General Motors: Beginning the Endgame?

by: Rick Newman November 08, 2008 | about stocks: GM    

Rick Newman

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All year, General Motors (GM) CEO Rick Wagoner has been insisting his company will never declare bankruptcy. "We're well positioned," he said in August. Company spokespeople reiterated that in October, despite the big stock market plunge. Even the company website states that "bankruptcy protection is not an option GM is considering."

Well, guess what. While announcing a $2.5 billion third-quarter loss, GM also said that its "estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business." That means the company is spending way more than it's earning and, unless something changes, will run out of cash sometime early next year. The company itself hasn't raised the possibility of a Chapter 11 filing. But at this dire juncture, Wagoner and his lieutenants ought to be fired if they're not doing contingency planning for bankruptcy  —since that's where companies end up when they run out of money and can't pay their bills.

There's one alternative, of course. No, it's not a desperate merger with Chrysler, which GM has now disavowed, since Chrysler is in even worse shape than GM. Salvation lies in — you guessed it — a government bailout. With the feds in full giveaway mode, GM is poised to be a major beneficiary, since it's still one of America's biggest companies, with about 140,000 employees (though shrinking quickly).

The mistake that brought GM to its knees is well known by now: It relied for too long on big trucks and SUVs that customers fled when gas prices spiked. As a result, sales have plunged 20 percent so far this year, with a dramatic 45 percent drop in October. "This type of decline is unheard of," says Tom Libby, a J. D. Power and Associates analyst.

GM is also a hit-and-run victim of the credit crunch and other factors beyond its control. GMAC, which provides financing for the majority of GM's buyers, recently tightened credit standards so much that thousands of customers couldn't get a loan, one reason GM's October sales were much worse than anybody else's, including Ford's and Chrysler's. Even GM itself can't get loans anymore, which is why its cash-flow problem is effectively a bankruptcy alert.

Wagoner & Co. have already tried a number of maneuvers to get the company back on track. GM has closed more than a dozen aging factories over the past 5 years and announced dozens of other cost-cutting measures. In fact, GM is like one of those highways that's always under construction: The company has announced reforms and taken charges for restructuring in virtually every quarter for the past four years.

Still, the damage never seems to get fixed. "What is taking so long?" wonders David Silver, an analyst at the research firm Wall Street Strategies. Last October, for instance, GM said that some of its truck and SUV production would be converted to smaller vehicles and that cars sold in Europe and Asia would be brought to the United States. "But I still see the same models in showrooms," Silver says. "Nothing Wagoner has done can be considered a strategic readjustment."

He and others have long argued that GM must take much more drastic steps — which may now be on the way. Some possibilities:

Consolidate brands. GM has eight divisions (quick, can anybody name them all?) with significant overlap. Chevrolet, Buick, Pontiac, and Saturn, for instance, share many vehicles that are nearly identical, except for the badging. Consolidation would cost some money up front to buy out dealers and close out certain brands, but it would make GM leaner and more competitive.

Pump out high-quality, smaller vehicles faster. One nice way to do this would be to shut down an old plant, retool it completely, retrain the workers, and then reopen as a Toyota-quality, made-in-the-USA operation. But that might be too expensive for a company bleeding cash.

Continue work on the electric-powered Chevy Volt. And make sure it meets the very high expectations GM has set, like being able to run 40 miles on a single charge, at an overnight recharging cost of less than $1 per day — with no quality problems!

Some help is already on the way. GM stands to get a boost of at least $5 billion from the $25 billion aid package Congress approved for the automakers in September. And all three Detroit automakers have been lobbying Washington for more help. One selling point is the devastation that a bankruptcy filing would cause. With plenty of quality cars in a crowded market, a Chapter 11 filing would be "so punishing it would virtually cripple the company," says Libby. "GM will sell other things or beg for money before they do that." The company might even admit how desperate it is.

Disclosure: No positions.

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This article has 33 comments:

  •  
    Nov 08 12:02 PM
    Rick, you perpetuate the false perception of their superior quality by suggesting GM "reopen as a Toyota-quality...opera... Toyota had an engine sludge problem so superior a couple of years ago, that it took a consumer class-action suit to get their attention (look it up on Google). They also got knocked recently by Asian-friendly Consumer Reports for quality issues. Yet, the perception of their superior quality continues...perpetuate... by journalists like you that just assume it's true.
    Reply | Link to Comment
  •  
    Nov 08 01:04 PM
    It is almost inevitable GM and Ford are going to be bailed out by the government.

    Consumers are not going to buy any GM or Ford brand while their names are in the bankcrupcy list.

    Who is going to honor their warranties if they go bankcrupt?

    Likewise, when nobody buys GM or Ford cars. How can they possibly survive?
    Reply | Link to Comment
  •  
    Nov 08 01:05 PM
    If GM wants to prosper, management only needs to do one thing:

    Crush the cancerous union that has insidiously eroded GM's competitive position over the years. GM's labor cost structure is far too high to compete effectively in a global market. The company is broken. Giving it another loan is like giving blood to an emergency room patient whose leg has been ripped off.... it just flows right out. GM needs a tourniquet instead.
    Reply | Link to Comment
  •  
    Nov 08 01:15 PM
    For some reason Warren Buffett is not investing in GM. He probably knows that the auto business is dead.

    Buffett is now on the economic advisory team of Barack Obama. Can he help?

    warrenbuffettstocks.bl.../
    Reply | Link to Comment
  •  
    Nov 08 01:17 PM
    yes, right

    GM is an auto company specializing in healthcare
    Reply | Link to Comment
  •  
    Nov 08 01:33 PM
    the auto industry built the cars america wanted! who wanted an alternative fueled car 5 yrs ago? who cared about mileage 5-8 yrs ago. 10yrs ago automakers were making money hand over fist, uaw wages have'nt went up that much!
    Reply | Link to Comment
  •  
    Nov 08 01:42 PM
    The same socialist-like liberals that verbally support Union labor and other entitlement programs seem to mostly drive non union produced Subarus, Toyotas, Hondas, Mazdas, Hyundais, etc.
    US manufacturers cannot compete while supporting union legacy costs. The future US auto industry will have to be non union.
    Reply | Link to Comment
  •  
    Nov 08 02:51 PM
    When I look at American cars from a european perspective, man, it looks like they are some 10 years behind. No style, large, awkward and fuel consuming.

    Where is the German perfection of a BMW or Audi, or the classy style of a small, womanish FIAT Panda, or Stilo...

    GM had a great electric car in the 80's. Look at the documentary "Who killed the electric car". It was perfect until someone had the brilliant idea to take it away from the consumers. And now the irony is... that the electric car is killing GM. The Toyota Prius and other hybrids are biting into the market share and the SUV's are just getting killed.

    Maybe the Volt is the answer. Maybe. I am no mechanic or engineer, but GM looks like a company who needs to rethink WHY SHOULD THEY PRODUCE CARS in the first place.
    Reply | Link to Comment
  •  
    Nov 08 03:00 PM
    yak yak yak yak blah blah blah !!!!!
    Right now, Ford is at $2 and GM is at $4
    A screaming bargain, arent they?
    quit analyzing and analyzing...
    Just call your broker, simple as that!
    GM and Ford is missing something... called shareholders!
    Reply | Link to Comment
  •  
    Nov 08 03:01 PM
    Dont worry about carbuyers..
    they will come back...
    Buy GM and Ford stock before they come back
    This is the oldest trick in the book!
    Reply | Link to Comment
  •  
    Nov 08 03:07 PM
    Allowing the auto companies to fail would be a mistake, yet the prospect of giving them our money to continue their disastrously bad ways is also unacceptable.

    Until there are big changes (radical downsizing, brand consolidation, serious small car production, union giveups, ...), they shouldn't be given taxpayer money.

    Why haven't we heard more about replacing management? Why aren't the stockholders more active?
    Reply | Link to Comment
  •  
    Nov 08 03:46 PM
    Quick, all you experts come and kick the Big 3... The same ones who told us gas would absolutely be $7/gal or more by now.
    Unions are not the trouble now - they have little say and they know it so get off the Blame Labor kick. The pensions and health care that MANAGMENT agreed to in the past are killing them. How about a national health plan to help ALL industries compete (OMG - SOCIALIST!) So do we let em di? Throw Grampa out on the street by taking away his pension? Where was the concern about companies deliberately under-funding the plans for YEARS!
    People wanted BIG cars, FAST cars, EGO cars and the big 3 had the gall to make what folks bought! Shame on them! Gas goes to $5 and now the unloved and discontinued 48mpg non-hybrid GEO METRO seems a good idea.
    Give them a break, buy or try one and see. They wont be allowed to fold and hell, I still can get parts for my AMC who went under in 88!
    Reply | Link to Comment
  •  
    Nov 08 03:48 PM
    Blame it on the MBA's. These dogass do nothing, know nothing, but I'm in charge, a-holes can run any and every company they touch down the toilet.
    The fed ex commercial with the guy wanting to ship something and the admin trying to tell him how to do it, until he says, quite condenscendingly, "I have an MBA" to which she replies, "Oh, well then let me show you how to do it", says it all.

    The guy who wants US auto cos to import the 'womanish' (is that a word?) Fiats probably has an MBA.

    Reply | Link to Comment
  •  
    Nov 08 05:09 PM
    Excellent comment. But, I'd like to add ,a serious commitment to product quality is also in order.


    On Nov 08 03:07 PM Fred in Michigan wrote:

    > Allowing the auto companies to fail would be a mistake, yet the prospect
    > of giving them our money to continue their disastrously bad ways
    > is also unacceptable.
    >
    > Until there are big changes (radical downsizing, brand consolidation,
    > serious small car production, union giveups, ...), they shouldn't
    > be given taxpayer money.
    >
    > Why haven't we heard more about replacing management? Why aren't
    > the stockholders more active?
    Reply | Link to Comment
  •  
    Nov 08 05:24 PM
    To Ax, who stated above that "GM had a great electric car in the 80's", the earlier GM electric EV-1 had an utterly inefficient set of lead/acid batteries. It would never have suited large masses of people over the long haul. Hybrids, like the Prius, rely on nickel/cadmium batteries, which are more efficient but unable to power a fully-electric car. The Chevy Volt will be powered by lithium ion batteries, similar to what powers your cell phone. and will have a fully electric drive train. Its small gas engine will only recharge the battery after miles without a charge,

    GM still sells 6 of the top 20 selling cars in the USA. Obviously, they know why they're in the business. They only need to reduce labor and legacy costs to the level of their competition.
    Reply | Link to Comment
  •  
    Nov 08 05:41 PM
    Yeah...right, Gumby.....why don't you just stick to acting in dumb stop-motion cartoons.

    Shareholders smell dog crap in the US automakers, but it's very old, dried out, bleached white dog crap. Look at a 50 year time-line of profitability and market share, and you tell me if these these companies deserve life support from the government. This will be the SECOND TIME that Chrysler has had it chestnuts pulled from the fire by the Feds (Remember the 70's and Lee Iacocca?)....if the Feds decide to do anything....(Probably so, since there are Bush/Obama cronies in Cerebus that owns that piece of crap company).

    Go ahead...root for a bailout. Throw even more money into rat hole. And then watch as these companies come right back to Uncle Sam begging for more dough....when it's so worthless from inflation and interest rates are so high that nobody can afford a car....even a piece of crap from GM or Ford or Chrysler.

    Aaahhh....America..... where Capitalism rules......until Capitalists screw it up so badly they beg for Socialism to save it.


    On Nov 08 03:00 PM Gumby wrote:

    > yak yak yak yak blah blah blah !!!!!
    > Right now, Ford is at $2 and GM is at $4
    > A screaming bargain, arent they?
    > quit analyzing and analyzing...
    > Just call your broker, simple as that!
    > GM and Ford is missing something... called shareholders!
    Reply | Link to Comment
  •  
    Nov 08 06:05 PM
    Why are they paying the CEO of GM $15 mill a year and $50 mill over the last five years? I guess the more you lose the more you make. His pay jumped 50% from '06 to '07. WTF???!

    www.companypay.com/exe...
    Reply | Link to Comment
  •  
    Nov 08 06:08 PM
    Now the Dems are pusing Bush to help the automakers so the Dems won't get the blames later if things fall apart. How smart.
    The only right thing to do now is "DO NOTHING."
    Let somebody buy these automakers out. No taxpayers money will be wasted.
    Reply | Link to Comment
  •  
    Nov 08 06:48 PM
    We're facing the same thing in Canada. Why give money to the Big 3 to produce cars that will never sell?

    So if the government is going to offer a bailout, what would it do? Universal Healthcare? Take over the pensions? Help Toyota build plants? I dunno. A bailout doesn't help anyone if you don't have a viable business plan.
    Reply | Link to Comment
  •  
    Nov 08 07:09 PM
    GM wants U.S.Taxpayer bailout and spends Billions to build new plant in Russia....Of course when the next war (with Iran?) breaks out that Russian Plant will supply Iran with Tanks, I bet.
    Reply | Link to Comment
  •  
    Nov 08 07:40 PM
    Adam,
    You maybe right.
    Reply | Link to Comment
  •  
    Nov 08 08:34 PM
    Ironic, isn't it? The Dems will very soon have to confront high labor expense, associated legacy costs, and their own CAFE standards if the American auto industry is to be saved.
    The only alternative is a continuous transfusion from the U.S. Treasury.

    Note to Pelosi and Reid: What goes around, comes around.
    Reply | Link to Comment
  •  
    Nov 08 10:59 PM
    Question: it seems like we, the taxpayers, are now going to be asked to pick up the astronomical costs of this cushy healthcare plan that GM employees AND retirees have....no payment towards premiums, no co payments, top quality everything. And why? Please someone tell me. We don't have that for ourselves but we have to pay it for them???

    If they want the bailout, bring wages and benefits down to the average of the rest of us....no more $50,000 UAW janitors (check it out).
    Reply | Link to Comment
  •  
    Nov 08 11:04 PM
    eternitus is right- unions are one the main problems. the other main problem is people with low brain cell counts ( like obama and pelosi) who support the unions.
    Reply | Link to Comment
  •  
    Nov 09 06:54 AM
    "GM has eight divisions (quick, can anybody name them all?)"

    I couldn't so I had to click on the link. Here's the list (comments added)

    *Chevrolet - well, of course, a synonym for GM
    *Buick - overpriced Chevys with more fake leather
    *Pontiac - a historic name but not relevant today
    *GMC - he-man truck brand with fight-to-the-death loyalists
    *Saturn - supposed new beginning, now another Chevy clone
    *Hummer - exists in name only & they're trying to sell that
    *Saab - they actually sell these? Have you ever seen one?
    *Cadillac - really overpriced Chevys with genuine leather
    Reply | Link to Comment
  •  
    Nov 09 02:44 PM
    They need new management. Sorry, the team in there isn't getting the job done. They may *need* bankruptcy too. Remember lots of companies go bankrupt and then emerge to continue business. Hasn't United Airlines done that about three times now?

    A bankruptcy filing would allow them to break their union contracts and other unworkable obligations.

    They could start by divesting themselves of obsolete factories in over unionized states, like Michigan. They should sell non-essential things like real estate. They should lay off everyone for a nice long Christmas vacation right now, while they think things over.

    To go on losing billions and billions of dollars month after month is stupid. The older generation that ran GM in the 1950s and 1960s at least had no illusions about running plants continuously. They were savage with layoffs. A twitch in the economy, a small backlog
    of a particular model and BOOM out go the lights at one or another plant, 4500 guys are the gov'ts problem (uninsurance) .

    A very hard nosed Mr. Capitalism type is needed. I watch these current guys on TV and it is clear they are Phil Donahue style capitalists who are not willing to take the savage steps needed to
    fix these once great companies.

    They would rather beg taxpayers to bail them out. How pathetic.



    Reply | Link to Comment
  •  
    Nov 09 02:46 PM
    Sell Hummer to the UAW for $1. Let them have something to play with for a while.
    Reply | Link to Comment
  •  
    Nov 10 02:07 AM



    On Nov 08 03:07 PM Fred in Michigan wrote:

    > Allowing the auto companies to fail would be a mistake, yet the prospect
    > of giving them our money to continue their disastrously bad ways
    > is also unacceptable.
    >
    > Until there are big changes (radical downsizing, brand consolidation,
    > serious small car production, union giveups, ...), they shouldn't
    > be given taxpayer money.
    >
    > Why haven't we heard more about replacing management? Why aren't
    > the stockholders more active?


    NO BAILOUT! NO MORE TAXPAYER $$ FOR THE BIG3!!
    Let them collapse. It is the only way to get rid on the union filth forever.
    Reply | Link to Comment
  •  
    Nov 10 12:35 PM
    Bailout after bailout after bailout after bailout.

    Welcome to the Socialist Corporate States of the Formerly United.

    But I'm not worried, the electorate voted all the f-ing bums back into office. Nothing but incompetent self-preservation for the wealthy! Yee-Ha!
    Reply | Link to Comment
  •  
    Nov 10 01:52 PM
    I can't think of a worse way to invest my taxes than in these money pits. How big would the bailout have to be to allow these horribly run companies to exist for 6 more months than they otherwise would? That money would disappear - poof!

    For the $100 billion or so it would cost to have these cash furnaces still around a year from now, making poorly built, money-losing products that nobody wants (in true Soviet form), how many light rail and subway systems could we have built in our cities to reduce our financially devastating oil dependency? How many windmills or geothermal wells?

    Look, management and the unions made the deals long ago that accepted short term gains in exchange for the long term destruction of these companies. Workers got paid as much as some doctors and management got their millions in bonuses for keeping the lines running another quarter. Eventually, they knew such a company couldn't compete, but they accepted that because the money was good. It was a rational business choice, and the people who made those decisions reaped the benefits until they retired. Now the day has come for the bill to be paid by a new generation of workers, who will lose their jobs and have few other prospects.

    It really is a parable of what has happened to America in the past few decades. Thanks a lot baby boomers. If I ever got the chance to vote away your social security benefits, I would, but I know you'll always be there to prevent that - riding the gravy train right off the cliff.
    Reply | Link to Comment
  •  
    Nov 10 02:58 PM
    Mister Jimmy wrote:

    "Rick, you perpetuate the false perception of their superior quality by suggesting GM "reopen as a Toyota-quality...opera... and "Yet, the perception of their superior quality continues...perpetuate... by journalists like you that just assume it's true."

    Sorry Jimmy, but it's not bloggers or Consumer Reports that are trashing the reputation of the Big 3's products, it's the products themselves.

    When I see the cheap paint flaking off of late-model GM and Chrysler cars - that's not just perception.

    When I see the white smoke blowing out the tailpipe of a 5 year old Chrysler on the freeway - that's actual smoke.

    When my parent's Chevy Lumina threw a rod at 80k miles, that cost actual money.

    When my GMC Sonoma was simultaneously leaking fluids from the engine, transmission, power steering, and cooling systems at 60k miles, no journalist was splashing those fluids up there.

    When my friend's Monte Carlo went through 3 alternators before 100k miles, that was no perception of low voltage.

    When another friend's Chevy needed a water pump at 60k miles at a cost of $600, that wasn't some journalist's anecdote.

    When yet another friend's Explorer roasted its rear end gears, that grinding sound was real.

    When yet another friend's 70k mile Saturn has interior rattles that drown out the radio (which doesn't always work on all speakers) that's not journalistic noise.

    When my Ford Ranger pings incessently on 87 octane, that noise is not just in my head.

    Of course, with expenses like the Big 3 have, they won't have the same amount of money to spend on quality or R&D as Toyota or Honda has. Oh well, that's business.
    Reply | Link to Comment
  •  
    Nov 10 08:50 PM
    some have trouble with Japanese cars too. or European. I had an accord that basically couldn't sit an idle for more a few minutes with out over heating. I had VW that had the same problem. Not that I haven't a gm do it to. long and the short of it, all cars can have this problem. and its perception that domestics have more trouble than any body else. and thats based on statistics collected from consumers. i think some one mentioned that the domestics and foreign car companies all seem to have the sames cost structure. which is true, the biggest difference between them is that the domestics have been around a lot longer (i seem to recall that GM has had its 100 year birthday this year). The other problem is that in the past they played games to be profitable (like most AMERICAN companies do at one time or another) and didn't contribute a realistic amount of money to their long term responsibilities. and now that is biting them. but they have at least started down the path to good products. they have several new cars that are recognized by the car magazines as being in the league as the big 2. and thats saying a lot. they also have a possible jump on the competition if can make the Volt work. But they h