The Balance Sheet Future

GM is Now a Going Concern

 In a case of showing up late to the party, GM's auditor's raise the spector of bankruptcy.

The doubt, according to Deloitte & Touche LLC, is about whether GM can overcome its staggering losses and generate enough cash to stay in business, or remain a "going concern" as accountants would say.

GM concedes in the report filed Thursday that it's on the edge of bankruptcy and won't be able to avoid it unless it gets more government money and successfully executes a huge restructuring plan.

How come the auditor's are just now adding the going concern clause into their audit report?  After all, GM lost $84.7 million per day during 2008.

In this case the following cartoon seems appropriate:

Automotive Depression

February's U.S. auto sales were at the lowest level since 1981 .  The Bailout 3's sales were down 49.3% from last year.  Consumers do not need a new car, they no longer feel the need to trade up every three years to a new car.

Automotive Depression

The results mark the 16th consecutive monthly drop in auto sales and come as a deepening recession in the United States and slowing global markets have pushed automakers to ratchet back production, ramp up discounts and seek government financing in a bid to survive.

"In our view, we are in an automotive depression," said Standard & Poor's equity analyst Efraim Levy.

"Shell-shocked consumers fearful for their jobs, the value of their homes and stock market assets are wary of making the sizable discretionary purchases," he said.

Consumers are trading down, finding value in Hyundai, Kia and Subaru whose sales were about flat from last year.  A change in consumer behavior is setting in as buyers are more price conscience and spending within their means. Consumers are focusing on their savings versus their spending. 

Flat is the New Up

Hyundai, South Korea’s largest automaker, said it sold 30,621 vehicles last month, down from 31,090 a year earlier. The company spent an average of $3,031 a vehicle last month, its highest level, according to Edmunds.com, a provider of auto- industry information based in Santa Monica, California.

Such spending was unchanged from January and is part of efforts to fight the market’s decline and build the brand’s image, said Dave Zuchowski, Hyundai’s U.S. sales vice president.

“In this market, we think flat is the new up,” he said in an interview. “If we’re flat again in March I’ll be happy.”

When will the auto manufacturers realized that we are not headed back to sales levels of 2004-2007?  They need to start drastic changes to their companies today.  Instead automakers across the globe are focused on government handouts.

Government Aid

Overall sales fell to 9.1 million vehicles on the annualized basis tracked by analysts, the lowest level on that basis since December 1981.

"These are obviously unsustainable levels and will cause almost every major automaker across the world to seek government aid," said GM's chief sales analyst Mike DiGiovanni.

Toyota, which passed GM as the world's largest automaker last year, said earlier it had applied for a Japanese government loan to help its finance arm cut funding costs.

Even the mighty Toyota is going to the trough for government assistance as their sales were down 39.8% from last year.  Governments need to let the auto manufacturers work through their problems privately, without taxpayer assistance.  By bailing out all the auto companies Governments are not allowing the weakest, least profitable manufacturers to fail, making way for the stronger companies to survive and thrive upon recovery. 

For more on the auto woe's, please see GM Loses $84.7M Per Day and Auto Bailout Task Force Takes Time.

GM Loses $84.7M Per Day

Please end this nightmare.  Let GM go the way of a bankruptcy restructuring.  GM's business plan is clearly failed.  Their production capacity and dealership network are too large for the industry's changed fundamentals.  Selling cars built by overpaid workers to maxed out consumers at zero percent financing will not bring the company out of its problems.

I have not been a fan of CNBC's Phil Lebau's reporting on GM as he comes off more as a lobbyist.  Here he pulls together the data on GM's disasterous year:

As expected, General Motors posted horrendous 4th quarter numbers this morning with the company losing $9.6 Billion. For all of 2008 GM lost $30.9 Billion making it one of the worst years ever for the auto maker.No wonder it's now on a lifeline courtesy of the Federal government.

Without that lifeline (and a $4 Billion loan) GM would have been dangerously close to not having enough money to run its business day to day. GM ended the year with $14 Billion cash on hand. It needs $11-14 Billion minimum.

That's what happens when you burn through $67.4 million in CASH a day - every single day in the 4th quarter.

This chart provides a good picture of GM's changed fortunes over the decades (Source: Automotive Data Center & R.L. Polk):

As the chart shows GM never properly restructured in the 80s and 90s with the rise of foreign competition.  Hopefully the President's Auto Bailout Task Force restructures the industry with drastic capacity and union wage/benefit cuts.  Doling out money everytime the automakers run out is not a solution. For more of my thoughts on the automakers see: Auto Bailout Task Force Takes Time.

Auto Bailout Task Force Takes Time

This week the auto companies provided their long term restructuring and survival plans to the new Auto Bailout Task Force.  The task force co-chairs, Treasury Secretary Tim Geithner and White House economic adviser Larry Summers, two guys with whom I have little confidence in to do the right thing.

Fundamental Restructuring

The companies received a $17.4 billion bailout in December and have requested a combined $22 billion more in federal aid to survive. The bailout requires the Obama administration to determine by March 31 whether GM and Chrysler can be competitive and eligible for more government assistance.

The Treasury said members discussed financial and operational details of the companies, as well as efforts to bring unionized wages and benefits in line with those at non- union foreign car companies in the United States, and initiatives to produce more fuel efficient vehicles.

Geithner and Summers sought more analysis from members, as well as their initial restructuring recommendations due at the next meeting. The date was not disclosed.

Geithner and Summers don't have the experience to reform these companies and are likely to throw more money at these fundamentally impaired companies. Someone with industry experience and the independence to make the needed cuts and changes should be incharge.  Will Congress and the President realize that a bankruptcy restructuring is needed?  The market has spoken.

Market Value

GM fell 23 cents, or 12 percent, to $1.77 at 4:15 p.m. in New York Stock Exchange composite trading. The closing price was a 71-year low, according to Global Financial Data, underscoring investor skepticism that the largest U.S. automaker can be turned around.

The company’s market value slid to less than $1 billion in intraday trading before finishing the day at $1.08 billion. Five years earlier, the value was $27.2 billion.

Senate Banking Committee Chairman Christopher Dodd said he doesn’t want U.S. automakers to go through a prepackaged bankruptcy or “forced merger.”

“I don’t like that last option,” Dodd, a Connecticut Democrat, said of a forced GM-Chrysler merger in an interview on Bloomberg Television’s “Political Capital with Al Hunt” airing this weekend. “I’m fearful it might turn into just a liquidation; but if it can be done well, it may come to that.”

GM’s 8.375 percent bonds due in July 2033 slid 0.5 cent to 16 cents on the dollar, yielding 52.1 percent, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority.

Let the market restructure these companies.  Let capital and resources flow towards more efficient manufacturers.  The labor force needs to find other jobs and be retrained to manufacture tomorrow's goods.  Hopefully the task forces realizes what must be done and has the will to make the
politically-difficult decision.