How Many More Body Blows!?!?

[Hogans_Heroes]

My question is "How many more body blows can GM take?" GM paid approximately $2.4 billion for 20% of Fiat Auto and spent another $2.0 billion to cancel Fiat's put. That's $4.4 billion of cash expended for what in the end was a bit of diesel engine technology. Essentially a loss of $4.4 billion. GM paid approximately $1.4 billion for a 20% stake in Fuji Heavy Industries (maker of Subaru). It then sold 8.7% of its stake to Toyota for $315 million, implying the remainder (to be sold at market prices back to Fuji for retiring) is valued at around $408 million. This would amount to about a $677 million loss on GM's holdings, and - in fact - GM will be restating 2nd quarter results to reflect this loss to the tune of $700 to $800 million. GM in the Fall of 2003 was compelled to sell $13.5 billion in long-term bonds to plug a hole in its Pension fund. This has had the effect of reducing operating cash flow as much as $800 million per year since - and, while GM reports its fund as being fully funded, by some measurements it continues to be underfunded by tens of billions of dollars. GM's fully-funded status is dependent upon accounting which calls for an expected return on plan assets of 9% per annum (down from an improbable 10% going forward). This may need to be revised further downwards, which would necessitate another floating of long-term bonds at much higher interest cost to plug yet another hole. For comparison purposes, Berkshire Hathaway's long-term expected return on plan assets is 6.5%! Not to disparage General Motors Investment Management Corporation (hat's off to a job well done thus far), but they're no Warren Buffet. And don't even get me started on the billions and billions spent on GM Common Stock share repurchases in the $60 and $70 range. My point is, GM's core business (GMAC aside) is suffering. There are important glimmers of hope in Europe, which seems to have turned the corner. Asia-Pacific, while maybe not as hot as it was last year, is a bright spot. GM LAAM, after years of losses following previous stellar returns, is bumping along alright. GMNA is the Sword of Damocles hanging over the corporation's head. Aggregated, GM Automotive operations are suffering. Yet these exogenous shocks just keep coming! GM has used its heft and size to absorb one body blow after another. But is there a point at which this becomes more and more difficult to sustain? You have to look down the road and wonder what similar shocks are on the horizon. Clearly, Delphi comes to mind, with a combination of job bank cash buyouts / cash contribution to Delphi measured in billions, plus the assumption of pension and OPEB liabilities measured in further billions, plus potential reacquisition of under-performing plants in any potential aid package to Delphi. In the event of bankruptcy, maybe no asset reacquisition or cash assistance, but far greater amounts of pension and OPEB liability assumption. The body blows are coming in waves and are not yet finished. I have a feeling the greatest is yet to come (and soon). Perhaps this sale of Fuji Heavy stock is an indication of an impending need for a large amount of cash. Again, I just have to lament that with all the problems GM has from a current or operating perspective, that these exogenous shocks just keep knocking us down. It's hard enough as is! All of this really adds up, at least in my mind, to an indictment of the Jack Smith era. I disagreed forcefully - vehemently - with a lot of Smith's decisions (Smale, Zarella, brand management, VSSM, Fiat, Subaru, etc. - admittedly easier to do in retrospect) but had never been willing to criticize him or his "alliance" strategy too loudly because of the tremendous respect I felt he deserved for "stopping the bleeding" and perhaps even saving the company from bankruptcy in 1992/1993. I've wondered, though, if the events of recent years mean his legacy should be reevaluated. The loss on the Fuji Heavy stake is just one more reason to think so.

[haypops]

Great read. Thanks.

[evok]

Hogan: Agree completely. The only thing I can forsee is the DPH Chapter 11 filing is eminent and a certainty and GM has been preparing for over a year for it. Whatever transpires over the next two week appears ready to rock GM. Edited October 5, 2005 by evok

[CaddyXLR-V]

Hogan:  Agree completely.

The only thing I can forsee is the DPH Chapter 11 filing is eminent and a certainty and GM has been preparing for over a year for it.

Whatever transpires over the next two week appears ready to rock GM.

[post="24308"]<{POST_SNAPBACK}>[/post]

It will be that soon? I was thinking it was still a while away. I'd like to buy some stock in both companies after that happens.

[Ghost Dog]

If it is about to get real ugly? I would'nt be shocked by some sort of Cash raising deal with Shanghai Auto. Technology,platform, maybe even a Brand. (Buick or Saab? ) Edited October 5, 2005 by Ghost Dog

[ehaase]

How much worse will things have to get before GM seeks Chapter 11 protection? To my uneducated mind, Ford and GM are just about where the legacy airlines were two or three years ago.

[Cory Wolfe]

This sounds like it's going to be a really bad time for GM, imo...

[Ghost Dog]

It all started as Evok said. One Year ago.

http://www.thecarconnection.com/Industry/I...S175.A7684.html

[motownr]

Very well written, Hogan. A family member is part of the Wall Street rat race. A client runs an extremely prominent hedge fund respected for its analytical ability. The founder recently met with GM's brass, and is now telling everyone that a Chapter 11 filing is inevitable. Not likely, INEVITABLE. These things usually involve some sort of tipping point. DPH might be it, but I'll vote for a loss of confidence in the bond markets. GM's proven adept at repeatedly being able to raise capital on favorable terms; when this stops, the end is near. Scary.

[Newbiewar]

perhaps the product cant come out soon enough to help the giant... how much cash does the company have again? in may it was around 20 billion, with a 1 billion dollar loss 2nd quarter, we are looking at 19 billion, add 650 million for Suburu, almost back up to 20 Billion, Assuming it does another 1 billion loss in 3rd quarter, down to 19 billion... ohh yea had to seperate ties with Fiat, when did that happen? are we down to 17 Billion? how long will this last?

[Teh Ricer Civic!]

I still stand by my opinion that Ch11 will give GM a terrible PR view for "abandoning" its workers. if worse comes to worse, GM should put Buick/Pontiac/Saab on "hiatus" (GMC is just clones of chevy's for the most part anyways) to streamline development until financial conditions improve. GM could get by with Chevy/Cadillac as their only brands if things really got bad...

[ehaase]

if worse comes to worse, GM should put Buick/Pontiac/Saab on "hiatus" (GMC is just clones of chevy's for the most part anyways) to streamline development until financial conditions improve.

GM could get by with Chevy/Cadillac as their only brands if things really got bad...

As someone stated on another thread, eliminating BPG would reduce GM sales by 1 million per year. You can't assume that all, or even a majority, of those buyers would just buy Cadillacs or Chevrolets. GMC is very profitable, and I believe I have read that Buick makes money also.

[Angry Dad]

Updated: 03:35 PM EDT Union Official Vows UAW Won't Budge On Delphi Wage Cuts By John D. Stoll, Of DOW JONES NEWSWIRES, Dow Jones DETROIT -(Dow Jones)- Certain United Auto Workers officials have informed employees that auto-parts maker Delphi Corp. (DPH) is pressuring the union for a cut in wages to as low as $10 an hour. Al Coven, president of UAW Local 699, said in an interview Thursday that his office, representing Delphi hourly workers in Saginaw, Mich., has sent letters to employees outlining some of the terms that Delphi is believed to want, including wages as low as $10 an hour. While Coven said Delphi hasn't sent the figure out in official documents, he insisted that "we know that's what they want," but "we're not going to budge." Currently, Delphi hourly employees make at least $14 an hour and pay tops out at more than $27 an hour. Coven said high-level UAW officials have told him that, in order to accommodate Delphi's demand, the union would have to "re- open" the existing contract between the two parties and "the international [UAW officials] indicated they won't do that." Delphi's contract with the UAW is slated to run through 2007. Delphi has pressured the UAW and its top customer, General Motors Corp. (GM), which spun the supplier off in 1999, to provide bailout assistance as Delphi teeters on the edge of bankruptcy. The supplier lost $4.87 billion in 2004 on $ 28.62 billion in revenue and reported a $747 million loss in the first half. Chief Executive Robert S. "Steve" Miller, who blames high labor costs as the main problem at Delphi, has set a mid-October deadline by which Delphi will seek federal bankruptcy protection if it doesn't get adequate guarantees from GM and the UAW. Delphi officials weren't available for immediate comment and the UAW said it isn't commenting on negotiations with the supplier. The company is expected to make an announcement concerning its restructuring plans prior to the bankruptcy deadline of Oct. 17, when U.S. bankruptcy laws stiffen. The company has lined up various consultants and legal staff that would be needed to navigate a Chapter 11 filing, and Miller insists the company has adequate financial backing needed to weather the storm. In total, Delphi is said to be seeking $2.5 billion in immediate concessions from the UAW. The supplier also has indicated it needs to stop funding its costly jobs bank of workers, which would yield an estimated savings of at least $400 million annually. Coven said, "I think the attitude is, if we're going down, we're going down swinging." He referenced the pattern set in recent bankruptcy restructurings in the airline and steel sectors and insisted blue-collar workers were "squeezed" by federal courts seeking to shrink labor costs to more competitive levels. He said Delphi workers would be treated the same way if the company files Chapter 11. "They're just picking us off one at a time," he said, referring to the weakening of the strength of various unions in the U.S. He said the UAW "has bargained for 40 years to achieve what we have, they shouldn't expect us to give it back." -By John D. Stoll, Dow Jones Newswires; 313-226-1249; [email protected] (END) Dow Jones Newswires My opinion: To survive GM is going to screw anybody and everybody as soon as posible. They simply have to. It will be painful, it will be bloody but the one thing driving this is the ignorance shown by the UAW. They cannot accept that they are part of any problem. They cannot accept that their actions are part of any solution. That last paragraph shows the ignorance of the UAW leadership.

[Cory Wolfe]

As someone stated on another thread, eliminating BPG would reduce GM sales by 1 million per year. You can't assume that all, or even a majority, of those buyers would just buy Cadillacs or Chevrolets. GMC is very profitable, and I believe I have read that Buick makes money also.

Exactly.

If Pontiac ever goes... I'm not going to settle for a Chevy. I'll leave GM for the truest replacement possible. I'm not alone here, either... (although Pontiac haters like to suggest that) I belong to enough Pontiac car forums to know that a good amount of them from each would.

Anyways, this happened with Oldsmobile too. Most didn't stick around and GM has never regained those sales. The same will happen with eliminating another brand... even Saturn.

[motownr]

Didn't someone on Wall Street estimate that GM is on the hook for something like 8 BILLION if Delphi enters Chapter 11? The negotiating position of the union in public is really bizarre. Do they know who they're dealing with? Miller is a hardcore turnaround pro. Chapter 11 probably doesn't phase him one bit--his comp is likely tied to the post-bankruptcy value of the company. It's gonna be an interest couple of weeks.

[Teh Ricer Civic!]

As someone stated on another thread, eliminating BPG would reduce GM sales by 1 million per year.  You can't assume that all, or even a majority, of those buyers would just buy Cadillacs or Chevrolets.  GMC is very profitable, and I believe I have read that Buick makes money also.

[post="24725"]<{POST_SNAPBACK}>[/post]

i never said elimate GMC... i justified keeping GMC because theya re just clones anyways.

I dont care if they lose sales, they will have less operating costs AND more importantly be able to focus efforts onto their core Chevy(GMC)/Caddy brands to make those world class. once Chevy has a strong foothold then the other brands can be brought back, and this time with the proper funds.

[SimonDavid]

I agree with Angry Dad To survive GM is going to have to get nasty Delphi will either file for chapter 11 or screw the UAW down to wages that are close to what they'd get out of chapter 11 anyway Then GM if it has any brains it will use that as the pattern to beat their UAW members down And if GM don't do that then Kekorian and Jerry York will do it for them - I don't think he just spent a couple of billion to watch it vanish into a chapter 11. Look how hard he went after DCX when he thought they were ripping him off. Interesting how Lutz said he would welcome Jerry York on the board - this guy knows alot about wielding the axe, and Lutz used to work with him....

[SimonDavid]

in fact the more I think about it I bet the Casino guy is already lining up a dream team to run the company when he takes it private. Lutz has been saying nice words about him. So if GM hits the wall financially in a year they will have 3 choices : the weak option - continue with Wagoneer-style GM consensual management playing a nice tune on the deck of the Titanic the desperate option - file for chapter 11, but then it's a lottery, who knows what the result will be or Kerkorian comes in with a buyout offer to take the whole thing private - still dramatic cuts but at least it's not tied up in the courts.

[ehaase]

i never said elimate GMC... i justified keeping GMC because theya re just clones anyways.

I dont care if they lose sales, they will have less operating costs

They will have less revenue also.

[SimonDavid]

Another thought, Is Toyota starting to "sniff around"? I mean it was very nice of them to snap up Subaru so cleanly. The last thing they want is GM in chapter 11.

[Sixty8panther]

WTF, how depressing. :(

[ehaase]

Interesting article in the Wall Street Journal this morning on the subject. A Delphi bankruptcy may actually work to GM's benefit. Here are some excerpts: Some analysts maintained yesterday that GM could still ride to the rescue with a multibillion-dollar bailout package that would ease the burden Delphi carries because many of its unionized U.S. workers still earn GM pay rates and have GM's rich benefits. But other investors and analysts said GM could conclude that it is better off letting Delphi -- the largest U.S. auto-parts maker by revenue, with $28 billion -- go to bankruptcy court. To keep Delphi out of Chapter 11, GM would likely have to pony up several billion dollars to cover pensions, retiree health care and life insurance for 45,000 union retirees and active workers. That amount has been estimated by Wall Street at $4 billion or more. But some analysts have zeroed in on the 1999 spinoff agreement between GM and Delphi. An indemnity clause in that agreement gives GM a general, unsecured claim on Delphi's assets in bankruptcy proceedings much like what a bondholder might have. As a result, analysts and lawyers said GM could be in a position of owning a sizable chunk of restructured, cleaned-up Delphi common stock -- essentially giving GM a way to earn back any money it spends paying retiree health care or topping up worker pensions, as it might be called upon to do should Delphi terminate its pension plan. GM would have a similar claim on Delphi assets out of bankruptcy, but Delphi is probably more attractive to own postbankruptcy once it sheds unprofitable businesses and onerous labor pacts. "If you are going to own a piece of Delphi, you'd rather that was a right-sized, cleaned-up one, right? GM would come out the other end of the bankruptcy process owning a substantial chunk of debt and likely the common stock would go to creditors like GM," said Robert Keach, a Maine bankruptcy lawyer and board member for the American Bankruptcy Institute. Another benefit, said Mr. Keach, is "bankruptcy would create certainty for GM" because it would know the exact amount of its liability, as opposed to this "open-ended contingent liability they have now." GM Chief Executive and Chairman Rick Wagoner and Chief Financial Officer John Devine reminded analysts at a conference in Detroit recently that several of GM's suppliers have declared bankruptcy without disrupting their supply. GM executives also said they are aware of the nuances of the various possible scenarios, saying that supply disruptions are manageable and insisting they see some opportunities in a Delphi bankruptcy.

[FUTURE_OF_GM]

It all started as Evok said. One Year ago.

http://www.thecarconnection.com/Industry/I...S175.A7684.html

[post="24566"]<{POST_SNAPBACK}>[/post]

Yeah, when the SEC decided to jump on the automakers backs and "have fun" like the media and analysts were.

GM is screwed either way as usual.... Even if they file this "inevitable chapter 11" then they'll still be chastised with a bad image.

I guess we might as well curl up and die... Congrats America and the Media! You've accomplished your goals!

Union Official Vows UAW Won't Budge On Delphi Wage Cuts

LOL...UAW leadership being the typical dumbasses that they are.

[motownr]

The WSJ is fascinating....do you think GM's braintrust had this in mind all the way along? If the courts help make Delphi a lean, competitive entity, GM wins on every front: they get an ownership stake in a Tier 1 supplier, and they set the tone for solving their own UAW problems. Certainly, if the UAW see whats happens under Chapter 11 at DPH, they'll never make the same mistake twice. I can't wait to see how this thing turns out.

[Teh Ricer Civic!]

They will have less revenue also.

[post="25141"]<{POST_SNAPBACK}>[/post]

Ok, heres my thinking. ditch the marginally profitable Buick (pontiac? et all). keep the bread winner GMC/Chevy/Cadillac.

invest heaviliy in Chevy/Cadillac (people will buy the GMCs even if they are just clones of Chevys anyways) to make those2 brands WORLD CLASS. In turn that will draw in FAR more revenue than keeping Buick and pontiac and the rest and turning out mediocre models in all brands.

get my logic? take a small short term loss for a great long term gain.

[ShadowDog]

I doubt simply dropping brands will effectively place GM in a position of immediate cost reduction to begin balancing their revenue/cost issues. There's legacy costs, contract payouts, unionized workers on the payroll getting paid well after plant closures, and major restructuring...and these are just the tangible issues. Public perception will take a nose-dive; PR and marketing will need to don magicians' capes to maintain GM any sort of credibility in the marketplace. Any way the scale tips, it's a logistical nightmare.

[wildcat]

:angry: Let me put it this way... GM already looks like a bunch of fools -- for many reasons -- including the cutting of Oldsmobile, a historical and viable American brand for some 100 years. If they cut another make like Buick or Pontiac, GM is through -- not from the act, per se -- but from running another of their hallowed brands into the ground. How can you even suggest they cut Buick, which, along with Cadillac, is one of the top five-rated vehicles for quality? ( <_< Are you gonna say like Lutz did, "We've got to protect Cadillac"? Bull****!) Leave a place in the market for Buick; stop giving everything to Chevrolet or Saturn! If you have to cut something, cut the morons that helped to make Buick and Pontiac "damaged" brands!

In one tiny way, I'd like to see GM drop Buick - if only because then they (and some of the immature fools on this board) couldn't make Buick the whipping boy anymore and deny GM's poor management.

< where's that outraged smilie whose head explodes in anger when you need it? >
Buick isn't to blame for GM's problems, but GM is d*** sure to blame for Buick's problems! Edited October 10, 2005 by wildcat

[FUTURE_OF_GM]

Any way the scale tips, it's a logistical nightmare.

Welcome to the world of GM...