GM needs smaller cars to stem crisis

GM needs smaller cars to stem crisis
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First Published: Sun, Aug 03 2008. 11 25 PM IST

Updated: Sun, Aug 03 2008. 11 25 PM IST
The second quarter loss of $15.5 billion (Rs65,720 crore) suffered by General Motor Corp. (GM) isn’t the worst of it. This is the third largest loss in the car company’s history. About $9 billion of the loss came from special items that were mainly non-cash charges for restructuring costs, an increased reserve for Delphi Corp., and an impairment in its interest in GMAC, formerly known as General Motors Acceptance Corp. The remaining $6.3 billion adjusted loss included a $2 billion impairment for its leasing business. The car maker’s US operations are in free fall, liquidity is worsening and write-downs seem unending.
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Worse, GM has shown less willingness than Ford to face reality and focus on small cars. There’s little reason to hope that Friday’s multi-billion-dollar hit marks any sort of denouement.
While the Motor City manufacturer’s problems are manifold, the company’s biggest headache is that Americans increasingly don’t want large cars and trucks.
Its North American sales fell a stunning 33%. Not only does this generate an operating loss due to the company’s huge fixed costs, it also caused a big hit to the company’s leasing business.
So how much breathing room does GM have?
The company has $26 billion of available cash and undrawn credit lines. And it estimates that cost-cutting efforts, capital expenditure reductions and suspending the dividend should generate another $10 billion of liquidity by the end of next year. That seems a lot.
But consider that GM thinks it needs up to $14 billion in cash on hand to run the business. Any less, and GM would be in a tight spot with supplier payments and cash for operations.
Further, GM has burned about $1 billion a month this year. As long as the economy remains weak and gas prices high, there seems little doubt the drain will continue.
Barring more unexpected write-downs, the company should have enough cash to survive the next couple of years. To provide more of a cushion, GM wants to sell assets and raise up to $3 billion on capital markets.
The problem is that GM has shown an unenviable ability to generate unexpected losses—so its cash pile may not last as long as the company hopes. And, there’s no guarantee that its cost-cutting or asset-sale plans will bear fruit.
GM’s executives need to present a convincing plan that they can not only stem the losses but also generate a sustainable profit, including a bolder switch from producing gas-guzzling behemoths to smaller cars.
Until they do that, investors should give GM’s plans to raise capital the cold shoulder.
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First Published: Sun, Aug 03 2008. 11 25 PM IST