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Friday, November 11, 2005

The B Word

The Detroit Free Press, the liberal leaning sister paper of the Detroit News, published a page 1 story about GM today with the word "bankruptcy" in the title.

GM is in danger, but I believe that this is premature, and a classic case of journalistic piling-on. One piece of evidence cited for GM's possible bankruptcy was the drastically diminished stock price--but in fact, the value of the stock has nothing to do with GM's profitability. Wall Street could sell GM down to $1 a share, it would not cause bankruptcy. No matter how many times The Freep, Wall Street analysts, or Robert Farrago warn of bankruptcy, it does not make it any closer.

Remember that GM is sitting on a huge pile of cash, about $20,000,000,000. Add to that the assets that GM could sell quickly, and you have about $45,000,o00,000. Even if GM lost $5 billion a year, it would take 4-10 years to become insolvent. And that $5 billion a year includes product development costs. All GM has to do is a little better than break-even, and it can operate nearly indefinitely. The stock analysts don't like that, since they are mostly focused on earnings growth.

GM's (and Ford's) job is to figure out how to be profitable businesses without gaining market share. This can be done. They need to reduce legacy costs by engaging the UAW, reduce product costs through platform sharing, and gain pricing power by building sexy cars. GM will never again have 60% of the U.S. market. And I agree with many pundits that huge changes at GM are necessary. But that doesn't mean GM is going away, either.

As the British conservative-writer-with-the-funny-name Theodore Dalyrimple wrote, "apocalypses have a habit of not happening". For all of its apparent mis-steps, a company as large as GM is not run by idiots. Guys like Rick "whipping boy" Wagoner and Bob "Uncle" Lutz did not get to the top of a multi-billion dollar company by being stupid. GM may change, but GM is not going away.


Dorri732 said...

Careful what you ask for.

Quote:". . . reduce product costs through platform sharing. . ."

Too much platform sharing is part of what got them into this mess.

Remember the Cadillac Cimmaron? Neither does anyone else. It was a Chevy Cavalier with leather.

The Auto Prophet said...

There is a right way to share platforms and a wrong way. I am not in favor of re-badging, but rather, re-use of underlying components while changing the parts that distinguish the vehicle.

For example, the Volvo XC90, S80, Ford Freestyle, and Ford 500 are all related, but you would never confuse the Ford for the Volvo or the Volvo for the Ford.

Anonymous said...

GM's GAAP earnings (losses) vs. its cash balances are not a relevant measure of whether or how soon GM is going bankrupt. If you look at their cash flow statements, GM has required net new financing of about $20B/year. As GM's situation becomes more precarious, it may or may not be able to obtain that financing--if not, it will have to go into bankruptcy. Of course, they might decide to go bankrupt voluntarily before that happens. If people become really skittish about GM, they won't be able to roll over their existing debt as it matures and then they will be forced into bankruptcy immediately.

That wouldn't mean GM goes away--it isn't in anyone's interest to liquidate GM, even if were possible. Presumably it would be reorganized and continue under new ownership.

The Auto Prophet said...

But GM is not borrowing for the purpose of day-to-day operations. GM is borrowing money so that GMAC can write loans to car buyers. Only about $30B of GM's debts are against the automotive side of the business.

The ~$300B GMAC debt is good quality debt, because it represents loans to good quality customers.

The GMAC debt won't be junk once that division is spun off as a partly owned corporation.

Anonymous said...

If Delphi, or any other significant supplier were to strike or shutdown, GM's cash would disappear in weeks.

GM is in trouble. How much and how soon remains to be seen. Just the fact that they may have to spin off GMAC to retain low financing for GM vehicles is prophetic of the damage level.

The Japanese thought for years that they wouldn't need product variation for customers across a broad base. But now they have Lexus.

I like GM products. 1990 Grand Prix went 250,000 serious maintenance. Sold it. 1995 Safari - 247,000 and still running. - all wheel drive version - some maintenance beyond what I'd consider normal. 2001 Impala - 137,000 miles.

Anonymous said...

It is true that much of GM overall borrowing is by GMAC, but I do not believe that the money loaned/borrowed by GMAC can account for the need for $20B additional borrowing/year. It isn't as if GM were selling more cars every year.

And of course the quality of GMAC's receivables depends upon the overall health of the economy. If there is any kind of dip, GM will have a double whammy of weak sales and bad debt.

In any case, the relationship between GM's accounting earnings is still not very relevant to the timing of a possible GM bankruptcy.

The Angry Engineer said...

GM does indeed have "only" $30B in bond debt right now on the automotive side. But consider that it's going to pick up an $12B tab from Delphi, and the GAO thinks that there may be a $31B underfunding of the pension fund. There's also $75B in unfunded future health costs hanging out there, although the new UAW deal decreased that by $15B.

Also, that $260B in GMAC bond debt might become a noose if there's any sort of economic downturn that results in a high default rate.

I've been a GM fan ever since I was old enough to recognize cars and trucks, but I don't think this is going to end well. I'm honestly not drawn to many of the company's current products.

Anyways, having been on the receiving end of GM's wrath towards suppliers, I suggest that karma is catching up with them.

Dave said...

One other thing about that GMAC debt that some of you might be overlooking is that these guys don't just do auto loans, they do mortgages (mine included) now, too. In fact, that annoying guy is wholly owned by GMAC.

IMO, this ups the quality of the loan portfolio and certainly broadens it beyond just automotive-related loans.