AFSCME 3357-HOF'S BLOG

General Motors and the Perfect Storm

I'm trying to get back into the whole blogging thing after making time for doctors and dentists and kids and work and you name it. A lot of things have happened in the past two weeks since I last posted. For General Motors, there hasn't been a lot of positive news. It seems like the entire world is conspiring to take the General's limited supply of cash much faster than Herr General wants (or needs) to give it up.

First thing's first: April's car sales were up, but truck sales were down by double digits. The way GM is set up right now, truck sales are where the profit lies. Things aren't expected to turn around anytime soon with gas prices staying high, or going higher. Already, GM has announced that it will stop producing most of its trucks and SUVs for 2008 at least a month before usual.

Delphi continues to be a problem for General Motors. Delphi is back to square one. Even though Delphi CEO Steve "The Pompatus of Bankruptcy" Miller just released a book touting himself as the turnaround king, the company is still a basket case. Delphi is still in Chapter 11 bankruptcy after a financing plan fizzled. Delphi lost $589 million in the first quarter of 2008. General Motors may have to come to the rescue to the dune of billions of dollars just to fund the continuing unfunded pension liabilities that Delphi has been ignoring since the bankruptcy. Ted Evanoff of the Indianapolis Star wrote an excellent piece on history and current status of the Delphi mess. It's linked here.

Rescap, the mortgage lending part of GMAC may be headed towards its own bankruptcy. Flow throw losses hurt GM's finances last quarter. Rescap lost almost $900 million last quarter. Bloomberg News reports that GMAC may be forced to loan Rescap $3.5 billion to avert a bankruptcy. With GMAC's junk-bond debt level, this means that the $3.5 billion will have to come in the form of capital infusions from GMAC's investors, General Motors (49%) and Cerberus Capital Management (51%). Cerberus Capital Management, GM's partner in GMAC has its hands full with Chrysler. Chrysler is even sicker than GM. If it's possible, Chrysler is even more dependent on trucks than GM. Chrysler's trucks get worse gas mileage than GM and Chrysler has fewer competitive models on the floor or in the pipeline. Moreover, Chrysler doesn't have General Motors' healthy international sales. Rescap lost $4.3 billion in 2007. Only half of that (49% actually) flows through to General Motors, but $2 billion is real money

American Axle strike continues. The AA UAW workers seem intent on dying on their shields rather than taking a huge paycut. GM offered to kick in $200 million in transition payments, but the offer was turned down by the union. So far GM has done a good job minimizing the effect of the AA strike. Shutdowns at plants selling hot-selling cars have been brief. I suspect that there are still some smart industrial engineers at GM who can program their way around American Axle products. With modern numerically controlled machinery, it's probably not that hard to send digital plans for commodity parts to an internal plant or alternate supplier.

So, what we have is an overall lousy economic climate for automakers in general, and added to that, General Motors has three cash sucking problems not shared by other automakers (or not to the same extent), specifically: Delphi, Rescap, and American Axle. Each can be expected to take billions from GM's bottom line this year. How much cash does GM have to weather the storm? According to Fortune Magazine on April 28, the answer was $34.6 billion. That is actually more than the company had last year at this time. It's enough to see GM through the end of this year. Things could get dicey in 2009 if the economy doesn't turn around.

Oh yes, did I mention the $30 billion that GM has to contribute to its VEBA by 2010?