GM Death Watch 163 What Doth It Profit A Man

Robert Farago
Wednesday, February 20, 2008

"Managing expectations." It's a term near and dear to the hearts of the people who pull our politicians' strings. Increasingly, it's the rhetorical weapon of choice for executives seeking to maintain their grip on America's large corporations. While there's nothing wrong with casting your company's efforts in a positive light, the danger is both simple and lethal. When a company's culture becomes based on hype, it loses its ability to react to reality both good and bad. It becomes lost in the fog of war. One such company is GM.

Last Tuesday, GM CFO Fritz Henderson did something his boss, CEO Rick Wagoner, has refused to do throughout his entire tenure at the top. Fritz set a deadline for GM NA's return to profitability. Well, not a deadline, exactly. More like an estimate. Actually, make that a prediction with caveats. Anyway, in the now-familiar post-bloodbath (a.k.a. financial results) conference call with industry analysts, Fritz said General Motors' North American operations should be solidly profitable by 2010. Or 2011.

Now that's saying something. GM North America is currently in complete turmoil, verging on chaos, heading towards meltdown. It's losing market share, production capacity, skilled workers, profitability (incentives are up) and, most of all, cash money. If you exclude the mother of all tax credit write-downs (which placed GM's '07 losses at $38.7b), NorAm dropped $1.5b last year. Not bad? Lest we forget, that number was propped-up by the sale of the Allison Transmission unit for $4.3b.

Speaking of fire sales and clever accounting, Fritz claims GM has $27b in cash and "cash equivalents" in the kitty. Take away $10b for life-sustaining cash flow, and GM is only $17b away from empty.

GM's cash conflagration continues unabated. Despite dramatic downsizing, the American automaker still has enormous overheads: advertising ($2.6b per year), research and development, factory modernization, pensions, health care, administration, servicing its massive debt ($2.9b per year) and, of course, executive compensation.

If we presume that these costs are holding steady at least until the new labor agreement yields significant reductions GM's $6.8b '07 loss (with Allison removed from the equation) indicates that they've got two-and-a-half years to turn the ship around or go down. In other words, if Fritz isn't right, if GM isn't "solidly profitable" by 2011, they will be bankrupt.

Of course, this also assumes there won't be any "exceptional" calls on GM's cash pile. Heading into a major industry downturn, that's about as safe as assuming that the IRS will forget that you're legally obliged to file a tax return.

For one thing, bankrupt parts supplier Delphi, is looking for a billion dollar plus cash infusion. If GM's former division doesn't find the financing, well& Chrysler's unresolved Plastech debacle shows how vulnerable GM's assembly lines are to a parts disruption (a.k.a. renegotiation/extortion). A quarter of Detroit's main parts suppliers are teetering on the brink of bankruptcy. Even if GM's suppliers simply ask for their money up front, The General's liquidity would take a massive hit.

And then there's GMAC. Since GM sold 51 percent of the lender to Cerberus, The General's former cash cow has cratered. GMAC just posted a $724m fourth-quarter loss; the ResCap mortgage-lending unit bled $921m worth of red ink. If ResCap collapses, creditors may pierce the veil and sink GMAC. Meanwhile, cheap GMAC loans to high risk debtors are a thing of the past, which pulls the rug from under one of GM's main weapons in its war on excess inventory.

And that brings us to the income side of the ledger. While GM boosters view the new Cadillac CTS, Chevrolet Malibu and GMC Acadia as evidence that the automaker has got its NorAm product-related shit together, it most decidedly does not.

As nice as they are, these vehicles are not class-leading import conquerers. Sure, GM's finally woken-up to the fact that they have too many brands (eight), products (49) and dealers (6750). But their "throw the losers (Buick, Saturn, Pontiac, Saab) into a gulag and starve em to death strategy" is a long-term play that will make things worse before they get worse. No matter how you slice it, GM needs LOTS of turnover the keep the lights on.

Post corporate fire-sale, you could consider GM's brands its only remaining asset. If so, the company is already dead. Aside from Hummer, none of GM's brands has a clear remit or a coherent product line. There is overlap, cannibalization, confusion and chaos. Fleet sales aside, you can't sell products in a highly competitive environment without proper branding.

So, Fritz, how IS GM going to become solidly profitable by 2011? "We need to step on the gas on how we are performing in the market." At the moment, in terms of market share, branding and overall product desirability, GM is going backwards. Stepping on the gas will simply accelerate that process. Right until they hit something. That's the only realistic expectation.

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