GM Bankruptcy May Occur Before End of Fourth Quarter 2008, Chrysler Purchase Shelved

By Chris Haak

11.07.2008

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.

COPYRIGHT Autosavant – All Rights Reserved

Author: Chris Haak

Chris is Autosavant's Managing Editor. He has a lifelong love of everything automotive, having grown up as the son of a car dealer. A married father of two sons, Chris is also in the process of indoctrinating them into the world of cars and trucks.

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4 Comments

  1. For all their history of restructuring and cut-backs, this is really uncharted territory for GM. For companies in all industries, bad financial results are generally accompanied by announcement of layoffs or other moves to fix the situation. Mangement tries to reassure investors that they have a plan and that next quarter or next year will be better. In this case GM is simply saying “We’ve done everything we know of and we’re still going to run out of money without help.”

    I think their only hope is that Congress will find a way to either guarantee loans or take an equity position. The Obama administration will do everything they can to avoid starting his term with the largest and most far-reaching bankruptcy in US history.

  2. Besides bankrupcy, another option might be a takeover by another carmaker, there was a French article from the French newspaper “Le Figaro” who mentionned then GM is under the eyes of Carlos Ghosn, CEO of Renault-Nissan and this time compared at 2006 when R-N beginned the talks but the talks ended despite the pressures of Kerkorian, Renault might probably have the bigger end of the stick. Could be possible to see Renault or another carmaker to attempt to do a takeover more sooner then we taught?

    And recently mainly due to the rising cost of materials and the currency of the yen who gained some force vs the US dollar, Toyota and Honda begin to be tempted to ask for…a bailout? http://www.businessweek.com/globalbiz/blog/eyeonasia/archives/2008/11/will_japans_car.html

  3. Chrysler and GM need to stay independent,no need to merge just to close Chrysler, especially using Tax payer money!
    These are bad times for all automakers,Chrysler needs to find a buyer who has passion for cars, and willing to down size! Do what Harley Davidson did in the 1980s!
    Dont let GM close it down, if it is to self destruct let it do it on its own! With the right team it will be a great company!
    They can talk all day about no room for Chrysler, but I think their is just as much room for them as Saab, Kia, BWM,etc!

  4. GM…PULL THE PLUG, Reset, PLUG BACK IN

    Without the THREE U.S. automakers combining into one there is no rationality to bailing out GM. GM’s cash burn is triple the street estimate and has lost all control over its sales, its product development and its future. The executives and the unions have the company hostage to government capital infusion. Bankruptcy is a viable answer that can push off creditors and force unions and management to make concessions that are impossible unless a loaded gun is at their head. There is too much capacity, too many models, too many plants, too many employees producing products that are more easily produced by others. The VW bug was the first indication that the Big Three did not have a clue to the needs and long-term preferences of the U.S. consumer. And today we have a glut of SUV’s that will ultimately have to be sold at a first-ever half-price sale. GM has already built them, they have already paid for them and no one wants them. You need cash, blow them out the door ½ price or less and they are out of inventory and cash hits the balance sheet.

    But to infuse GM with cash to keep it afloat without bankruptcy is no answer because next in line will be Ford and Chrysler. These three should be forced to combine and re-form to use their talents and capacity to building something we all need and that is energy independence.

    There is one industry that has a payback that cannot be overlooked as a place to re-train and invest and that is in renewable energy. Train those people, insist that the manufacturing capacity of GM be converted to energy and produce, once and for all, a source of energy that once in place CAN NEVER GO UP IN PRICE. In World War II Ford built a massive number of B-24’s in their new Willow Run plant in Ypsilanti. That change in production and product proved that it can be done and Ford did a spectacular job producing that airplane to the considerable consternation to the Nazi war machine. Fast forward to 2008 and our enemy is our own waste and inefficiency; energy independence is crucial to our national safety and we can actually budget part of our national defense budget to this end.

    I am not against giving money to GM…but I am against giving them money to build products that have no measurable or important upside to our economy long-term. I am against giving money to GM with Ford looking like that doggie in the window. Force them into solar, wind, wave and nuclear. Support them in their endeavor to re-tool and you got my money. Absent that, you will not get me to suggest giving them, their workers or their bloated retirees belly-aching about their co-pay when millions have no health care a single dime.

    The side benefits are obvious: our defense structure is enhanced because we no longer have to depend on a cartel of Bedouins in the Middle-East to determine for us how much oil we are going to use and our environment actually can become healthy in L.A. vs. choking to death sitting in traffic on the five. We put a pin in our energy costs once in for all and bankrupt our dear friends in the middle east forcing them to drive Chevy Cobalts and trade in their Bentleys.

    Here is what we said about the Chrysler/GM merger talk=
    “Two drunks walking down the street
    holding each other up…
    until they hit the curb,
    then they both fall down”

    From the AP this day: “DETROIT, Mich. (AP) — General Motors Corp. says it lost $2.5 billion in the third quarter and warned that it could run out of cash in 2009. GM also said it has suspended talks to acquire Chrysler. While it didn’t specifically name the automaker, GM said it was setting aside considerations for a “strategic acquisition. The automaker also said its cash burn for the quarter accelerated to $6.9 billion due to a severe U.S. auto sales slump.”
    You can be sure if GM is saying that it is not considering bankruptcy then you can also be sure they are lying

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