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GM Continues Its Slide Into Bankruptcy


Via the NYTimes I see that a couple bond agency have cut GM's rating to junk status:

Two major rating agencies cut the debt rating of General Motors further into junk status on Tuesday after the company announced a plan to improve its liquidity by refinancing $5.6 billion in loans.

G.M., which plans to eliminate 30,000 jobs and close 12 factories as part of an extensive overhaul, said it would offer banks collateral and more favorable terms to extend its credit package through 2011. The company's existing loans are scheduled to mature in 2008.

Gina Proia, a General Motors spokeswoman in New York, said refinancing the loans was "a positive action toward additional financial flexibility for G.M."

Although the proposal would remove uncertainty about G.M.'s ability to obtain capital during the overhaul, analysts said that unsecured bondholders would be less likely to recover their investments in the event of a bankruptcy.

Standard & Poor's reduced its rating of G.M.'s senior unsecured debt to B– from B; and Moody's Investor service dropped its rating to Caa1 from B3. The ratings are six and seven notches below investment grade, respectively, and both agencies said they might lower their ratings again in coming months.

GM's problems are simple - the cars cost too much. GM loses about $5,000 per car it sells. Business idiots will tell you it's the pension, benefit and wage costs. They're about half right - GM would still be losing between 2,500 and 3,000 a car if it was even with, say, Toyota in wage and benefit costs.

GM bet big time on a SUV and other fuel gobbling cars. The reason it bet so heavily on them is that, sadly, its engineering culture sucks. It's easy to engineer an SUV, which sits on a pickup truck chassis but it's very hard to engineer a really good, small fuel efficient vehicle.

For a long time GM made most of its money on its financing arm (they recently sold it, which might have been the right thing to do 10 years ago, but you don't sell your money making arm when you're going bankrupt) - the cars themselves made no money, but the loans did. This got GM to thinking that they were a financing company, not a car company. They managed (and manage) by spreadsheet, they are not managed by engineers, and it shows.

They've lost sight of the fact that you should always be trying to make either the best product possible, or the cheapest product possible. They produce expensive crappy cars.

The result of GM (and probably Ford) going down is going to be devestation to what's left of the rust belt and to Southern Ontario. And then the government will have to decide if GM is too big to fail.

There are ways that GM could turn things around, but there is no sign that management understands that more than cutting costs is necessary - that they have product and quality issues that are as important, or more important than trying to beat down their employees. Because beating the workers down will not, can not, make up enough of a difference to keep GM afloat.


Ian Welsh June 21, 2006 - 9:50pm
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identity code

A survey was conducted about US peoples feelings about cars.
End result was that cars was indentity related. (read image.)
Hence the PT Crouser.
They tried to sell this converted Neon in Germany but the identity related image in Germany of cars was engineering. The PT Crouser didn't sell there.
Interesting talk show on CBC enlightened me on this.

repressive governments mix administrative clumsiness & ineffiency with authoritarian tendencies.

kimmy June 22, 2006 - 1:47am
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People are not individuals

Nokia knows that there are only 11 types of people buying mobile phones. The new phones will be tailored to abuse their neurosis.

So, there are 11 types of people, but there is the common problem with people: They can't express what they want even if they claim otherwise. I think computers know this problem very well :-)

-- Happy fishing in ocean of noise!

Gandalf June 22, 2006 - 1:55am
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Stocks for half a decade

Long GM+F+etc and short XOM+COP+TOT+BP+etc

You are supposed to buy low and sell high.

Big old crap companies seldom go completely bankrupt and big old crap companies never receive returns over their historical average for an extended period of time. The historical average returns in oil business have been miserable and will be.

-- Happy fishing in ocean of noise!

Gandalf June 22, 2006 - 1:49am
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Don't want to argue ...

... but a few nits to pick here.

"Business idiots will tell you it's the pension, benefit and wage costs. They're about half right - GM would still be losing between 2,500 and 3,000 a car if it was even with, say, Toyota in wage and benefit costs."

Looking at the liabilities chart at a GM finacial meeting awhile back, pension, benefits and taxes were all lumped together and at the bottom of the chart, by far the least drag on their finacial postion as stated by GM.

"The reason it bet so heavily on them (SUV's) is that, sadly, its engineering culture sucks."

Don't say that to Bob Lutz! :) Really though, they make SUV's for one reason, its the best margin of any product they make. They stuck with it too long, oc.

Concerning GMAC, GM still owns a large hunk of it. GM, by spinning off GMAC, de-linked the downward pressure on GMAC's rating caused by GM's slide. It also improved GM's liquidity. Smart, really. Oh, and GM's Asia market is making them the most money, and Europe is turning around with consistent gains in South America's market share as well. The US market predominates as GM's biggest drag.

"There are ways that GM could turn things around, but there is no sign that management understands that more than cutting costs is necessary"

As stated just last week at their quarterly financial meeting, they are well aware that no company has ever climbed out of a hole by cost cutting or improving MS/profits alone. Both are required and was a main talking point.

GM is seeking to cut costs, improve market share across the board via product development emphasizing the Asian/S Amer potential, and obtain greater liquidity. The cost of money is hurting them.

Turning this company around is like changing course on an aircraft carrier; slow going. But with the vast majority of loans maturing 18years out, they are a long way from bankruptcy, which one has to admit, isn't a very good strat anyway. ;)

Disclosure: I am not in any way a finacial analyst, nor do I play one on TV. My presence at GM's Quarterly finacial/analyst meetings are for reasons other than their explicit purpose. Some of the specific info I have exposure to is considered GM property. But they needn't worry. My memory for finacial data is not that good. Oh, they haven't cut me a check since 1982 or so. Note the recent 'retirement' of former GM CFO Devine. And Wagoner is no dummy.

ww June 22, 2006 - 2:48pm
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The numbers I've seen

Very interesting to hear your take.

The numbers I've seen aren't internal, but they are the numbers the suppiers have - and the suppliers are not sanguine at all. It's true that GM says they understand that you can't cut your way out of it, but I haven't seen them do what is necessary to fix the problem beyond cutting.

I cop to a huge bias for maintaining control of assets. I am not a fan of spinning things off, and that is a bias on my part. It is twice as hard to ever convince me it is a good idea. Too often I have seen people spin things off, or outsource things that should have been kept firmly in hand. (Delphi, for example.)

Ian Welsh June 24, 2006 - 4:07am
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Quote

GM made $445 million in the first quarter of this year after losing $10.6 billion in 2005.

From
http://biz.yahoo.com/ap/060622/gm_buyouts_1021.html?.v=5

Union should demand 5-10 year stock options as payment to its members NOW!.

Unsubstantiated talking points about bankruptcy help to control the union and to get rid of extra workers. It might be that large stock buyers are on the move and want to do their purchases at a cheaper price. Usually the common drumming about stocks in the media is 180 degrees from thruth.

-- Happy fishing in ocean of noise!

Gandalf June 23, 2006 - 12:44am
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