GM reports large loss, liquidity crisis
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General Motors and Ford were expected to post massive third quarter losses this afternoon (7 November), a day after automaker and union chiefs went to Washington to seek extra help from the country’s political leadership.
As Reuters noted this morning, Ford and GM together booked more than US$27bn of net losses in the first half – and that was before the deepening economic slowdown pushed US industry sales beyond 15-year lows.
Also in the mix is Chrysler’s future. With talk of some sort of deal with Carlos Ghosn’s Renault–Nissan Alliance now firmly nixed, the money is on a GM-Chrylser tie-up – whether that’s a merger or a part sell-off remains to be seen.
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By GlobalDataWith talk of 40,000-200,000 job losses if Chrysler, as we know it, disappears, the stakes are high in a week when annualised sales hit a quarter-century low and US electors slung a Republican administration out on its ear in place of a personable new Democrat – the country’s history-making first Afro-American president – promising change.
Analysts on average expect GM and Ford to post losses of roughly $2bn each for the third quarter excluding one time items, according to Reuters Estimates.
Other predictions around on Friday suggest GM will post a $3.51 per share Q3 loss before charges after losing $51bn in 2005-2007, plus losses of more than $18.7bn in the first half of 2008.
Ford is seen posting a third-quarter loss before charges of 93 cents per share. It booked a $100m first-quarter profit, but an $8.7bn Q2 net loss.
While both automakers are expected to prune even more costs, US industry observers are not expecting any drastic plant closure announcements today.
The consensus seems to be more shift cuts, and more buyouts at both white- and blue-collar work stations.
Ford cut white collar expenses last summer, and told the UAW in September 4,000 people were surplus to need, while Chrysler just announced 2,500 more will go.
Shifts may be axed, overtime banned and plants shuttered temporarily, as is happening increasingly here in Europe and South America.
GM is also seen delaying some new models and engines for a time.
Meanwhile, there has been little public comment apart from bland automaker statements after the Detroit Three and United Auto Workers chiefs met with House of Representatives speaker Nancy Pelosi and Senate majority leader Harry Reid.
Ford president and CEO Alan Mulally stressed his company’s plans to develop new, fuel-efficient vehicles and said: “Speaker Pelosi and majority leader Reid are seeking ways to help the auto industry given these unprecedented economic challenges. We applaud their efforts and will work together with all of our nation’s leaders to continue our transformation to greater fuel efficiency and to help protect jobs.”
Chrysler chairman Bob Nardelli said: “We appreciated the opportunity to meet with speaker Pelosi and her leadership team, as well as with senate majority leader Reid to discuss the challenges facing the industry.
“We are encouraged by their understanding of the importance of the automotive industry to the economy and we look forward to working with them on these issues. We would also like to acknowledge that UAW president Ron Gettelfinger was present at these meetings and added his support.”
The automakers pledged to work with the leaders “to ensure immediate and necessary funding to keep the auto industry viable and its transformation on track during this critical time,” according to a GM statement.
Pelosi said before the meeting that the discussions would focus on “how we can work together to go forward to ensure the viability of that important industry, looking out for the taxpayer and looking out for the worker.”
GM said the additional federal support would allow “a competitive” auto industry “to contribute to our nation’s economic revival.”
“The maths for GM is simple: it had $21bn in cash on hand at the end of the first half of this year,” said Global Insight auto analyst Aaron Bragman. “With a burn rate of roughly $1bn a month and the need to maintain a level of $11-14bn just to keep operations going, that gives GM until January 2009 before it reaches a critical point in its liquidity. One hundred days [a reference to GM’s president for North America, Troy Clarke, recent statement that the next 100 days are going to be critical to the company’s future] roughly equates to three months, or the end of January 2009. The spectre of bankruptcy becomes more and more real with each passing day.”
The automakers are after an an additional $25 billion in federal loans (supported with conditions by incoming president Barack Obama with whom automakers and the UAW hope soon to meet) for future health care payments for retirees and also want lawmakers to help them to a slice of the treasury’s $700bn financial bailout package and to low-rate emergency borrowing from the Federal Reserve bank.
The loans would help the companies make required payments to health care trust funds that were created as part of a 2007 deal with Gettelfinger’s UAW union in an attempt to loosen the healthcare and pensions millstone around the long-established automakers’ necks.
Representative John Dingell, a Michigan democrat and longtime advocate for the industry, was quoted by one news agency as saying the meeting was productive but did not address the specifics of the industry’s request.
“They’re not seeking money just to spend it,” he said. “They’re seeking money to invest in jobs and opportunities for American workers and American industry.
But, in an interesting new twist, Barclays Capital last night said the automakers’ ability to access the already approved package of $25bn in federal loans may be limited by rules proposed by the department of energy which say they can only be extended to “financially viable” applicants who must prove they have a “reasonable prospect” of repaying the loan.
Under the rules, the government will lend up to 80% of an eligible project’s cost and successful applicants can get the requested funding within the current quarter.
But the cash-strapped US automakers, particularly General Motors, may find it difficult to tap into the program at a time when they are arguing the case for federal assistance to survive a deep industry downturn, Barclays Capital analyst Brian Johnson told Reuters.
“The current provision on financial viability seems to box GM into a regulatory trap, in our view,” Johnson said in a research note.
“As a result, we believe that additional bailout revenues will be needed to meet GM’s needs.”
Assuming GM and Ford will meet the requirements, GM can borrow up to $4.5bn in 2009 and Ford $2.8bn, Johnson added.
