue to claim that this website is “crying wolf” regarding The General's descent into ignominy. But to challenge any outcome other than a Chapter 11 filing borders on lunacy. As its centennial mark approaches, the vertex of the perfect storm now engulfs The General. Like it or not, believe it nor not, it's a tempest that will engulf the ship and send it to a rocky bottom.

The storm has three main components. First, higher costs for diesel and gasoline.

Not to belabor the obvious, but higher fuel prices have dramatically lowered demand for big rigs. Until recent "End of Days," GM’s domestic production was geared 60 percent (plus) towards fuel-hungry trucks and SUVs. GM’s suits only built cars as a way to satisfy requirement for corporate average fleet economy (a.k.a. CAFE) regulations, and to keep a full line-up of choices amongst six of its seven brands.

GM doesn’t make money on cars. It hasn’t done so for well over a decade. The domestic automaker is the high-cost producer in a competitive car environment, where its passenger cars are mostly inferior to the offerings of Toyondissan. Even when a particular GM car is in demand, it’s still a losing proposition– when you you consider (as you must) the aggregate profit and loss across all of GM’s automotive offerings. Now, without truck sales to bolster gross contribution, the money just drains away.

Second, the finance crisis continues full tilt.

The current “downturn” is mostly a result of the debacle in the housing market (which resulted from a finance system flush with excess liquidity just a few years ago). Lenders find their balance sheets under pressure and contracting. This obviates the possibility of making credit available at reasonable terms, and then only to the least risky of borrowers.

That’s a huge downer for the car market. Without lenders willing to finance a new car to a 650 FICO score borrower, dealers might as well kiss the metal goodnight every evening– since they’ll see it again in the morning. And the next. And the next.

Third, the general economy stinks no matter what the President and the Fed’s Bernanke say.

Americans feel mostly poorer (surprise – they are!) and are acting accordingly. That means big time cash conservation. Anyone who can or needs to defer buying (heck, you can’t lease a domestic car anymore!) will do just that. They’ll sit on the sidelines. The sales numbers for all manufacturers (except Honda) prove the point; total '08 auto industry turnover is now expected to come in at around 14m units. That’s at least two million units under trend. Or think of it this way: at $28k for the average selling price of a new car, that’s $56b in lost revenues.

And there you have it. All three Motown automakers relied on trucks to cover their asses on cars. The plan worked great as long as they shared the big rig market to themselves, gas was cheap and anyone who had a job and half-decent credit could get financing. That’s all gone away and, well, we know where The Big 2.8 stand today: teetering on the abyss of bankruptcy. With GM closest to the edge. (Chrysler’s a black hole of info, but let’s suspend reality and believe Nardelli’s telling the truth.)

All the signs are there. At $10/share, GM’s stock price yields a total market value of less than $6b for a $160B revenue company. The credit agencies all mark the corporate credit of the company just a few notches above default, and that’s a gift. The bond market trades GM’s debt securities at close to recovery values.

The company’s financial statements chart the changes; GM’s just a breath away from insolvency. As of June 30th, GM's working capital stands at a deficit of $20b. Total shareholder equity is a staggering $56b in the hole. GM’s net liquidity (cash less debt) remains underwater at $15b. How can GM escape?

It can’t. There is no light at the end of the tunnel. There’s no amount of restructuring that can save this company. GM will do what automotive suppliers before it-– Delphi, Tower, Dana– have done. File bankruptcy for its North American operations. End the misery, pare the company’s balance sheet, shed brands, complete the transformation.

The new round of employee pricing marks the last gasp of life prior to a filing. Yes, this time GM's lowered its dealer inventory to 750k units (as of July 31st). That's 300k units lower than the last time General Motors ran its "I'm an Employee, You're an Employee" sale, in June, 2005. But there's no mistaking the urgency involved. The General must get its dealers to order new vehicles at a rapid pace. That's the only way they can keep the factories humming and life-sustaining cash flow coming… for a few more months.

In fact, Captain Rick Wagoner's recent "We're OK through to the end of 2009" pronouncement is more of a timeline for C11 than a RenCen renaissance. Maybe the perfect storm will pass by then? If it doesn’t, it’s lights out. Sooner, rather than later.