Other Editorials

GM Death Watch 87: Dead Beat

Robert Farago

from www.thetruthaboutcars.com

A few days after GM's vice president of vehicle sales, service and marketing
assured auto industry analysts that his employer will maintain
incentive-free "value pricing" policy, General Motors announced two grand
cash back on the 2007 Chevrolet Tahoe, Avalanche and Suburban and the GMC
Yukon, Yukon XL and Denali. To be fair, nobody took LaNeve's price promise
seriously. By now, everyone knows GM's new(ish) SUV's are a drug on the
market, and it ain't Viagra. There's only way to move the metal: lower the
price. Either that or stop making the damn things.

Last Friday (always Friday), GM CEO Rick Wagoner announced that The General
will curtail production of its GMT-900 based SUV's. Rabid Rick tried to
minimize the damage by asserting that GM was going to halt "some overtime"
on SUV assembly lines and introduce "other products" into the production
mix, as if to say demand for GM's gas guzzlers was still hot, just not
sizzling, and besides, we've can make some other shit instead. Yeah right.
At the end of July, in an industry where a 60-day supply is an acceptable
maximum, GM dealers were stuffed to the gills with Tahoes (82 days), Yukons
(89 days) and Chevrolet Suburbans (75 days). And that, folks, was July.
August is going to be a bitch.

Meanwhile, Rabid Rick proclaimed that GM's share of the full-size SUV market
has "boomed." According to Wagoner, GM now "owns" 50 to 75 percent of
various segments within the SUV genre, which is a bit like saying you've
scored the best cabins on the Titanic after its hit the iceberg. The
executive's statement was a remarkable piece of spin, but it pales in
comparison to GM's creative accounting. Lest we forget, Rabid Rick ascended
to his throne as GM Chief Financial Officer. Here's a bit of what he's

Yesterday, The General's GMAC finance unit signed a three-year, $10b funding
facility with a Citigroup subsidiary. The deal includes $4b worth of
"unrated notes": high risk paper backed by assets "not typically securitized
by GMAC." So GM's "Zero Percent for Deadbeats" summer blowout left GMAC with
loans so far outside its traditional credit markets it couldn't sell the
notes to institutional investors. No problem. Citigroup buys the risk and GM
pays GMAC the difference between the funds advanced and the proceeds from
the sale.

It's a bit confusing, but here's the bottom line: GMAC carries little or no
risk for the bad loans. GM buries a "charge" in its sales costs to cover the
money paid to GMAC for the dicey loans. The shell game maintains the
illusion of higher average transaction prices, hides huge discounts/rebates
and moves vehicles off the lot. Given that GM generates about $28b in sales
per quarter, $4b in bad debt equals about 15% of sales (assuming 100%
financing). Since most of this paper was written in about 60 days, as 40% of
GM's recent sales surge may be directly attributable to bad loans. Put that
in your quarterly report and smoke it.

Obfuscation aside, just like last year's "Fire Sale for All" program, the
"Zero Percent for Deadbeats" program will eventually bite GM in the ass. Can
you imagine what these vehicles will look like when (not if) they're
repossessed? At the risk of sounding, um, deadbeatist, people with
sub-basement level credit scores tend to smoke, spill beer, puke, rip up
interiors, ding 'em good and never fix a thing. And speaking of repair

As TTAC has reported, GM downgraded its warranty expenses per vehicle to
$325 in the second financial quarter (compared to $523 for the same quarter
in '05). GM's improving reliability record doesn't justify that kind of
drop. The revised figure added $433 million (the equivalent of $0.67 a
share) to GM's second quarter "profits"Clearly, GM is ducking and diving,
"window dressing" its earnings to mask the company's true performance, or
lack thereof.

The truth is things are not going well at RenCen. While GM has finalized its
new credit line of $4.5b (albeit on onerous terms), the company still
withdrew an additional $2b from its VEBA on July thirty-first to cover
health care reimbursement. GM's continual need to tap into the VEBA account
suggests a cash shortage. That need for operating cash could well be heading
towards critical, now that the GMAC sale has been postponed until next year.
While the risk of a GM default may not be imminent, a strike at bankrupt
auto parts maker Delphi would be the tipping point. In the event of a work
stoppage, GM's credit line would be reduced to $3.5b.

Industry watchers still say it'll never happen. Meanwhile, negotiations are
stalled and the final final deadline arrives in two days. If Delphi goes
down, GM does down. If it doesn't, the inevitable will be postponed.