Most people run out of cerebral processing power when they are confronted with numbers that run to seven digits even though they might by now be living in houses that take that quantity of digits to price.
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Ten digit numbers are beyond the realms; they won’t even fit on the calculator. Beyond 10 digits there is a further categorisation called GM-numbers which don’t fit anywhere.
The guys who prepared the GM Quarter Three earnings release did their best to give the unfathomable a familiar, folksy feel: “non-cash charges of $38.6B” is what it said on the slide.
We will take this in stages: non-cash means that nobody has to give real money to anybody else. It just sits there in the accounts…for now. Charges means that it’s bad news. $ stands for a dollar which used to be worth a lot of money but because the US economy is so very sub-prime these days you can get more than two to the pound.
B stands for billions and just to help kick-start the cerebral computer drive, that’s $38,600,000,000. In other words GM has to sell 1,767,441 cars at its present average transaction price to get that back in revenue, and sell its whole global production for more than four years to get it back in earnings.
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By GlobalDataWhat is this “non-cash charge”? It’s tax credits (mainly). It’s a balance sheet credit that assumes that you will make profits again some time in the future and that you can then use credits to reduce your tax payments. What triggered the write-down was the necessary acknowledgment that GM might never make profits again, or at least not at the appropriate rate. The accounting rule is applied once a company has made losses for any 12 successive quarters. And GM has.
This development put an unusual spin on the analysts’ briefing because instead of hammering away at the minutiae to allow an earnings (or losses) forecast to be built up, the analysts were justified in asking the sort of big picture question that has had to be answered already in satisfying the accounting rule: “So do you thing that there is no realistic probability of making profits again in the future?”
“Well; uuuuum,” was the answer in summary. It’s not looking good. Though (mercifully) GM sold control of GMAC, the finance company, it still has a huge holding that allows it to look straight through to the nightmare that is the sub-prime mortgage market in the US. There are some horrible truths. The faster GM shuts factories and lays off people the lower the housing market goes. And as house values fall, as we all know, the weaker is the resolve to buy a new car – especially when the current one has a good five years of active life left in it. Fritz Henderson, the GM CFO, said that he did not like the look of the US car market which is now annualising at 16.1m where less than a year ago the expectation was a million higher.
One thing that has been a real disappointment for those of us who now see brave men making superhuman efforts to save a company, is that General Motors Europe did not deliver in the way that was hoped. The business has sold 15% more cars in the third quarter than a year ago which is a huge gain in such a competitive market. Revenue was up by over a billion dollars which is a fine effort. GM is barnstorming Russia with sales up 75% compared with the same quarter last year, and Chevrolet has become the fastest growing brand in Europe, now selling at the rate of 450,000 cars a year. Trouble is that none of that compensates for the fact that the German market is badly off, (that is where all the rich margin comes from), and there has been a bad shift between the Euro and the other currencies in Europe which has generated translation losses.
Just when the boys carrying the burden at GM thought the worst of the storm had passed the sky has darkened again.
Rob Golding
