Why General Motors Is Doomed
I titled this link. Frequently MSN changes the link titles to their articles multiple times in the course of a week and this is what they were using when I saw it:
Why General Motors Isn’t Doomed
Of course, when I read the article, I got a different feeling. The actual title is a question.
Can General Motors come back?
The future for automakers is so murky that even deeply wounded GM could enter the next decade in control. But the company will have to keep a close eye on its cash.
By Jim Jubak
It’s likely that the auto industry will look radically different in 2010 than it does today.
And that’s what’s likely to save GM. The company is bleeding market share in its home market because fewer motorists want to buy its North American product line of trucks and SUVs. And its losses are so huge that in the past couple of months the company has burned through cash at a rate of more than $1 billion a month. In the quarter ending in March, the burn rate was about $500 million a month.
Market weakest where GM is strongest
How bad are things at General Motors? The company showed a $4.4 billion operating loss in 2007, the fourth operating loss in the past four years. Cash flow for the year was a negative $5.6 billion. The company finished the year with $25 billion in cash, about flat with 2006 but down a huge $24 billion from the end of 2005.
Then everything got worse. After averaging 16.8 million units a year from 2000 through 2007, U.S. auto sales are on a pace to fall to just 14 million units in 2008. The hardest-hit segments are exactly where General Motors’ sales are strongest. Industrywide, sales of pickups, SUVs and vans — exactly the kinds of vehicles most affected by higher gasoline prices — were down 21% in the first half of 2008 compared with a year ago. The company gets about 60% of its sales from these categories. The company’s share of the U.S. market, which tumbled to 23.5% by the end of 2007, has declined further, to just 21%.
Losing cash, facing debt
Pushing off a recovery for an additional 18 months gets very scary when a company is burning through cash as fast as GM — whether it’s the $1 billion a month of the past couple of months or the $500 million a month of the March quarter.
Do the math: Eighteen months at $1 billion a month comes to $18 billion. General Motors finished the March quarter with $22 billion in cash. The current rate of cash burn would cut that to just $4 billion by the start of 2010. That’s cutting it a little close for a company with $34 billion in long-term debt.
Betting on high fuel economy
Crucially, the cuts seem to preserve all the new models that GM needs to drive a sales recovery. The product development cuts are a result of delaying plans to design future large pickups and SUVs.
The company plans to bring five new products to the U.S. market by the third quarter of 2010, including a small Chevrolet, the Cruze (a replacement for the current Cobalt); the Buick Invicta sedan, a new sports wagon; and a coupe version of its Cadillac CTS sedan. A new direct-injection turbo four-cylinder engine is a critical element of the turnaround. The goal, according to Bob Lutz, the vice chairman in charge of product planning, is to give GM best-in-class fuel economy in every market from small to big models.