By Robert Farago
May 9, 2007 1,299 Views
GM’s Board of Bystanders just voted to allow its top execs to resume trading
their company’s shares. GM’s big dogs have until May 21 to buy, sell, or buy
and then sell their company-subsidized stock. According to Bloomberg News,
it’s “another sign of confidence at GM.” Viewed another way, it’s a sign of
impending doom. This fall, after GM fails to wrest any significant
concessions from the United Auto Workers (UAW), after the full extent of GM’s
cash conflagration becomes apparent to the Street, bankruptcy will once
again loom large and GM stock will tank.
Looking at General Motors’ inflated stock price, I reckon Wallace Hartley’s
band could have taken a few anti-anxiety tips from GM’s spinmeisters. GM’s
PR machine has successfully focused the minds of both the press and the
investment community on cost cutting, union buyouts, new products,
theoretical new products, Chinese Buicks, carbon cap groups, anything and
everything save the only thing that really matters: cash.
In its last quarterly statement, GM reported that it has $24.7b in the
hopper. It’s generally accepted that the automaker needs $10b to keep the
lights on (i.e. pay suppliers). So General Motors is $14.7b away from filing
for Chapter 11 protection. Of course, that’s the best (worst?) case
scenario; if General Motors has any sense, they’ll declare bankruptcy before
hitting the wall and save some much-needed cash for restructuring. Anyway,
they’re headed in that direction.
Last quarter, GM reported that it had immolated $1.7b of its cash hoard. All
things being equal (i.e. no turnaround), the company’s coffers will be
lightened by $6.8b this year. If GM’s cash burn continues at that rate, the
company has a little over two years before bumping-up against the 10 bil
But all things are not equal– even without supposing GM’s turnaround turns
into a nose dive. For one thing, the first quarter’s results are not the
harbinger of things to come.
Last quarter, GM’s accounts payable rose by roughly a billion dollars. It’s
entirely possible that the extra bil represents the current state of pay and
belongs on the cash burn side of the ledger. If so, that would raise the
[artist formerly known as the world’s largest] automaker’s quarterly cash
burn to $2.7b per quarter. At that pace, General Motors could only evade
bankruptcy for another year and four months.
At the same time, GM’s also declared that it will spend between $8b and
$9.5b on capital expenditure (i.e. developing new products) this year. In
the first financial quarter, GM spent just $1.2b of that total– some $800m
to $1.17b less than one quarter of the total amount of their planned “cap
ex.” If they spread the rest of the expense evenly over the last three
quarters, that’s an additional $277m to $392m heaped onto GM's quarterly
There’s one reason and one reason only why GM’s feeling the burn: the North
American market. This quarter, GM North America (GMNA) posted an adjusted
loss of $85m. This after selling the family jewels, cutting structural costs
to the bone, trimming production and, most importantly, introducing a raft
of new products. If GMNA’s not making a profit now with their new metal
glittering in the marketplace, how will they do so in the short to long-term
There’s only one answer to that vexing conundrum: drastically cut the UAW’s
wages, health care and pension costs. As we’ve said before, there’s not a
hope in Hell that’s going to happen. For one thing, unions are in the
business of increasing wages and benefits. For another, CEO Rick Wagoner’s
$10.2m smash and grab compensation package has destroyed management’s
bargaining position. But most critically, GM is profitable.
Although GM’s European operations are flat, GM Asia Pacific (GMAP) is on
fire. Low-cost (non-union) labor and hot products have increased the unit’s
sales by 20 percent, boosting revenue by 35 percent to $4.6b. GM Latin
America, Africa and Middle East (GMLAAM) is also cranking. First quarter net
income tripled to $201 million in the first quarter of 2007. Russia, India,
China– the third world is GM’s oyster.
This international dichotomy plays straight into the union’s hands. As long
as GM’s foreign relations are banking bucks, their American and Canadian
unions are happy to tough it out, take Johnny Foreigner’s money and keep on
keeping on. If GM somehow turns its North America operations around, great!
If not, so what? Let it limp.
Which brings us to the end game.
GM’s foreign operations can’t grow quickly enough to damp down the flames of
GMNA’s cash burn. And even if they did, GM’s Board of Bystanders would
eventually recognize that GMNA is a bottomless pit. GM’s foreign ops will
need every dollar they make to compete against cash rich Toyota. One way or
another, GMNA’s going down.