By Chris Haak
This morning, both GM and Ford released their third quarter 2008 earnings, and the news was unsurprisingly about as bad as it could have possibly been for both companies. Ford is in a better liquidity position than is GM, but both companies saw their cash positions drop precipitously, with Ford burning through $7.7 billion of its cash pile during the third quarter ($2.57 billion per month on average) and GM burning through $6.9 billion in [operating] cash during the third quarter ($2.3 billion per month on average).
The cash conflagration at both companies (remember, Chrysler is no longer publicly traded, so we don’t know its situation, but it’s likely similar, if not worse) in the third quarter meant that Ford was left with $18.9 billion in cash and marketable securities, with another $10.7 billion in readily accessible credit (thanks to Alan Mulally’s foresight in mortgaging most of the company right before credit markets froze), for a total liquidity cushion of $29.6 billion. GM does not have any more credit available to tap, so it’s on its own, down to its last $15 billion. The company needs $10-12 billion in cash just to keep the lights on, pay suppliers, etc., so bankruptcy could come long before the cash number gets to $0. Most telling – and alarming – of all the news today was this statement in the body of GM’s earnings release, which we are duplicating here unedited (emphasis added):
Even if GM implements the planned operating actions that are substantially within its control, GM’s estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business.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 economic and automotive industry conditions significantly improve, it receives substantial proceeds from asset sales, takes more aggressive working capital initiatives, gains access to capital markets and other private sources of funding, receives government funding under one or more current or future programs, or some combination of the foregoing. The success of GM’s plans necessarily depends on other factors, including global economic conditions and the level of automotive sales, particularly in the United States and Western Europe.
You read that right – this past summer, GM announced $15 billion in liquidity improvements (meaning cost savings, etc.) and announced today that it has identified a further $5 billion in liquidity savings. With all of the “within its control” savings already accounted for, GM is saying that absent some sort of miracle economic turnaround and subsequent pickup in sales, or a bailout from Washington, it will no longer be able to operate its business. That means Chapter 11.
Thanks to the available credit, Ford’s in a far better place than GM in terms of available cash, and many analysts think that the combination of Ford’s credit availability plus its cash on hand will enable the company to survive on its own until 2010, when the economy and auto market are both expected to recover, and six new fuel-efficient Ford models developed in Europe will be offered in the US for sale.
Also telling in the contrast between both struggling companies is that while GM suspended nearly all product development activities, Ford is actually accelerating some of its product development in an effort to bring the products that people want to buy to market faster. If Ford is able to continue its product development during the next year and a half or two years, it will set the company on a course that will make it difficult for GM to catch, because of the difficulty GM will have in re-starting halted programs, not to mention that the rest of the industry kept pushing ahead during GM’s dark days of no development spending.
There are any number of potential scenarios in play here, and people far smarter than us don’t know how this will turn out. While bankruptcy is all but a certainty for GM at this point, absent a government handout, the ripple effects of a GM bankruptcy would devastate the economy, with suddenly tens of thousands of autoworkers out of work, not to mention suppliers declaring bankruptcy as automakers have less demand for component parts. A merger between GM and Chrysler might be a solution, but there will still be tens of thousands of direct job losses, not to mention supplier job losses if – as rumored – GM axes most of Chrysler’s lineup. I mean, do we need a Challenger and a Camaro, a G8 and a Charger, a Journey and an Equinox? GM’s 8 brands would become 11 brands. Oh yeah, and GM obviously doesn’t have the money to pay anything for Chrysler, or to buy out displaced, unneeded workers, without getting money from the Federal government. And would the government really want to provide aid that would directly result in massive job losses? Further, GM announced today that it has shelved the Chrysler acquisition talks to put a priority on saving itself. Again, GM’s words:
Finally, GM has recently explored the possibility of a strategic acquisition that it believed would generate significant cost reduction synergies and substantially strengthen GM’s financial position in the medium and long term, while being neutral or modestly positive to cash flow even in the near term. While the acquisition could potentially have provided significant benefits, the company has concluded that it is more important at the present time to focus on its immediate liquidity challenges and, accordingly, considerations of such a transaction as a nearterm priority have been set aside.
Translation: we’d save a lot of money if we could afford to buy Chrysler, but we obviously cannot afford it.
Then there’s the question of whether people would want to buy a car from a bankrupt car company, even one that’s in Chapter 11 reorganization as opposed to Chapter 7 liquidation. Why buy from GM, who may or may not make it to 2010, much less the end of a five year/100,000 mile powertrain warranty, when you know that Toyota and Honda are certainly healthy enough to survive through the end of their warranties?
All of this news is very interesting to say the least. We’ll stay on top of this story and deliver any other breaking news as soon as we hear it.
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