General Motors

http://www.nytimes.com/2009/03/30/business/30auto.html?hp

Today, the White House pushed out General Motor's CEO Rick Wagoner and said that GM has not done aggresive enough in its restructuring and cost cutting plan. The administration is giving GM 60 days to present a cost cutting plan and will provide taxpayer assistance to keep it afloat during that time. It also says bankruptcy is still an option. 

Fair enough ...

But will GM really survive? The answer is ... I doubt it. It has absorbed $17.4 billions along with Chrysler since December 2008. Amazing... four months to burn that kind of money. It can be used perhaps to wipe out poverty in this world, instead of building cars that noone wanted to buy. We all know that GM cars are all shit and not reliabe. Plus, it has been asking for another $16 billion to keep it going. Aside from this, the company is still burdened by around $20 billions in pension and heath care. Considering that the US government decide to bail it out with $36 billions, the money will be spent just to keep the company from going under. It still wouldn't repair its problems underneath that had rotten for tens of years. 

Here's the report 'Determination of Viability Summary' from US Treasury department that led to its decision. It painted a very bleak future for the company. My opinion, on economic sense alone, GM would not survive. However, this would drive an even higher unemployment number. US government will still need to do something. We'll see. Only time will tell...

 

... it is important to recognize that a great deal more progress needs to be made, and that GM’s plan is based on

fairly optimistic assumptions that will be challenging in the absence of a more aggressive restructuring.

• The plan contemplates that each of its restructuring initiatives will continue well into the future, in some cases until 2014, before they are complete.

o The slow pace at which this turnaround is progressing undermines the Company’s ability to compete against large, highly capable and well-funded competitors. GM’s plan forecasts it to catch up to (and, in some cases, surpass) its competitors’ current performance metrics; however, its key competitors are constantly working to improve as well, potentially leaving GM further behind over time.

• Given the slow pace of the turnaround, the assumptions in GM’s business plan are too optimistic.

o Market Share

􀂃 GM has been losing market share slowly to its competitors for decades. In 1980, GM’s US market share was 45%; in 1990, GM’s US share was 36%, in 2000, its share was 29%. In 2008, its share was 22%. In short, GM has been losing 0.7% per year for the last 30 years.

• Yet, in its forecast, GM assumes a much slower rate of decline, 0.3% per year until 2014, even though it is reducing fleet sales and shuttering brands which represent a loss of 1.8% market share, of which only a fraction will be retained. Management’s plan to achieve this is driven by a reduction in nameplates and an ensuing increase in marketing spend per nameplate.

• Furthermore, in the current plan, GM has retained too many unprofitable nameplates that tarnish its brands, distract the focus of its management team, demand increasingly scarce marketing dollars and are a lingering drag on consumer perception, market share and margin.

o Price

􀂃 In 2006 and 2007, GM North America achieved a 30.4% contribution margin. Then, the plan assumes, despite a severely distressed market, that margins increase to 30.8% in 2009 and 30.7% in 2010. These figures remain at 30.9% in 2013 and 30.3% in 2014, despite GM’s plan to increase its focus on passenger cars and crossovers, which have traditionally earned lower margins.

􀂃 Fundamentally, the lingering consumer perception is that GM makes lower- quality cars (despite meaningful improvements in the last few years), which in turn leads to greater discounting, which harms GM’s price realizations and depresses profitability. These lower price points are an important impediment to enhanced GM profitability and need to be reversed over time in order for GM to bring its margins into line with its best-in-class peers.

o Brands/dealers

􀂃 GM has been successfully pruning unprofitable or underperforming dealers for several years. However, its current pace will leave it with too many such dealers for a long period of time while requiring significant closure costs that its competitors will not incur. These underperforming dealers create a drag on the overall brand equity of GM and hurt the prospects of the many stronger dealers who could help GM drive incremental sales.

o Europe

􀂃 GM’s European operations have experienced negative results for at least the last decade with a sharp decline in market share from 12.9% to 9.3% between 1995 and 2008, leaving the Company with high fixed costs and low capacity utilization.

􀂃 The European business is seeking additional capital beyond the funds requested from the Treasury. These funds have not been allocated and thus represent a risk to the viability of GM’s current plan.

o Product mix and CAFE compliance

􀂃 GM earns a disproportionate share of its profits from high-margin trucks and SUVs and is thus vulnerable to energy cost-driven shifts in consumer demand. For example, of its top 20 profit contributors in 2008, only nine were cars.

􀂃 GM is at least one generation behind Toyota on advanced, “green” powertrain development. In an attempt to leapfrog Toyota, GM has devoted significant resources to the Chevy Volt. While the Volt holds promise, it is currently projected to be much more expensive than its gasoline-fueled peers and will likely need substantial reductions in manufacturing cost in order to become

commercially viable

􀂃 Absent the successful introduction of a number of new-generation nameplates, as described in the Company’s plan, GM’s product portfolio is more vulnerable to CAFE standard increases than the portfolios of many of its competitors (although GM is in compliance today with current

standards). Many of its products fail to meet the minimum threshold on fuel economy and rank in the bottom quartile of fuel economy achievement.

o Legacy liabilities – cash costs

􀂃 As GM moves through its forecast period, its cash needs associated with legacy liabilities grow, reaching approximately $6 billion per year in 2013 and 2014. To meet this cash outflow, GM needs to sell 900,000 additional cars per year, creating a difficult burden that leaves it fighting to maximize volume rather than return on investment.

• Even under the Company’s optimistic assumptions, the Company remains breakeven, at best, on a free cash flow basis throughout the projection period, thus failing the fundamental test of viability.

o Under its own plan, GM generates $14.5bn of negative free cash flow over its 6 year forecast period. Even in 2014, on its own assumptions, GM generates negative free cash flow after servicing legacy obligations.

o Given the highly challenging current market, the Company is already behind plan in its overall volume expectations and market share for calendar year 2009.

o Since the Company has built a plan with little margin for error, even slight swings in its assumptions produce significant and ongoing negative cash flows. For example, a 1% share miss in overall global sales, all else being equal, in 2014 would lead to a $2 billion cash flow reduction in that year.

In short, while the Company has made meaningful progress in its turnaround plan over the last few years, the progress has been far too slow, allowing the Company to continue to lag the best-in-class competitors. Furthermore, even if the projected plan is achieved, the cash flow forecast is quite modest, leaving the Company little margin for error in what will be a very difficult turnaround. As a result, the President’s Designee has found that General Motors’ plan is not viable as it is currently structured. However, given the improvements that have been made to date, and the path on which these improvements place GM, we believe that there could be a viable business within GM if the Company and its stakeholders engage in a substantially more aggressive restructuring plan