Editorial: General Motors Death Watch 228: Good Money After Bad

Ken Elias
by Ken Elias
editorial general motors death watch 228 good money after bad

Last Thursday in Detroit, General Motors presented its rescue case to the Society of Automotive Analysts, a group of Wall Street securities analysts. [ pdf here] The story was chock full of “not good.” In fact, the company presented enough information to make the case that bankruptcy is inevitable. But I’m still waiting for a single report from Wall Street telling everyone what we’ve known at TTAC for at least three years. GM is bankrupt and putting another dime of government money into this car wreck is merely good money after bad.

It’s too bad GM presented nothing more than damning evidence of why the company has to file bankruptcy. Not that management didn’t try the old positive spin manipulation of bad news – they did. But you won’t see any analyst reports coming out telling the truth that there is no where to go but to the Bankruptcy Court in Manhattan. So we’ll do it for you.

For starters, GM lowered its forecast for new car sales in the US auto market overall. As recently as December 2, when GM last presented to Congress its non-starter rescue plan, the company anticipated that 2009 car sales would come in at 12 million units. (2008 saw 13.2 million units sold.) Now, the company sees the market at 10.5 million units, a haircut of 1.5 million units or another 300,000 units less for GM from its previous lowered forecast.

Assuming GM’s correct, and assigning a 20% market share to GM for 2009 (reduced fleet sales, negative consumer confidence, more incentives from the Toyondissan camp, etc.), GM will sell 2,100,000 units in 2009. That’s nearly 900,000 fewer units than last year or a reduction of 30%.

Add to that the desperate attempts by everyone else – and especially those manufacturers with stronger capital structures – to move units in a terrible market. The incentive money will be huge. Despite production cut backs, four day work weeks, and extended plant holidays, it’s simply too costly to just shut down for an extended period beyond a few weeks for any auto manufacturer.

The high fixed-cost nature of vehicle assembly, marketing, and white-collar staffing demands that the products keep moving out the door just to minimize losses. The Japanese will give away cars with thousands of dollars on the hood to keep the metal moving. The Europeans will provide money through the back door – so-called “trunk money” – to keep iron from stacking up at the ports. And yet GM’s management thinks it can improve the gross contribution during this period. Sure.

Revenues at GM will decline with fewer cars sold and shrinking gross contributions per unit due to incentives needed to match or exceed the competition. At an average revenue to GM of $25,000 per vehicle (my estimate before incentives which are paid after retail delivery), 900,000 fewer units sold in 2009 means a revenue loss of – ready now – $22.5 billion from the top line. And with the company already bleeding cash at the rate of $20 billion per year in 2008, is there any chance of cutting costs fast enough to become cash flow positive?

The killer chart proving my point came from Rick Henderson, the Chief Operating Officer. When the crap really started hitting the fan at GM back in 2005, management outlined its goal to reduce “structural costs” to 25% of revenue. (In 2005, GM’s structural costs were 36% of revenue.) Target date for 25% – something like 2009 if I remember correctly.

Liars may figure, but figures don’t lie. GM has never gotten close to achieving this target percent. In 2007, structural costs accounted for 29.5% of revenues, the best performance since 2005. But in 2008, they rose to 33.9% as revenues shrunk faster than costs could be cut. Anyone care to guess what will happen in 2009? GM’s simply chasing the rabbit down the hole.

But let’s heap on more bad news. GM Europe, like GMNA, will bleed cash badly in 2009. The sales projections for Western Europe are dismal. Maybe Andrea Merkel will lend GME some dough? Spain’s a write-off. And England looks like it will be a gloomy London gray for the year for car sales. GM’s key overseas unit will need cash too.

And here’s the worse news. By next month, after the last round of government bail out loans, GM will have a staggering debt load of $76 billion (including the present value of its VEBA liability). But let’s suspend reality and assume that the unsecured public bond holders and the UAW agree to the mandated debt-to-equity conversion.

Guess what? GM will still have $43 billion in debt – practically the same amount it had in 2007 ($39 billion exclusive of the VEBA liability). On a smaller revenue base in 2009.

And there you have it. GM itself has made the case for bankruptcy. There’s simply no point at giving this company more money to try and restructure. It just doesn’t make sense. Now let’s see when Wall Street tells the government that’s the case. Heck, we’ve done it for them.

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  • Dealmaker Dealmaker on Jan 22, 2009

    I absolutely contend that the current financial tsusami is the cause of the D3’s problems. It’s without a doubt. The restructuring plans they had in place for 3 years prior were on many occasions breaking sales records before this credit crisis. They are certainly not the only businesses caught in its web. The reasons for it and who’s responsible is irrelevant at this point. What recourse we have to correct it should be our objective. Those that say do nothing and let the markets work it out are in my opinion the narrow minded ones. They ignore the magnitude of the harm to people, regular people that would be forced to bear the brunt of the burden. The list of small businesses that would be harmed goes from A to Z. The market share decline is a red herring. In 1962 when they had a 50% share they sold fewer cars than they did in 2007. If we look at the numbers we can see how unlikely it would be to maintain a 50% share under any conditions. I believe the market sold 17 mil vehicles in the US in 07, think how large they would be if they produced and sold over 8 million vehicles in the US alone per year. They (GM)are playing with a stacked deck and doing remarkably well considering all the facts. For example, they don’t have the luxury to import half their vehicles that cost considerably less than it costs to produce them here. They are not based in a country that routinely closes their markets and manipulates their currency. These are but two examples of that stacked deck. I owned an 84 Chevy S10 I drove for 16 years, with nothing ever going wrong. I also owned a Toyota Corolla SR5 that was a nightmare, everything and anything went wrong with it. The point is, it’s no more logical to believe Toyotas are junk in 08 than it is to say the same for GM and Fords. The quality gains are one of the biggest successes they’ve made with their business plan restructuring of the past few years. They are currently meeting or exceeding world class quality standards yet the critics give them no credit whatsoever. This whole issue gets me thinking about motives. I’m looking at a headline that states “new jobless claims hit 589K for the week”. We not only have to do whatever it takes to keep as many jobs in the D3 from disappearing. We have to look at the other pertinent industries that have been hurt as well. I can’t help but think some want BK for the D3 because they think it’s the perfect opportunity to break the union. They want to break the union no matter what the cost. Talk about narrow mindedness.

  • on Jan 22, 2009

    Its nice to see an American genuinely concerned about Americans. I would like to see transparency by the foreign businesses. I would like to see THE TRUTH ABOUT CARS show the differences in laws and restraints between foreign and Domestic businesses. They have no regulations from the fishing industry to killing whales,lead in their products to injecting synthetics into their foods in order to make their product seem something other than what it is. They have devestated families across America from Poisoned pet food to lead tainted toys ,candies for our kids. They run slave shops with forced child labor and they go unregulated and are able to pollute their environment at will. Yet we hold our businesses to standards from pollution controlled smoke stacks to carbon emmisions. Yet our Government has not penalized these governments for their tactics. They devalue their currenies in order to undermine Americans,and yet they are not penalized. They have been gave a free ticket to do as they please with out restraints and all at the costs of the American business, How many lobbyists and how much money has lead to the selling off of the American industry. The same Industries that pay taxes to the same who let these entities to run free.

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