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April 20, 2005

GOLDING’S TAKE: GM knows the source of the sickness

You get the feeling listening to GM that they are girding their loins for the big one. The senior men actually did a cracking job of telling a good tale at their Q1 earnings announcement yesterday and you could almost come away believing that financial returns were getting better all on their own.

You get the feeling listening to GM that they are girding their loins for the big one. The senior men actually did a cracking job of telling a good tale at their Q1 earnings announcement yesterday and you could almost come away believing that financial returns were getting better all on their own.

But a reality check against the detail of the earnings statement and a quick sip from the cup of truth and you know it is not so. GM has to DO something major. And they have to do it soon.

Two bits of behaviour arouse the expectation. First, the beautifully mannered and historically helpful CFO John Devine refused to give any guidance to the equity analysts about the outlook for earnings for the remainder of the year.

And second, he absolutely refused to discuss any of the options they had in dealing with the crushing legacy cost that is healthcare and the stupidity that is redundant workers on the payroll.

One reason for refusing to forecast could be because the nature of the game is about to change radically and rapidly. One reason for not talking about healthcare cost could be because now is not the time for “negotiating through the media.” If the workforce is to hear that GM is arbitrarily removing healthcare benefit from the benefits package it needs to hear direct.

If that were to happen – the earnings impact would be rapid and the cultural change for all US business would be radical. Healthcare cost for GM has risen by a billion dollars to more than $5bn this year.

The basics are grim without doubt. Crudely expressed, the group lost in the first quarter a billion dollars on 50 billion of turnover – despite stellar and still improving results from the vehicle finance wing of GMAC. A year ago the group made half a billion.

From that hideous starting point, Devine and his colleagues had to salvage crumbs of comfort. They got vehicle stocks down by 100,000 units. They are becoming confident that the cost-cutting in Europe (driving GM Europe down to a loss of $103million in the first quarter) will produce payback in the second half of the year. For the first time ever, GM has in the new Astra, Europe’s best-selling car. The China market – GM’s second largest in the world now – is sucking up structural cost for expansion but the volume is following. There is $20bn of cash left in the balance sheet at the end of the quarter that can be drawn on for healthcare payments. There is an assumption that “under most scenarios” no top-up will be required to the pension fund “for the rest of the decade.” A third of the salaried staff have left the company and yet effectiveness remains unchanged. Product is getting better but there is a “market lag in the recognition of that.”

Only once did the language slip to reveal the pressure that the company is under. “If all hell lets loose and we cannot get any financing from anywhere then we always have the comfort that we have more asset than debt in the GMAC balance sheet.”

Mainly the Press and stockbroker interrogators were quiescent. Only the man from the Bank of America became restless. “The math doesn’t add up,” he said. “I can’t see how you can get what you need.” His answer was soothing rather than convincing. Over time, the board hoped, he would gain confidence.

The stock was down four per cent on the day, having now halved in a year. One additional crumb of comfort to offset that position is that GM is no longer a shareholder in Fiat – whose stock lost 15% earlier this week on rumours (later denied) that there is a threat to repayment of the €3bn of debt.

The cost of getting rid of the Fiat liability was part of the cost that created the first quarter losses. Confronting the other liabilities is as essential – but far harder.

Rob Golding

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