The head of Britain's largest manufacturing trade union has warned that General Motors is not "too big to fail" as concern over the future of the iconic American car manufacturer, which employs 5,000 workers in Britain, continues to grow.
By James Quinn, Wall Street CorrespondentLast Updated: 9:59AM GMT 12 Nov 2008
The Vauxhall motif on a vehicle Photo: AP
GM shares on Tuesday slumped to a 65-year low as analysts questioned the company's liquidity position after it admitted late last week that it may have run out of money by the end of the year.
One hedge fund manager even went so far as to say that GM should be allowed to fail, while an automotive analyst effectively said the company was worthless, placing a price target of zero on the company's shares.
Tony Woodley, joint general secretary of super-union Unite, believes that the collapse of GM, which operates under the Vauxhall brand in the UK, would be a "catastrophe" not just for the US and UK economies, but for the global automotive sector as a whole.
Mr Woodley, himself a former Vauxhall worker, told The Daily Telegraph that if GM were to enter Chapter 11 bankruptcy protection it would have an "immediate effect" on Vauxhall plants at Luton and Ellesmere Port and GM sites across Europe.
"I don't think anything is too big to fail. It's a question that it's too important both for historical and real corporate capital sense that GM must not be seen to fail in the States."
Mr Woodley added that in the same way that it was the right thing to keep financial institutions solvent by nationalisation, the US government should take a similar view regarding the major car manufacturers.
The trade union leader is spear-heading British efforts to ensure the US government injects money into GM and the other troubled US car manufacturers, and raised the subject with the new Business Secretary Lord Mandelson's during a meeting on Monday.
Mr Woodley was on Tuesday trying to contact United Auto Workers union head Ron Gettelfinger in the US, to discuss the situation and come up with some form of co-ordinated response.
In New York, GM's shares slumped below $3 for the first time since April 1943, but rallied slightly before closing down 44 cents at $2.92, as analysts continued to voice concerns about the company.
Mark Oline of credit agency Fitch, said that "strategic bankruptcy" was not an option for GM: "This is an issue of operating or not operating.''
Hedge fund manager Bill Ackman of Pershing Square said GM should be allowed to fail, and that the company should enact a pre-packaged bankruptcy.
His comments came as Deutsche Bank's Rod Lache placed a zero price target on GM's shares.
The future of GM and the rest of the car industry was one of the subjects discussed by President-elect Barack Obama and outgoing President George W Bush during their meeting at the White House on Monday, during which Mr Obama pleaded for urgent aid for the car manufacturers.
The conversation came as a letter was sent by Democratic leaders in the Congress to US Treasury Secretary Hank Paulson, asking him to provide money to the companies under the $700bn Troubled Assets Relief Programme. (TARP)
A GM spokesman said: "Bankruptcy is not an option for GM, as it creates more problems than it solves," before going on to stress that the company is involved in freeing up $20bn of capital through cost cutting measures and asset sales.
"GM has taken a host of self-help actions," the spokesman continued. "But additional support from the US government to aid the overall industry is essential, in whatever form it takes."
Wednesday, November 12, 2008
GM, Circuit City face financial fallout
CREDIT CRUNCH: The US automaker needs federal help now, its CEO and analysts say, while Circuit City became the first major retailer to seek bankruptcy protection AFP AND BLOOMBERG, NEW YORK Wednesday, Nov 12, 2008, Page 10
Children ride their bikes in front of an abandoned Circuit City store in Chicago, Illinois, on Monday. The US’ second-largest consumer electronics retailer filed for Chapter 11 bankruptcy protection on Monday.PHOTO: AFPThe global financial crisis closed in on two more victims yesterday after General Motors said it would need a government rescue and major US electronics retailer Circuit City filed for bankruptcy.
The news capped another day of gloomy developments in the US, the world’s largest economy, undermining hopes that coordinated action by governments around the world could keep the global downturn from getting worse.Fannie Mae, the US mortgage giant bailed out by the government earlier this year, posted a US$29 billion loss. Meanwhile the US expanded its bailout of insurer AIG to more than US$150 billion.General Motors CEO Rick Wagoner said the US automaker would need state help before president-elect Barack Obama takes over the White House in January, telling industry publication Automotive News that time was of the essence.“This is an issue that needs to be addressed urgently,” he said, calling on the government to “overshoot, not undershoot” the level of assistance.His call for support came as GM shares lost 23 percent on Monday after analysts at Deutsche Bank said they expected the stock eventually to be worth nothing at all.“Even if GM succeeds in averting a bankruptcy, we believe that the company’s future path is likely to be bankruptcy-like,” the bank said.Only federal aid can prevent a collapse by the largest US automaker, analysts including Buckingham Research Group’s Joseph Amaturo said on Monday as the shares plunged to a 59-year low. Reorganizing in court protection also may not be possible, because the credit crunch has dried up financing.“Strategic bankruptcy is not an option for GM,” said Mark Oline, a credit analyst with Fitch Inc in Chicago. “This is an issue of operating or not operating.”The prospect of a forced liquidation raises the stakes for GM’s quest for new federal borrowing after saying on Nov. 7 it may run out of operating cash as soon as year’s end. GM had US$16.2 billion on hand as of Sept. 30, down from US$21 billion at the end of June, and needs US$11 billion to pay its monthly bills.“A bankruptcy wouldn’t address our immediate liquidity concerns,” said Renee Rashid-Merem, a spokeswoman for GM. “It’s not an option for GM because it creates more problems than it solves.”Wagoner said the entire US auto industry was suffering, with sales expected to be down by more than 3 million vehicles next year in the face of the global economic downturn.“I’d question whether the US industry as a whole could survive that without support,” he said.US electronics retailer Circuit City said on Monday it had filed for bankruptcy protection and obtained a US$1.1 billion credit lifeline to battle a sharp decline in sales.Just a week after announcing it would close 155 stores and take other restructuring measures to fight a cash crunch, the firm became the first major US retailer to file for bankruptcy protection since the crisis began.Canadian telecommunications equipment provider Nortel Networks posted a third-quarter loss of US$3.4 billion and announced 1,300 job cuts.“We have seen worsening economic conditions, together with extreme volatility in the financial, foreign exchange and credit markets globally,” Nortel president and chief executive Mike Zafirovski said in a statement.The latest gloomy company news came ahead of emergency talks among the leaders of the G20 group of largest developed and emerging nations in Washington on Saturday aimed at restoring market confidence and stability.Washington officials have said that the summit is likely to result in an “action plan” including short-term steps to help fix the global economy.However, other countries, notably France, have pushed for the talks to agree concrete steps.
Children ride their bikes in front of an abandoned Circuit City store in Chicago, Illinois, on Monday. The US’ second-largest consumer electronics retailer filed for Chapter 11 bankruptcy protection on Monday.PHOTO: AFPThe global financial crisis closed in on two more victims yesterday after General Motors said it would need a government rescue and major US electronics retailer Circuit City filed for bankruptcy.
The news capped another day of gloomy developments in the US, the world’s largest economy, undermining hopes that coordinated action by governments around the world could keep the global downturn from getting worse.Fannie Mae, the US mortgage giant bailed out by the government earlier this year, posted a US$29 billion loss. Meanwhile the US expanded its bailout of insurer AIG to more than US$150 billion.General Motors CEO Rick Wagoner said the US automaker would need state help before president-elect Barack Obama takes over the White House in January, telling industry publication Automotive News that time was of the essence.“This is an issue that needs to be addressed urgently,” he said, calling on the government to “overshoot, not undershoot” the level of assistance.His call for support came as GM shares lost 23 percent on Monday after analysts at Deutsche Bank said they expected the stock eventually to be worth nothing at all.“Even if GM succeeds in averting a bankruptcy, we believe that the company’s future path is likely to be bankruptcy-like,” the bank said.Only federal aid can prevent a collapse by the largest US automaker, analysts including Buckingham Research Group’s Joseph Amaturo said on Monday as the shares plunged to a 59-year low. Reorganizing in court protection also may not be possible, because the credit crunch has dried up financing.“Strategic bankruptcy is not an option for GM,” said Mark Oline, a credit analyst with Fitch Inc in Chicago. “This is an issue of operating or not operating.”The prospect of a forced liquidation raises the stakes for GM’s quest for new federal borrowing after saying on Nov. 7 it may run out of operating cash as soon as year’s end. GM had US$16.2 billion on hand as of Sept. 30, down from US$21 billion at the end of June, and needs US$11 billion to pay its monthly bills.“A bankruptcy wouldn’t address our immediate liquidity concerns,” said Renee Rashid-Merem, a spokeswoman for GM. “It’s not an option for GM because it creates more problems than it solves.”Wagoner said the entire US auto industry was suffering, with sales expected to be down by more than 3 million vehicles next year in the face of the global economic downturn.“I’d question whether the US industry as a whole could survive that without support,” he said.US electronics retailer Circuit City said on Monday it had filed for bankruptcy protection and obtained a US$1.1 billion credit lifeline to battle a sharp decline in sales.Just a week after announcing it would close 155 stores and take other restructuring measures to fight a cash crunch, the firm became the first major US retailer to file for bankruptcy protection since the crisis began.Canadian telecommunications equipment provider Nortel Networks posted a third-quarter loss of US$3.4 billion and announced 1,300 job cuts.“We have seen worsening economic conditions, together with extreme volatility in the financial, foreign exchange and credit markets globally,” Nortel president and chief executive Mike Zafirovski said in a statement.The latest gloomy company news came ahead of emergency talks among the leaders of the G20 group of largest developed and emerging nations in Washington on Saturday aimed at restoring market confidence and stability.Washington officials have said that the summit is likely to result in an “action plan” including short-term steps to help fix the global economy.However, other countries, notably France, have pushed for the talks to agree concrete steps.
GM: The Threat of Bankruptcy
GM's senior management, business experts, and some members of Congress think letting the automaker go Chapter 11 would be a disaster
By David Kiley
GM Chairman and CEO G. Richard Wagoner Jr. Getty Images
View Slide Show
Over the past several days, while General Motors (GM) Chairman and Chief Executive G. Richard Wagoner Jr. has repeated his mantra that "bankruptcy is not an option," the specter of a Chapter 11 reorganization is circling GM's downtown Detroit headquarters like vultures.
When it reported its third-quarter earnings on Nov. 7, GM said that it may face cash reserve levels (BusinessWeek.com, 11/7/08) by the New Year that would put it at the threshold needed just to meet payroll and continue some level of normal operations.
It has already suspended most of its future product programs. It has stepped up the pressure on the White House and Congress, especially the Michigan caucus, to find a way to get government help. "The third-quarter results made it clear that, without government intervention, GM is headed for bankruptcy," Gimme Credit auto analyst Shelly Lombard said.
Circuit City Isn't a Model
Bankruptcy lawyers say the automaker could benefit from a prepackaged bankruptcy, which would be a reorganization that is worked out among the automaker's creditors before the case ever gets to a bankruptcy court judge. "It would be messy but ultimately could help the company restructure itself a lot faster," says Mark Bane, a partner at New York law firm Ropes & Gray.
The biggest obstacle to any bankruptcy is the lack of availability of debtor-in-possession (DIP) financing, which is liquidity normally provided by banks and private equity firms that a company in bankruptcy needs to reorganize itself. Indeed, the question of bankruptcy has been on the minds of GM's top executives. On Nov. 6, GM North America President Troy Clarke told a gathering of auto suppliers that obtaining DIP financing would be "practically impossible" given the state of the credit markets and the size of GM's obligations. "But that's where the government could come in," says attorney Bane, "providing the liquidity GM would need to massively reorganize under Chapter 11."
The worst-case scenario for GM, say most experts, is a spontaneous Chapter 11, like the one filed by electronics retailer Circuit City (CCTYQ.PK) on Nov. 10. But a prepackaged filing could be set up to make sure that the vast majority of auto suppliers would continue to get paid on time.
Hoping for Liquidity
Others disagree. Kimberly Rodriguez, a partner at Grant Thornton, an accounting and management consulting firm that works with auto companies and suppliers, says bankruptcy is a "last resort." Rodriguez says that in better times GM and Ford (F) have provided liquidity to its biggest suppliers who would have otherwise been forced into Chapter 11, which is very messy and destructive. "The government could play that same role for GM, and it will be a lot more orderly," says Rodriguez.
Aides to House Speaker Nancy Pelosi (D-Calif.) said on Tuesday, Nov. 11, that the Speaker, whose congressional district is in San Francisco, is working up a bill with House leadership that would help automakers and suppliers with liquidity to avoid bankruptcy. President-elect Barack Obama's transition chief, John Podesta, told reporters Tuesday that he is in favor of helping the auto companies "remain independent."
Robert Reich, former Labor Secretary under President Bill Clinton and a member of Obama's economic transition team, said Tuesday: "The question [about bailing out the U.S. automakers] is what kind of conditions do you put on that bailout?" In an interview on MSNBC, Reich said that those conditions will likely center on job protections and commitments to green technology. A congressional staffer with knowledge of negotiations on Capitol Hill said limits on executive compensation at the automakers is "probably going to be a condition as well."
"Buy" Recommendation on Bonds
After a few days of dire Wall Street warnings about GM and forecasts of possible bankruptcy that drove GM stock down 33% from Friday to Tuesday's close, JPMorgan Chase (JPM) issued a "buy" recommendation on GM's bonds, not its stock, and spotlighted different sources of liquidity it can tap.
"We believe GM has several sources of liquidity it can access to bridge the company to 2010 when it realizes considerable cost cuts," JPMorgan Chase analysts Eric Selle and Atiba Edwards said in a report issued Tuesday. "These include an overfunded pension plan, possible asset sales, capital market transactions, equity injections, cost-cutting, and government loans," they said. Participation by the government could help free up an additional $10 billion, said one source at GM, from banks and equity holders who are sitting on the sidelines waiting for the government to act. GM executives believe they must have $10 billion to $15 billion in government loans to get through 2010 if auto industry sales in 2009 are below the 13 million forecast by some firms.
Certainly, there is a history of companies operating under Chapter 11, and emerging. United Airlines and LTV Steel—now known as Cliffs Erie are examples. But there are several reasons why GM is avoiding the option.
Bankruptcy Would Kill Sales
Chief among them is GM's belief that customers who own GM vehicles, as well as those who might consider them in the near future, would flee the companies' brands if it were in bankruptcy. In the past, when GM has been associated with the specter of a bankruptcy filing, showroom traffic drops off. During an interview with Fox Business News on Nov. 7, Wagoner said that GM's research shows that 80% of those surveyed said they wouldn't buy a car from a bankrupt car company. "If your revenue line falls, you would not be talking about a reorganization, you would be talking about a liquidation."
Some experts agree with Wagoner's assessment. Eric Dezenhall, a crisis management consultant, says the consumer doesn't always act rationally even after he has all the information. "Even though bankruptcy doesn't necessarily mean obliteration, these decisions aren't entirely rational…In the minds of many, bankruptcy equals oblivion," he said.
Still, it's tempting to find out if a coordinated communication effort between GM, Congress, and the White House could persuade consumers that GM would remain in business. Under Chapter 11, the company could renegotiate contracts with the United Auto Workers and more rapidly realign and kill superfluous brands without worry about lawsuits from its dealers. "I can envision a very efficient GM operating Chevrolet, Cadillac, and a third sales channel that sells GMC and Saturn," says independent marketing consultant Dennis Keene. "The aim of GM should be to get to the structure it would choose if it was starting with a clean sheet of paper, and that doesn't, I would think, include Saab, Pontiac, Buick, and Hummer."
Negative Stockholder Equity
GM spokesman Tony Cervone says that kind of speculation is simplistic. He notes that GM has already made huge gains in cost reductions with labor that will start paying off in 2010. "Our cost of sales will be 25%, and that is better than Toyota is today," said Cervone.
GM, in the most recent quarter, has a negative $58 million in stockholder equity on its balance sheet. That's how much the liabilities exceed its assets. That compares with negative $42 billion it reported a year ago.
The aspect of a GM bankruptcy that worries some analysts and legislators is the ripple effect that would impact Ford and Chrysler as well as numerous auto suppliers. Grant Thornton's Rodriguez says that Ford and Chrysler, in the event of a GM bankruptcy, would also be quickly driven to bankruptcy court because their costs would be so much higher than GM's, "they'd quickly find themselves uncompetitive." Too, there could be such a disruption to auto suppliers that the auto companies' production of vehicles would be interrupted as if their workers were on strike. Seventy percent of GM's suppliers also supply critical parts to Ford and Chrysler, and there is no new credit or loans for those companies outside of the government.
A Little Breathing Room
The best-case scenario, says Rodriguez, is for government loans that give GM the time and space it needs to work through the recession, the way a bankruptcy court gives relief from creditors.
"The Detroit automakers have, in essence, been pursuing an out-of-court restructuring over the past three years. These efforts have produced a competitive labor contract with the UAW, a viable solution to reduce retiree health-care expense, and a substantial downsizing of capacity and headcount," analyst Kid Penniman of independent research firm KDP Advisors wrote in a report. "Incremental gains achieved through bankruptcy would be minimal in comparison and would likely result in an even further deterioration of enterprise values as consumers would be far less likely to purchase an expensive vehicle from a bankrupt manufacturer, with or without government guarantees," he added.
By David Kiley
GM Chairman and CEO G. Richard Wagoner Jr. Getty Images
View Slide Show
Over the past several days, while General Motors (GM) Chairman and Chief Executive G. Richard Wagoner Jr. has repeated his mantra that "bankruptcy is not an option," the specter of a Chapter 11 reorganization is circling GM's downtown Detroit headquarters like vultures.
When it reported its third-quarter earnings on Nov. 7, GM said that it may face cash reserve levels (BusinessWeek.com, 11/7/08) by the New Year that would put it at the threshold needed just to meet payroll and continue some level of normal operations.
It has already suspended most of its future product programs. It has stepped up the pressure on the White House and Congress, especially the Michigan caucus, to find a way to get government help. "The third-quarter results made it clear that, without government intervention, GM is headed for bankruptcy," Gimme Credit auto analyst Shelly Lombard said.
Circuit City Isn't a Model
Bankruptcy lawyers say the automaker could benefit from a prepackaged bankruptcy, which would be a reorganization that is worked out among the automaker's creditors before the case ever gets to a bankruptcy court judge. "It would be messy but ultimately could help the company restructure itself a lot faster," says Mark Bane, a partner at New York law firm Ropes & Gray.
The biggest obstacle to any bankruptcy is the lack of availability of debtor-in-possession (DIP) financing, which is liquidity normally provided by banks and private equity firms that a company in bankruptcy needs to reorganize itself. Indeed, the question of bankruptcy has been on the minds of GM's top executives. On Nov. 6, GM North America President Troy Clarke told a gathering of auto suppliers that obtaining DIP financing would be "practically impossible" given the state of the credit markets and the size of GM's obligations. "But that's where the government could come in," says attorney Bane, "providing the liquidity GM would need to massively reorganize under Chapter 11."
The worst-case scenario for GM, say most experts, is a spontaneous Chapter 11, like the one filed by electronics retailer Circuit City (CCTYQ.PK) on Nov. 10. But a prepackaged filing could be set up to make sure that the vast majority of auto suppliers would continue to get paid on time.
Hoping for Liquidity
Others disagree. Kimberly Rodriguez, a partner at Grant Thornton, an accounting and management consulting firm that works with auto companies and suppliers, says bankruptcy is a "last resort." Rodriguez says that in better times GM and Ford (F) have provided liquidity to its biggest suppliers who would have otherwise been forced into Chapter 11, which is very messy and destructive. "The government could play that same role for GM, and it will be a lot more orderly," says Rodriguez.
Aides to House Speaker Nancy Pelosi (D-Calif.) said on Tuesday, Nov. 11, that the Speaker, whose congressional district is in San Francisco, is working up a bill with House leadership that would help automakers and suppliers with liquidity to avoid bankruptcy. President-elect Barack Obama's transition chief, John Podesta, told reporters Tuesday that he is in favor of helping the auto companies "remain independent."
Robert Reich, former Labor Secretary under President Bill Clinton and a member of Obama's economic transition team, said Tuesday: "The question [about bailing out the U.S. automakers] is what kind of conditions do you put on that bailout?" In an interview on MSNBC, Reich said that those conditions will likely center on job protections and commitments to green technology. A congressional staffer with knowledge of negotiations on Capitol Hill said limits on executive compensation at the automakers is "probably going to be a condition as well."
"Buy" Recommendation on Bonds
After a few days of dire Wall Street warnings about GM and forecasts of possible bankruptcy that drove GM stock down 33% from Friday to Tuesday's close, JPMorgan Chase (JPM) issued a "buy" recommendation on GM's bonds, not its stock, and spotlighted different sources of liquidity it can tap.
"We believe GM has several sources of liquidity it can access to bridge the company to 2010 when it realizes considerable cost cuts," JPMorgan Chase analysts Eric Selle and Atiba Edwards said in a report issued Tuesday. "These include an overfunded pension plan, possible asset sales, capital market transactions, equity injections, cost-cutting, and government loans," they said. Participation by the government could help free up an additional $10 billion, said one source at GM, from banks and equity holders who are sitting on the sidelines waiting for the government to act. GM executives believe they must have $10 billion to $15 billion in government loans to get through 2010 if auto industry sales in 2009 are below the 13 million forecast by some firms.
Certainly, there is a history of companies operating under Chapter 11, and emerging. United Airlines and LTV Steel—now known as Cliffs Erie are examples. But there are several reasons why GM is avoiding the option.
Bankruptcy Would Kill Sales
Chief among them is GM's belief that customers who own GM vehicles, as well as those who might consider them in the near future, would flee the companies' brands if it were in bankruptcy. In the past, when GM has been associated with the specter of a bankruptcy filing, showroom traffic drops off. During an interview with Fox Business News on Nov. 7, Wagoner said that GM's research shows that 80% of those surveyed said they wouldn't buy a car from a bankrupt car company. "If your revenue line falls, you would not be talking about a reorganization, you would be talking about a liquidation."
Some experts agree with Wagoner's assessment. Eric Dezenhall, a crisis management consultant, says the consumer doesn't always act rationally even after he has all the information. "Even though bankruptcy doesn't necessarily mean obliteration, these decisions aren't entirely rational…In the minds of many, bankruptcy equals oblivion," he said.
Still, it's tempting to find out if a coordinated communication effort between GM, Congress, and the White House could persuade consumers that GM would remain in business. Under Chapter 11, the company could renegotiate contracts with the United Auto Workers and more rapidly realign and kill superfluous brands without worry about lawsuits from its dealers. "I can envision a very efficient GM operating Chevrolet, Cadillac, and a third sales channel that sells GMC and Saturn," says independent marketing consultant Dennis Keene. "The aim of GM should be to get to the structure it would choose if it was starting with a clean sheet of paper, and that doesn't, I would think, include Saab, Pontiac, Buick, and Hummer."
Negative Stockholder Equity
GM spokesman Tony Cervone says that kind of speculation is simplistic. He notes that GM has already made huge gains in cost reductions with labor that will start paying off in 2010. "Our cost of sales will be 25%, and that is better than Toyota is today," said Cervone.
GM, in the most recent quarter, has a negative $58 million in stockholder equity on its balance sheet. That's how much the liabilities exceed its assets. That compares with negative $42 billion it reported a year ago.
The aspect of a GM bankruptcy that worries some analysts and legislators is the ripple effect that would impact Ford and Chrysler as well as numerous auto suppliers. Grant Thornton's Rodriguez says that Ford and Chrysler, in the event of a GM bankruptcy, would also be quickly driven to bankruptcy court because their costs would be so much higher than GM's, "they'd quickly find themselves uncompetitive." Too, there could be such a disruption to auto suppliers that the auto companies' production of vehicles would be interrupted as if their workers were on strike. Seventy percent of GM's suppliers also supply critical parts to Ford and Chrysler, and there is no new credit or loans for those companies outside of the government.
A Little Breathing Room
The best-case scenario, says Rodriguez, is for government loans that give GM the time and space it needs to work through the recession, the way a bankruptcy court gives relief from creditors.
"The Detroit automakers have, in essence, been pursuing an out-of-court restructuring over the past three years. These efforts have produced a competitive labor contract with the UAW, a viable solution to reduce retiree health-care expense, and a substantial downsizing of capacity and headcount," analyst Kid Penniman of independent research firm KDP Advisors wrote in a report. "Incremental gains achieved through bankruptcy would be minimal in comparison and would likely result in an even further deterioration of enterprise values as consumers would be far less likely to purchase an expensive vehicle from a bankrupt manufacturer, with or without government guarantees," he added.
THE ENDGAME: A SMALLER GM
Will Wagoner be around to make that choice? By approving his plan and his takeover of the troubled North American business, the GM board has signaled that it is being patient -- too patient, some analysts think. All indications are that Wagoner will be given a couple of years to get traction for his strategy. But if the cash burn rate accelerates and GM's stock deteriorates further, outside forces will pressure the board to take action, or will seize the wheel themselves. "If the board feels they're on the right path, they won't make a change that disrupts that," says CAR's Cole, who has close ties to GM's brass. "But in two to three years, if there is not an improvement on the revenue side, it's over for these guys."Private-equity investors seem to believe that the company's global cost handicap will eventually force it into bankruptcy court to shed union and dealer obligations. Wall Street bankers already are salivating over the opportunity to pick off GM's profitable mortgage operations. But the auto business is a whole other animal. For now, the legacy costs are too onerous and the politics of chopping so many jobs just too dicey for it to be worth the trouble of a takeover. Says one senior banker: "The joke used to be that all of the airlines would have to go through a car wash...now the car companies are going to have to go through the car wash. That's the challenge for anyone looking at these businesses and saying, Look, how do you deal with starting at a $2,000-a-car disadvantage vs. the rest of the world?"Just mention the word "bankruptcy" to any of GM's top executives and the mood gets frosty fast. "That's definitely not the plan," Wagoner said in a January interview. No wonder: Bankruptcy would almost certainly follow a catastrophic failure in the marketplace, or a play by a private-equity investor seeking to break up the company. In either case, management would be out on its ear.GM's cash hoard makes a court filing unlikely -- at least for now. If it happened, though, a GM bankruptcy would boggle the mind. The auto maker would bring to a judge four times the assets of the largest case filed so far, by WorldCom Inc. in 2002. Its 324,000 worldwide employees are about 70,000 more than Kmart Corp. (SHLD ) had before it filed that same year. GM could almost certainly find a judge who would allow it to dump many of its most burdensome obligations, says Lynn M. LoPucki, a law professor at UCLA. GM's pension plans are fully funded for now, but if GM's finances worsen or its pension investments sink in the coming years they might still be dumped on the federal Pension Benefit Guaranty Corp. GM also could shed its union contracts, firing anyone who didn't want to take lower wages or benefits. Ending health-care obligations to retirees alone could save $4 billion to $5 billion a year.Imagine the uproar, though, if that happened. Even if GM could demonstrate to a judge that it had negotiated for the cuts in good faith, the UAW would certainly respond with a strike. That would burn up in a few months much of the cash that any raider coveted. And pensioners could still sue for their benefits. "If there was value, you wouldn't get away scot-free," notes Wilbur L. Ross Jr., who has taken interests in bankrupt steel, textile, and coal companies.Bite the BulletBreakup or bankruptcy are the ghosts of GM's future. They become much more substantial threats if current management can't deliver on its promised turnaround over the next couple of years -- or if the board doesn't find someone who has a better idea of how to deploy GM's $468 billion in assets.It was a former General Motors chief -- the legendary Alfred P. Sloan Jr. -- who foresaw the problems that are now tying his company in knots. "Any rigidity by an automobile manufacturer, no matter how large or how well established, is severely penalized in the market," Sloan wrote in his 1965 memoir, My Years With General Motors. Of course, Sloan was talking about a competitor, Henry Ford, and his refusal in the 1920s to change his business model to build different cars to suit the changing tastes of American consumers. But Sloan's indictment stands just as well for today's GM.What would a healthy GM look like? It might have five fewer assembly plants, building around 4 million vehicles a year in North America instead of 5.1 million. That would slash U.S. market share to around 20%, but factories would hum with real demand, stoked less by rebate giveaways and cheapo rental-car sales. Workers would have a cost-competitive health-care plan but would fall back on government unemployment benefits when hard times demanded layoffs. Profitable auto sales and finance operations would fuel a richer research budget, tightly focused on four or five divisions instead of eight.This new GM might make two-thirds as many models: Chevrolet, perhaps its most recognized global brand, handling trucks and mass-market cars; Saturn, behind its cool new Euro styling, selling more expensive cars with design flair. A resurgent Cadillac would parade advanced technology and luxury. Hummer would only last as long as brawny SUVs are hip. GMC, which is very profitable these days, would stick around if Chevy couldn't satisfy America's yen for trucks. Pontiac, Buick, and Saab would follow Oldsmobile to the scrap heap.Maybe Wagoner will decide to bite the bullet and spend the billions needed to launch such a dramatic overhaul now, rather than waiting. And maybe the UAW leadership will get religion and offer more than token help. Where they decide to take GM will matter a great deal to the army of auto workers toiling away in its factories, the vast web of businesses that feed off of them, and legions of investors. As we learned a long time ago from outfits like AT&T, no company is too big to fail, or at least shrink dramatically. Not even mighty GM.
General Motors : Coming Confrontation?
Wagoner appears even less likely to start a fight to completely rewrite the union's health-care plan. The union's opposition could soften if GM's fortunes slip dramatically in the next year. But the UAW has almost never agreed to a huge giveback in the middle of a contract. (It did so in 1980, when the federal government demanded concessions as part of its Chrysler bailout, and again for Ford and GM in 1981, when spiking gas prices and a recession slammed sales.) Says Sean P. McAlinden, economist at CAR: "Why would union workers on the verge of retirement agree to cut retirement benefits?" GM's Kowaleski responds that there may be ways to get what GM wants while giving the union something in return: "Do not underestimate the breadth of scheming that can go on to come up with a win-win for everybody."There might be loopholes Wagoner could exploit. Read one way, the labor contract does not guarantee benefits to retirees -- who account for two-thirds of GM's health-care costs -- and only covers active workers, says Sanford C. Bernstein's Johnson. But one GM insider says that interpreting the contract that way would spark a "nuclear war." The UAW could find any number of ways to strike key supply factories and gum up the company. Wagoner knows that firsthand. While president of GM North America in 1998, he played hardball with the UAW over a dispute involving two union locals in Flint, Mich. Those workers, who made parts needed by every GM assembly plant, struck for 54 days over what they said were local issues. That shut down the entire company, costing it $2 billion and nine percentage points of market share, though GM recovered all but a point of that by yearend.Labor experts believe Wagoner is raising a hue and cry now to position the company for bigger concessions when contract talks open. "If you want to get the union to cut medical benefits in September, 2007, you don't start in August. You start now," says Harley Shaiken, a labor professor at the University of California at Berkeley. But if the sales picture deteriorates over the next year, GM probably will have little choice but to force a confrontation sooner and radically reshape its cost structure.
General Motors : LABOR DAY OF RECKONING
It was no coincidence that when GM executives pulled their financial guidance for the rest of this year, they pointed to the uncertainty of getting relief from the company's unions. Wagoner has to decide whether he's willing to settle for halfway measures that will only delay an inevitable confrontation when the UAW contract expires in two years, or if he's willing to risk a labor war to get big savings sooner.GM doesn't need to open the UAW contract to send workers off into retirement and close some plants. Its factory workers have an average age of 51, so many are close to the 30-year service point that qualifies for retirement. And union leaders might go along with a buyout program. The master UAW agreement says GM has to replace some of the retirees with new workers. But the union has long looked the other way as GM slashed jobs through retirement while hiring almost no new assemblers.Industry observers believe Wagoner is laying the groundwork to close a couple of factories and send thousands of workers off to early retirement. That might help, but it still only gets Wagoner about halfway to where GM needs to be. If he targets four of his 20 assembly plants, the company would be running fairly lean. David E. Cole, executive director of CAR, says GM could easily trim production by 1 million cars, or 20% of its capacity, and still have enough to serve the market. GM could save $2 billion per year in the long run by buying out 20,000 workers, estimates Sanford C. Bernstein & Co. analyst Brian A. Johnson. But it would pay $1.5 billion in severance costs to do so.That would allow GM to build fewer vehicles more efficiently, cut incentives, and pull back on low-priced sales to rental fleets. Plus, the company's remaining factories would be more productive and probably more profitable. "That would hit really bad this year," Cole says. "But it would yield returns." There are several candidates for plant closings: GM has two factories making its Chevrolet TrailBlazer, GMC Envoy, and Buick Rainier midsize SUVs; it could probably get away with one. Its next-generation minivans will likely be built at a plant in Lansing, Mich., which puts the current van plant in Doraville, Ga., on the hot seat. GM is already rumored to be considering the closure of one of its full-size pickup or SUV plants, such as one in Janesville, Wis., or Pontiac, Mich.
General Motors : On the Threshold
Now, Wagoner is pegging his turnaround largely to a rebound in large pickups and SUVs. That's highly problematic. GM should get some pop just from replacing its aging truck lineup, which is six years old and staggering as buyers turn to smaller SUVs and newer vehicles such as Toyota's Sequoia full-sized SUV and Ford Motor Co.'s (F ) rejuvenated F-150 pickup line. GM's Kowaleski says: "Even if those markets don't grow, there is a lot of opportunity for volume and profit." But first-quarter sales of full-size SUVs nosedived 21.5% from a year earlier, according to Autodata Inc., thanks to rising gas prices and competition from crossovers, such as the Honda Pilot, which carry almost as many people while using less gas. GM, with 48% of the big SUV market, is highly exposed to a downturn, according to Merrill Lynch. On the other hand, it has a paltry 19% share of the crossover SUV segment, which now accounts for nearly half of all SUVs sold.If Wagoner can't find some way to spark a sales rebound, look out below. GM's financial situation is linked so closely to how many cars it pumps out that its cash drain worsens dramatically with each lost point of market share. In a March report, Merrill Lynch estimated that with a 24% share and the current annual U.S. auto sales rate of 16.9 million vehicles, GM would bleed $2.4 billion in cash per year. If share plummeted to 20%, the cash burn would be $4.5 billion a year. Merrill analyst John A. Casesa estimates GM can last five years before it hits a liquidity crisis. "We believe that 25% market share is the threshold," Casesa says. "If GM falls below that, things get ugly fast."But that assumes overall U.S. car sales remain at their current high level. If rising interest rates, high gas prices, or other factors hammer the economy, the picture darkens further. At 15.4 million vehicles and a market share of 24%, GM would burn through $3.6 billion of cash annually, says Merrill; a 20% share would leak a catastrophic $5.7 billion. "The next blow comes if there is a recession," says longtime industry analyst Maryann N. Keller. "We just got through an [economic] expansion, and the balance sheet is in worse shape than it was before."
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