CNNMoney - Deepening Crisis at GM, May Borrow Over 10 Billion to Stay Afloat
06-19-2008, 10:19 PM
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CNNMoney - Deepening Crisis at GM, May Borrow Over 10 Billion to Stay Afloat As the auto giant grows sicker, its chances for a full recovery get dimmer.
By Alex Taylor III, senior editor
Last Updated: June 19, 2008: 10:05 AM EDT
NEW YORK (Fortune) -- The news coming out of Detroit is getting worse, and unlike in past years, there will be no full recovery. Analysts are betting that General Motors will be forced to take emergency financial measures this year that could hamper its competitiveness for a long time to come.
Here's why the damage is likely to be permanent: The sales slump is digging a far deeper hole than seemed possible just a few months ago. June is shaping up as a full-fledged disaster. Expectations are that U.S. sales of cars and trucks will run at an annual rate of 12.5 million, as compared with 16.3 million last year and 15.2 million for the first quarter of 2008. If you are keeping score at home, those are practically Depression levels. Citibank analyst Itay Michaeli expects that June sales for GM (GM, Fortune 500) and Ford (F, Fortune 500) will be down 28% and 27% respectively. Since truck sales alone are likely to fall much further than that, the impact on profitability will be even greater.
There's a cascading effect that comes from such a punishing decline. With the trade-in value of trucks and SUVs plummeting, the companies are left with huge write-offs on vehicles returning from lease. Meanwhile, repeat customers are being kept out of the market because they don't have enough equity in their old trucks to buy new ones.
As investors have sold off GM stock, they have pushed its market capitalization below $8.5 billion. That's only $1 billion more than Cerberus invested in Chrysler last year. If you valued GM on the terms Chrysler got last year, it implies that investors are getting GM's very profitable Asian and Latin American business for free.
With investor Kirk Kerkorian now holding a stake in the company, Ford at least has a committed investor on its side, which is effectively putting a floor under the price of its stock. There is nobody filling that role at GM.
This stunning sales decline means that GM is continuing to burn cash at a fearsome rate - perhaps $1 billion a month by some estimates. Rod Lache of Deutsche Bank figures that GM will consume as much as $19 billion in cash over the next two years. Since it began the second quarter with $23.9 billion on hand and needs $10 billion to $15 billion to keep the lights turned on, that leaves a big hole.
To fill it, GM could follow the Chrysler example and start selling off its non-earning assets like land, empty plants, and even underperforming brands like Hummer and Saab. Or it could follow the example of Ford and borrow against its unencumbered assets like trademarks and real estate. Anybody want to make a guess as to how large a mortgage GM could get on its headquarters in downtown Detroit?
Whatever GM does, it is likely to be expensive. Borrowing $10 billion at around 10% interest would cost it $1 billion a year. Analyst Himanshu Patel of JP Morgan lopped $1.20 per share off his estimate for 2010 earnings to account for the interest payments.
It is also likely to leave GM weaker for the long haul. In order to attract financing, analyst Lache figures that GM will need to develop a comprehensive restructuring plan that would include cutting more overhead and further consolidating its brands.
That will accelerate GM's shrinkage. In May, GM sold only 268,892 vehicles in the U.S., leaving it just a smidgen ahead of Toyota (TM), which sold 257,404. June could see Toyota beating GM out for the title of the number one auto company in the U.S.
In GM history, 1992 is generally considered the worst year of modern times, with multiple plant closings, huge losses and the shunting aside of CEO Robert Stempel. Now it looks like 2008 will have that beat.
As GM continues to slide downhill, there is going to be plenty of finger pointing to identify who is to blame. There is plenty to go around. Some comes from just plain bad decision-making, like the Fiat deal, the Delphi spinoff and the Saab acquisition. But a lot stems from the poor running of the day-to-day automotive business. Every time that gasoline prices have spiked, GM has gotten burned, and its Japanese competitors have out-maneuvered it at every turn: first into small cars, then to crossover vehicles, and now with hybrids and other fuel-saving technologies.
Business historians and plain old second guessers will have a field day.
By Alex Taylor III, senior editor
Last Updated: June 19, 2008: 10:05 AM EDT
NEW YORK (Fortune) -- The news coming out of Detroit is getting worse, and unlike in past years, there will be no full recovery. Analysts are betting that General Motors will be forced to take emergency financial measures this year that could hamper its competitiveness for a long time to come.
Here's why the damage is likely to be permanent: The sales slump is digging a far deeper hole than seemed possible just a few months ago. June is shaping up as a full-fledged disaster. Expectations are that U.S. sales of cars and trucks will run at an annual rate of 12.5 million, as compared with 16.3 million last year and 15.2 million for the first quarter of 2008. If you are keeping score at home, those are practically Depression levels. Citibank analyst Itay Michaeli expects that June sales for GM (GM, Fortune 500) and Ford (F, Fortune 500) will be down 28% and 27% respectively. Since truck sales alone are likely to fall much further than that, the impact on profitability will be even greater.
There's a cascading effect that comes from such a punishing decline. With the trade-in value of trucks and SUVs plummeting, the companies are left with huge write-offs on vehicles returning from lease. Meanwhile, repeat customers are being kept out of the market because they don't have enough equity in their old trucks to buy new ones.
As investors have sold off GM stock, they have pushed its market capitalization below $8.5 billion. That's only $1 billion more than Cerberus invested in Chrysler last year. If you valued GM on the terms Chrysler got last year, it implies that investors are getting GM's very profitable Asian and Latin American business for free.
With investor Kirk Kerkorian now holding a stake in the company, Ford at least has a committed investor on its side, which is effectively putting a floor under the price of its stock. There is nobody filling that role at GM.
This stunning sales decline means that GM is continuing to burn cash at a fearsome rate - perhaps $1 billion a month by some estimates. Rod Lache of Deutsche Bank figures that GM will consume as much as $19 billion in cash over the next two years. Since it began the second quarter with $23.9 billion on hand and needs $10 billion to $15 billion to keep the lights turned on, that leaves a big hole.
To fill it, GM could follow the Chrysler example and start selling off its non-earning assets like land, empty plants, and even underperforming brands like Hummer and Saab. Or it could follow the example of Ford and borrow against its unencumbered assets like trademarks and real estate. Anybody want to make a guess as to how large a mortgage GM could get on its headquarters in downtown Detroit?
Whatever GM does, it is likely to be expensive. Borrowing $10 billion at around 10% interest would cost it $1 billion a year. Analyst Himanshu Patel of JP Morgan lopped $1.20 per share off his estimate for 2010 earnings to account for the interest payments.
It is also likely to leave GM weaker for the long haul. In order to attract financing, analyst Lache figures that GM will need to develop a comprehensive restructuring plan that would include cutting more overhead and further consolidating its brands.
That will accelerate GM's shrinkage. In May, GM sold only 268,892 vehicles in the U.S., leaving it just a smidgen ahead of Toyota (TM), which sold 257,404. June could see Toyota beating GM out for the title of the number one auto company in the U.S.
In GM history, 1992 is generally considered the worst year of modern times, with multiple plant closings, huge losses and the shunting aside of CEO Robert Stempel. Now it looks like 2008 will have that beat.
As GM continues to slide downhill, there is going to be plenty of finger pointing to identify who is to blame. There is plenty to go around. Some comes from just plain bad decision-making, like the Fiat deal, the Delphi spinoff and the Saab acquisition. But a lot stems from the poor running of the day-to-day automotive business. Every time that gasoline prices have spiked, GM has gotten burned, and its Japanese competitors have out-maneuvered it at every turn: first into small cars, then to crossover vehicles, and now with hybrids and other fuel-saving technologies.
Business historians and plain old second guessers will have a field day.
06-19-2008, 10:43 PM
#3
These focks should all be fired for putting all their eggs in one basket..Now they have their hands up their *** trying to build these small economical cars..I read somewhere today that they stopped all the design updates for the trucks & SUV's, that it cost to much money & resources..So Guess what? In 3-4 years when these boats start selling again guess where GM is going to be? With their hands up their asses again because they now have an outdated product..How do these ******** keep their jobs? The Camaro should have been selling 3 years ago along with the VOLT, Not 2 years from now.
06-19-2008, 10:45 PM
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The people running our favorite automaker ran it directly into the ground.
They abandoned cars (which killed the F-body among other things) to feed at the truck trough and now that path has come home to roost.
Wagoner, Lutz and the board that enabled it come to this should be out.
They abandoned cars (which killed the F-body among other things) to feed at the truck trough and now that path has come home to roost.
Wagoner, Lutz and the board that enabled it come to this should be out.
06-19-2008, 11:28 PM
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They really did f-themselves, the last 20 yrs they could have been playing the compact game and have decided to remain silent, now they are f-ed because of it even worse than before. I love trucks and I think they really nailed it on the head with these new trucks so a redesign 5 years after it comes out is probably not needed at all. so that is maybe a not so bad idea. Focusing their reasources in firing these ******** who should have seen this coming and getting the right people in where they need to would be the first step, but like with an old gentelmens club they are all watching out for each other im certain. They should have seen this fuel problem back when gas first shot up over 2 bucks a gallon in 2002. I think everyone was in denial.
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06-20-2008, 12:54 PM
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Yeah the article did fail to mention how much trouble EVERYONE is in right now. However that doesn't really change how bad things are for GM...or all the US automakers.
This situation is a metaphor for what we are doing to our own country. The sheeple mentality WILL destroy our country. It's present in EVERYTHING. We eat up what the media tells us, we whine and complain to no end about our government...but both we AND the government know that we aren't going to do **** about it. Our own greed and apathy has created this downward spiral, and it's only going to get worse because everyone passes it off as someone else's problem.
The way of life we have enjoyed for the last 20-30 years is now nothing but history. A scary new world lies ahead.
This situation is a metaphor for what we are doing to our own country. The sheeple mentality WILL destroy our country. It's present in EVERYTHING. We eat up what the media tells us, we whine and complain to no end about our government...but both we AND the government know that we aren't going to do **** about it. Our own greed and apathy has created this downward spiral, and it's only going to get worse because everyone passes it off as someone else's problem.
The way of life we have enjoyed for the last 20-30 years is now nothing but history. A scary new world lies ahead.
06-20-2008, 01:35 PM
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The return of the Geo Metro will save the company!
Seriously tho, there have been alot of stupid decisions made at GM (Saab, Hummer, unions) and the effects are being felt. The Malibu and Caddies are a step in the right direction, but they still need to tap into the small car/crossover market.
Seriously tho, there have been alot of stupid decisions made at GM (Saab, Hummer, unions) and the effects are being felt. The Malibu and Caddies are a step in the right direction, but they still need to tap into the small car/crossover market.
06-20-2008, 01:35 PM
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what drives me crazy is that they don't seek new leadership. Any other company that was as large as GM is, would have underwent a new leadership program, get the best in their business and not just keep people that have been failing the company since 2000. They might as well try to get some of the guys from toyota who would understand toyotas' strategy and how it works because its allowed them to catch up to GM in the US market.
06-20-2008, 03:29 PM
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If this were a Japanese company the CEO would have resigned in disgrace years ago.
What company lets their credit rating go "junk", tolerates a loss of millions (nevermind billions), underperforming brands that have never turned a profit (like Saturn, Saab), brands that completely overlap and compete with each other, spreading resources thin trying to prop up eight brands as marketshare continues to fall, not profiting at all on most cars sold and concentrating the future on a niche (trucks).
What was obvious to many people outside the auto industry seems like it was never obvious to anyone running GM or they simply ignored it until now which is too late.
What company lets their credit rating go "junk", tolerates a loss of millions (nevermind billions), underperforming brands that have never turned a profit (like Saturn, Saab), brands that completely overlap and compete with each other, spreading resources thin trying to prop up eight brands as marketshare continues to fall, not profiting at all on most cars sold and concentrating the future on a niche (trucks).
What was obvious to many people outside the auto industry seems like it was never obvious to anyone running GM or they simply ignored it until now which is too late.
06-20-2008, 04:54 PM
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^^^^ exactly, they are living in their little perfect american automaker world and need to wake up. Nobody is held responsible, its ridiculous. No One on their board should still have a job but keep doing things like you have been just run the company into the ground. Sad thing is they have some cars that are better than the competition (malibu, cts, etc) that could do some good, unfortunately they don't know how to make money on them though
06-21-2008, 02:13 AM
#14
No one held a gun to people's heads and told them they HAD TO buy big heavy trucks ya know. The consumer market wanted trucks so GM built and sold them big (and very well made I might add) trucks.
Businesses/fleets, construction companies etc all still need to buy these trucks as well in order to survive.
GM now just needs to focus on the general population's needs during the next few years and that will be some smaller, more fuel efficient vehicles such as the Saturn line, Cobalt/G5 and even the 4 cylinder Malibu (now available with the awesome 6 speed automatic).
It's not just GM that's guilty either, Toyota and Nissan obviously felt the need to stick their toes in the big V8 truck waters as well with their Tundras, Land Cruisers, Sequoias, LX570s, Titans and Armadas, ALL of which return even worse fuel economy numbers than the GM trucks do.
Businesses/fleets, construction companies etc all still need to buy these trucks as well in order to survive.
GM now just needs to focus on the general population's needs during the next few years and that will be some smaller, more fuel efficient vehicles such as the Saturn line, Cobalt/G5 and even the 4 cylinder Malibu (now available with the awesome 6 speed automatic).
It's not just GM that's guilty either, Toyota and Nissan obviously felt the need to stick their toes in the big V8 truck waters as well with their Tundras, Land Cruisers, Sequoias, LX570s, Titans and Armadas, ALL of which return even worse fuel economy numbers than the GM trucks do.
06-21-2008, 05:51 AM
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It's not just GM that's guilty either, Toyota and Nissan obviously felt the need to stick their toes in the big V8 truck waters as well with their Tundras, Land Cruisers, Sequoias, LX570s, Titans and Armadas, ALL of which return even worse fuel economy numbers than the GM trucks do.
This is very true and for all the Prius commercials on TV about saving the planet and being Al Gore friendly its very Ironic.Don,t you think.
This is very true and for all the Prius commercials on TV about saving the planet and being Al Gore friendly its very Ironic.Don,t you think.
06-21-2008, 09:39 AM
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http://www.usatoday.com/money/autos/...tsubishi_x.htm
I think alot of GM current problems were formed during Ron Zarrella days at GM, Lutz came in to pickup the peaces but it was too late. Alot of weight was put on the GMT900 trucks, people within GM knew if these trucks didn't pay the bills it would mean financial trouble.
06-21-2008, 01:06 PM
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thats true and thats bc at the time chrysler was making all of the military's jeeps and the gov't was forced to keep them afloat. I think chrysler didn't pay a bunch of that loan back either. Same situation now, GM makes the military's main vehicle, the hummer, so the gov't might get involved again to make sure they stay up and running
06-21-2008, 02:46 PM
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thats true and thats bc at the time chrysler was making all of the military's jeeps and the gov't was forced to keep them afloat. I think chrysler didn't pay a bunch of that loan back either. Same situation now, GM makes the military's main vehicle, the hummer, so the gov't might get involved again to make sure they stay up and running
Chrysler shouldn't have sold out....
The K's were just what Chrysler needed to save itself, and for all the bad-mouthing, I see more of them on the road today than similar-era Japanese cars...
06-21-2008, 03:27 PM
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Didn't the CEO of GM or someone in the higer ups just get their pay raised back up to the 2 millions or something? Yeah they should drop that back down because GM is going into the *******.
-Joel
-Joel