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Can General Motors come back?

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Can General Motors come back?
By Jim Jubak - Link to original article
Jubak's Journal 7/18/2008 12:01 AM ET

The future for automakers is so murky that even deeply wounded GM could enter the next decade in control. But the company will have to keep a close eye on its cash.

The auto industry is in chaos -- fortunately for General Motors.
  • Gasoline above $4 a gallon in the U.S. has sent sales of trucks and SUVs plunging as drivers look for more mileage for their dollars.
  • Higher steel prices have savaged profit margins.
  • New competitors from India and China are about to emerge in the global market.
  • And nobody knows what the future will bring -- electric cars, more hybrids, even cleaner diesels.
It's likely that the auto industry will look radically different in 2010 than it does today.

And that's what's likely to save GM. The company is bleeding market share in its home market because fewer motorists want to buy its North American product line of trucks and SUVs. And its losses are so huge that in the past couple of months the company has burned through cash at a rate of more than $1 billion a month. In the quarter ending in March, the burn rate was about $500 million a month.

But whatever its current troubles, the company isn't shut out of the future of the global auto industry. So much change is sweeping across the global marketplace, nobody -- not even Toyota Motor -- will be able to lock up the market and turn GM into a permanent also-ran. There's so much uncertainty about demand trends and developing technology that even a player as currently challenged as General Motors could grab the brass ring if it makes the right decisions on what cars to produce and what technologies to back.

And amazingly, given all the talk about the death of General Motors, the company has a better chance of grabbing that prize than almost any car company in world except for Toyota. If GM can get to 2010 with a few dollars left in its gas tank, that is.

Market weakest where GM is strongest

How bad are things at General Motors? The company showed a $4.4 billion operating loss in 2007, the fourth operating loss in the past four years. Cash flow for the year was a negative $5.6 billion. The company finished the year with $25 billion in cash, about flat with 2006 but down a huge $24 billion from the end of 2005.

Then everything got worse. After averaging 16.8 million units a year from 2000 through 2007, U.S. auto sales are on a pace to fall to just 14 million units in 2008. The hardest-hit segments are exactly where General Motors' sales are strongest. Industrywide, sales of pickups, SUVs and vans -- exactly the kinds of vehicles most affected by higher gasoline prices -- were down 21% in the first half of 2008 compared with a year ago. The company gets about 60% of its sales from these categories. The company's share of the U.S. market, which tumbled to 23.5% by the end of 2007, has declined further, to just 21%.

And the recovery in U.S. auto sales is getting further and further away. First projected for the end of 2008, as the economic slowdown has dragged on and as oil prices have shown no signs of a meaningful retreat, the recovery has receded into 2009. General Motors has recently started talking about 2010 as the year the auto market turns around and the company returns to profitability.

Losing cash, facing debt

Pushing off a recovery for an additional 18 months gets very scary when a company is burning through cash as fast as GM -- whether it's the $1 billion a month of the past couple of months or the $500 million a month of the March quarter.

Do the math: Eighteen months at $1 billion a month comes to $18 billion. General Motors finished the March quarter with $22 billion in cash. The current rate of cash burn would cut that to just $4 billion by the start of 2010. That's cutting it a little close for a company with $34 billion in long-term debt.

Fortunately for GM, only about $6 billion of that debt comes due in the next five years. (If you use the $500 million burn rate of the March quarter, the situation looks a bit better, with GM’s cash balance falling to $13 billion.)

In early July, reports from analysts at Merrill Lynch (MER, news, msgs) and Citigroup (C, news, msgs) argued that the $4 billion margin, the start-of-2010 projection from GM's current burn rate, would not be enough. Yet the most recent auto sales numbers show the plunge getting worse. GM managed to hold its June sales decline to just 18.5% by staging a 72-hour sale with 0% financing during three days at the end of the month, for example.

If the slowdown is deeper than projected and the turnaround doesn't come until 2011 or later, these analysts say, GM might be headed for bankruptcy.

Piffle, responds GM CEO Rick Wagoner. GM has plenty of cash to make it to a recovery. And if necessary, the company can raise more.

GM moves to hold on to cash

Perhaps realizing that investors aren't likely to take the word of a CEO who has presided over a 61% drop in the price of GM shares from Dec. 31 to July 14, Wagoner announced July 15 a package of measures to cut costs and raise capital designed to demonstrate that GM wasn't in danger of running out of cash.

Here's what General Motors announced:
  • An end to the 25-cent-a-share quarterly dividend.
  • Cuts of about 20% to the company's salaried work force of 32,000.
  • The elimination of company-paid health insurance for retired white-collar workers older than 65.
  • The closing of four truck plants, with more plant closings on the way.
  • Plans to raise an additional $2 billion to $4 billion through asset sales and an additional $2 billion to $3 billion through new financing secured by company assets.
  • The elimination of cash bonuses for executives.
  • A delay in paying $1.7 billion owed to the union retiree health care fund.
  • A reduction in capital spending of $1.5 billion in 2009.
Total savings: $10 billion a year. Total new financing: $4 billion to $7 billion.

That, Wagoner said, will be enough to get the company through 2010. In its projections, the company is assuming that U.S. auto sales will fall to 14 million units in 2008 and 2009 and that oil will cost $130 to $150 a barrel.

Betting on high fuel economy

Crucially, the cuts seem to preserve all the new models that GM needs to drive a sales recovery. The product development cuts are a result of delaying plans to design future large pickups and SUVs.

The company plans to bring five new products to the U.S. market by the third quarter of 2010, including a small Chevrolet, the Cruze (a replacement for the current Cobalt); the Buick Invicta sedan, a new sports wagon; and a coupe version of its Cadillac CTS sedan. A new direct-injection turbo four-cylinder engine is a critical element of the turnaround. The goal, according to Bob Lutz, the vice chairman in charge of product planning, is to give GM best-in-class fuel economy in every market from small to big models.

And if everything goes according to plan, GM's electric car, the Volt, will go into production in 2010 and hit full production in 2012.

And 2010 is critical for General Motors in another way. The 2007 agreement with the United Auto Workers set up a voluntary employee beneficiary association that, if approved by the courts, would transfer $40 billion in health care liabilities off GM's balance sheet. The savings, the company estimates, would run about $2.6 billion to $3.4 billion in 2010 or 2011. Court approval is expected in 2010. The savings would go a long way toward bringing GM's costs in line with other carmakers operating in North America.

Will GM be able to introduce the new small models it needs to revive its North American sales? Evidence from the world's emerging markets suggests the company can. Though GM's sales in North America have done a swan dive, sales in developing markets have been growing faster than the auto industry average. For the second quarter of 2008, for example, sales in Latin America, Africa and the Middle East set a quarterly record for the company in the regions, driven by demand for the company's small-car models: the Chevrolet Corsa, Celta and Aveo. Even if it's hard to see the evidence from a point of view inside the North American market, GM is capable of getting things right.

Bumps along the road to recovery

If over the next year it increasingly looks like GM can survive until 2010 or 2011, that new products will contribute to a sales recovery in North America as expected and that cost savings from the current round of cuts and the 2007 agreement with the UAW will work as projected, then GM shares, which traded at a 2008 low of $9.38 on July 14, could climb to $16 a share by July 2009. After a two-day rally in GM's shares, that would be a 39.4% increase from the July 16 closing price of $11.48.

I'm not sure a potential gain of 40% in a year is enough for me to take the plunge on these shares right now, given the risk. I liked GM stock a lot more when it traded at $9.38 than I did at $11.48 just two days later.

In this continuing bear market, I suspect that I'll get another shot at that July 14 low. There will be lots of bumps along the road to recovery for GM. I'm willing to wait for the current enthusiasm to swing back toward despair.
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All domestics are in trouble right now and all domestic CAN "come back".

What has to be dealt with is the public PERCEPTION that imports are superior cars to domestics by simply BEING "imports".

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