Other Editorials

GM Death Watch 95

Robert Farago
Monday, October 30, 2006

From www.thetruthaboutcars.com

The Sun Will Come Up Tomorrow. Or Not

constant amusement. The press' collective reluctance to investigate the truth behind the automakers' plight delivers endless wonder. But Motown media's "eternal sunshine of the big ass automaker" shtick just plain rankles. In "Detroit Can Ride Out These Strange Days," Free Press columnist Tom Walsh told his readers to hold fast and be of good cheer. "These are nutty and painful times for Detroit's auto industry. But they are times for resolve, not for panic." Hey Tom; are you sure about that?

Tom's sure, and here's why: "The most formidable challenge, the one so many in the global auto industry are obsessing about, is Toyota. Indeed, the Toyota monster is the underlying reason for GM's stock price drop after Wednesday's good-news earning report." And there I was thinking that GM's stock price drop was the "dump" part of Merrill analyst John Murphy's "pump and dump" strategy. Or perhaps that GM's sinking stock price had something to do with GM's cash burn, employee-related liabilities, bloated dealer network and/or less-than-thrilling product portfolio. Nah; it's all about ToMoCo.

At least Mr. Walsh is realistic about GM's future prospects, in a denial-oriented, pay no attention to that man behind that curtain kinda of way. "GM is by no means in safe harbor& But whatever the short-term hiccups, Wagoner and Henderson and the rest of GM's management team are taking a disciplined approach to their issues. Costs are way down, revenue-per-vehicle-sold is up, and they handled the Renault-Nissan alliance issue smartly."

Short term hiccups? You mean, like sinking market share and billions wiped from the corporate ledger? A disciplined approach meaning- the guys aren't heading off for the links every Wednesday? Or an endless cycle of "no we won't yes we will no we won't" on discounts and spiffs? Sure, revenue-per-vehicle is up, but the company is still losing money. And if Walsh thinks GM handled the Nissan merger "smartly," let's hope he means quickly instead of intelligently. The really intelligent thing to do: not become so desperate in the first place.

Anyway, despite Tom's stricture to chill, the facts about GM's predicament are pretty nerve-racking. In the third financial quarter, GM's cash position declined by $2.5b. (Short-term liquidity now stands at $20.4b.) Cash flow from its automotive operations "including restructuring costs" was a negative $5.1b. During the quarter, GM turned $2b of short term VEBA funds into cash and scored a $500m dividend from The General's GMAC financing arm. At the same time, GM forked-over $2.5b to GMAC to cover the "buy down" of its Zero Percent sale; a figure that includes additional loan loss reserves to cover deadbeats. Uh-oh.

As we warned, the Anyone With A Pulse sale boosted GM's sales and reduced inventory, and hit GM's cash flow like a Silverado driving into a wall. Sure, GM will receive another cash flow boost when its new pickup trucks arrive at dealers over the next several months, just as it did when the GMT900 SUVs rolled onto dealer lots. But The General's bottom line remains the same: GM can't generate cash from its automotive operations. That's got to be stressful.

Oh, GM also tapped into its secured credit line this summer- supposedly to "test the mechanics of the line." In fact, GM needed the additional liquidity to cover payables during plant shutdowns. The amount of the drawdown is [strangely enough] unknown. The borrowed funds were repaid during the quarter. But it was still a completely unprecedented maneuver. Feeling nervous yet?

CEO Rick Wagoner's claim that GM's cost cutting will save $9b annually will actually save the company about $5b in cash. Meanwhile, GM says it needs $400m to cover the deal over at bankrupt parts supplier Delphi in the fourth quarter of '06, and will then pay Delphi around $100m per year for an "undefined period." GM is also set to make a $1b contribution to the DC-VEBA in 2007, as per the health care "concessions" made by the UAW earlier this year. Without the proceeds of the GMAC sale& fuhgeddaboutit. Ready to freak?

Actually, panic is a highly evolved behavior. When an animal is trapped and fighting for its life, when it's tried the logical escape route (fleeing) or last-ditch strategy (fighting), all that's left are illogical and random actions (a.k.a. panic). By the same token, when an carmaker is trapped (heading for oblivion), when it's tried the logical escape route (downsizing) or last ditch strategy ("bold" new products), all that's left are illogical and random actions (filing for bankruptcy, merger, leaving the biz Studebaker-style, triggering a union strike, etc.). Of course, you can't predict chaos (or its aftermath). But you'd think one of Detroit's auto hacks would at least, you know, try.