GM, low on cash, seeks aid
Posting another multibillion-dollar quarterly loss Friday, General Motors Corp. said it was “cutting to the bone” but may run out of money by early next year without help from the federal government.
The nation’s largest automaker is now throwing itself on the mercy of Congress and President-elect Barack Obama in hopes that federal aid will be provided even before President Bush leaves office.
“From our perspective, immediate federal funding is essential to help the U.S. automotive industry in order to weather this downturn,” GM President and Chief Operating Officer Fritz Henderson said.
Increasingly, it appears that help may be forthcoming.
On Friday, Obama, accompanied by Michigan Gov. Jennifer M. Granholm, acknowledged the automakers’ woes during a news conference on the economy. Noting GM’s $2.5-billion net loss, plus a huge shortfall that Ford Motor Co. posted Friday, Obama said he had “made it a high priority for my transition team to work on additional policy options to help the auto industry adjust, weather the financial crisis and succeed in producing fuel-efficient cars here in the United States.”
Obama’s remarks in Chicago came a day after leaders of GM, Ford, Chrysler and the United Auto Workers union met with House Speaker Nancy Pelosi, Senate Majority Leader Harry Reid and other congressional leaders to discuss aid options. Some participants said automakers were seeking $50 billion in loans as part of a new economic stimulus program, the Associated Press reported.
The intense discussions underscore the blazingly fast decline of the American automakers’ fortunes and the growing recognition among policymakers of what the collapse of a major car manufacturer might mean to the U.S. economy.
A report released this week by the Center for Automotive Research indicated that the failure of a Big Three automaker would wipe out 2.5 million jobs and $125 billion in personal income in the first year alone.
“In this weak economy, the slightest thing could set off a domino effect that could get really ugly,” said John Wolkonowicz, an analyst at IHS Global Insight.
Still, it’s unclear whether any government aid -- be it in the form of loans, equity investments, grants or something else -- will come soon enough or be sufficient to stop the bleeding for the automakers, particularly GM. Analysts worry that with auto sales expected to stay well below normal levels at least until 2010, cash infusions may only forestall, not prevent, disaster.
With their U.S. sales down 20% and 18%, respectively, so far this year, GM and Ford have been spending significantly more money than they’re taking in. In the third quarter, revenue at GM fell 13% from a year earlier to $37.9 billion as its monthly cash burn, a key measure of liquidity, increased to $2.3 billion from around $1 billion in the second quarter. Operating losses at GM reached $4.2 billion, excluding special gains related to payments to a retiree health fund.
Ford’s revenue declined 22%, to $32.1 billion, and its cash burn nearly tripled, to about $2.6 billion a month. For the quarter, Ford reported a net loss of $129 million but said it went $2.9 billion in the red on its global automotive operations.
Also on Friday, GM said it had abandoned talks on a possible merger with Chrysler because it needed to focus on its liquidity situation. Chrysler, taken private last year, is also struggling, with its U.S. sales down 26% through October compared with last year. GM’s decision to give up its pursuit of Chrysler raises new questions about the future of the No. 3 U.S. automaker.
Despite deep cuts in spending, including news that Ford would lay off 2,200 additional white-collar workers by January, both Ford and GM face large financial obligations to suppliers, employees, creditors and retirees. GM raised the specter of failing to meet those obligations as soon as January.
“GM’s estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business,” said Ray Young, GM’s chief financial officer. “Looking into the first two quarters of 2009, even with its planned actions, the company’s estimated liquidity will fall significantly short of that amount” unless outside help is provided.
To remain solvent, the Detroit company announced plans to save $5 billion, much of it through cost cuts. The retrenchment comes on top of $15 billion the company said in July that it would generate through cost savings and asset sales.
GM is attempting to sell its Hummer brand as well as parts supplier ACDelco. The cuts the company has made severely curtail its production of even relatively strong models. Now GM is reducing spending on new products and delaying or even canceling launches of some models. “It’s a dire predicament,” said Efraim Levy, an analyst with Standard & Poor’s. “GM is hemorrhaging billions in cash every quarter.”
The bankruptcy option appears too painful to consider for many inside and outside the industry. GM executives repeatedly dodged questions Friday about a possible filing.
Beyond the 263,000 people it employs worldwide, GM touches millions of workers in related industries. A collapse would probably drag several major parts suppliers down too. Makers of seats, batteries, tires, windshields and practically everything else except the engine and the sheet metal are in even worse shape than GM.
Suppliers such as Johnson Controls Inc., TRW Automotive and Lear Corp. have seen their stocks tumble 50% or more this year. On Friday, Dana Holding Corp., which makes truck axles and frames, posted a $271-million quarterly loss because of falling orders from GM and Ford, its biggest customers.
Since most suppliers serve multiple customers, their collapse could affect other automakers and create a cascade of failures in the industry, analysts say. That could even hurt import brands such as Toyota Motor Corp. and Honda Motor Co., which employ thousands of Americans at plants in this country.
If one of the automakers did seek bankruptcy protection, it’s unclear whether it would opt for Chapter 11, which has allowed companies like Northwest Airlines to remain in business while undergoing a supervised reorganization, or be forced into Chapter 7, which calls for liquidation.
Industry officials have repeatedly said Chapter 11 was not an option because of the complicated relationships carmakers have with suppliers, debtors and customers, leading one person who is familiar with GM’s operations to suggest that liquidation would be the only possible outcome should solvency efforts fall short.
One avenue of federal support is already established. In September, Congress approved $25 billion in loan guarantees to automakers to finance the development of more fuel-efficient vehicles.
The Energy Department expedited the rule-writing for those loans, releasing them this week. On early review, analysts said the funds would not be available soon enough, or in large enough installments, to carry automakers through the current crisis.
“That’s like bringing a Band-Aid to a train wreck,” said Shelly Lombart, debt analyst at Gimme Credit.
The carmakers have explored various alternatives in Washington, including getting access to the Treasury Department’s $700-billion asset purchase program. But to date, the only concrete step taken has been to open a short-term borrowing program at the Federal Reserve to the carmakers’ lending arms -- GMAC, Ford Credit and Chrysler Financial.
Ford’s chief executive, Alan Mulally, said Friday that although the company had “sufficient liquidity” and wasn’t hinging its plans on government money, worsening conditions could push the company to seek “bridge loans” from Washington.
After the negative quarterly reports, S&P; downgraded GM’s debt rating, its second downgrade of the year, while Moody’s Investors Service downgraded Ford.
In trading Friday, GM shares fell 9% to $4.36, while Ford’s rose 2% to $2.02.