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.