YOU might have thought that running the world’s largest car-maker would be a piece of cake. But for Rick Wagoner, chief executive of General Motors since 2000, it has been more like a bed of nails.
The manufacturer, whose brands include Chevrolet, Cadillac, Corvette, GMC, Hummer, Vauxhall, Opel, Saab and Daewoo, has in the first nine months of this year racked up losses of $3.81 billion.
As the Detroit-based car giant risks getting submerged in a sea of red ink, analysts and bond traders are raising the odds that it is heading for the bankruptcy courts.
Last week, on new fears that the car giant might struggle to overcome the bankruptcy of its largest parts supplier, Delphi (spun off by General Motors in 1999), General Motors shares sank to 14-year low of $21. They have lost 47% of their value this year, making General Motors the worst performing stock of the thirty in the Dow Jones Industrial Average.
Graeme Maxton, director of the Economist Intelligence Unit and author of the best-selling book Driving Over A Cliff: Business Lessons from the World’s Car Industry, which he co-wrote with Dr John Wormald, says: “It seems inconceivable that in a world where General Motors was once the bellwether for the US economy, and where so many jobs and pensions depend on its survival, that the government in Washington would not step in to try and support the company.”
He added: “I suspect that overt protectionism is likely to apply.”
Maxton is referring to the prospect that General Motors may go through a period of 18 months to two years in the “rehab” of Chapter 11, a form of bankruptcy protection unique to the US. Chapter 11 has been used in recent times to great effect by most of America’s leading airlines. It would give the carmaker protection from its creditors, giving it breathing space to continue as a going concern as it seeks to restructure its business.
Non-US car companies would almost certainly cry foul. But their cries would fall on deaf ears in Washington DC which, despite the free market rhetoric of Republican president George W Bush, usually lapses into protectionism when a corporate icon such as General Motors is at risk.
For General Motors’ 200,000 US car workers — many of whom are currently being paid to be idle because of over-capacity at GM’s US car plants — plus its one million retirees and their dependents, Chapter 11 would come as worse news. Some are wondering whether it would mean sacrificing their future healthcare and pensions packages on the altar of General Motors’ survival.
The biggest problem facing the motor giant is these “legacy” costs, including agreements, mainly made in happier times for the car industry, to pick up the healthcare bills for around one million of its former employees and their dependents, as well as for its 200,000 current US staff.
The company — said to be the US’s largest provider of Viagra through these deals — admits that some $1,500 of the sale price of each new vehicle goes towards funding healthcare for current and past employees.
The situation makes it hard for General Motors, and other US car makers locked into similar packages, such as Ford, to grow their businesses in an increasingly globalised and competitive car market.
Rivals such as Toyota, Nissan, DaimlerChrysler, Renault, Volkswagen and Peugeot — in whose home markets the state generally plays a more active role in healthcare — have been boosting their market shares at General Motors and Ford’s expense.
In the US, the leaner approaches and arguably the superior engineering skills of Asian rivals such as Toyota, Nissan and Honda have enabled them to make massive inroads into General Motors’ home turf.
Stuart Thomson, bonds analyst at Edinburgh-based Charles Stanley Sutherlands, believes General Motors might well be driven into bankruptcy. He says: “We’ve been bearish on both General Motors and Ford for at least three years, expecting the companies eventually to be forced into Chapter 11.
“The odds are now 60% that GM will go into Chapter 11 before the end of 2006, and this will be driven by its high pension and legacy costs as well as the prospective slowdown in consumer demand.
“A sale of GMAC [General Motors’ consumer credit arm] would delay the hangman but would not solve the cost burden. These costs can only be adjusted within Chapter 11 bankruptcy.”
General Motors becomes ‘junk’
Other factors ensuring General Motors is struggling to recover its poise, and might even precipitate a bankruptcy, include the fact that ratings agencies Standard & Poor’s and Moody’s have cut the company’s bonds to junk status. This means raising money in the bond market will become more expensive for GM.
And the current pessimistic outlook for US consumer spending is expected to become even more negative as Federal Reserve interest-rate rises start to bite.
Analysts are concerned about the continuing erosion of General Motors’ US market share at the expense of nimbler Asian rivals; its dependence on price cuts to prop up sales; and the fact that it over-estimated the US appetite for gas-guzzling sport utility vehicles (SUVs) in an era of $3 per gallon-plus pump prices. And overseas competitors have a massive head start in making more fuel-efficient vehicles.
The combined market share of US brands made by General Motors and Ford fell to 43.3% in May, about the same share that GM alone had in 1983.
After the terror attacks of 11 September 2001 on New York and Washington, General Motors unleashed a price war which Wagoner has been unable to quell. He won some kudos for the patriotic “Keep America Rolling” campaign, which offered no-interest financing packages for five years on any GM vehicle.
It has since proved extremely difficult to wean consumers off the easy credit, which was costing the company an average of $3,000 per vehicle in September, down from $4,600 a year earlier. But sales in that 12 month period fell by 26%.
To make matters worse, earlier this year the company was forced to pay $2.8bn to extricate itself from ill-starred alliances with Italy’s Fiat and Japan’s Fuji Heavy Industries, the parent of the Subaru AWD brand.
And to add to its woes, General Motors recently admitted to a string of accounting errors, which provoked derivatives traders to raise their bets that the company would follow former parts subsidiary Delphi and Delta Air Lines inexorably into bankruptcy.
Traders in credit default swaps (CDS) last week started seeking upfront payments over and above the annual premiums for their contracts — which is exactly what happened to the CDS of Delphi and Delta prior to those two companies defaulting.
Then ten days ago, General Motors revised its second-quarter loss figures, saying its losses in the three months to June 30 were $1.07bn, four times the $286 million previously indicated. This was apparently caused by General Motors overestimating the value of its 20.1% stake Fuji Heavy Industries (the stake has since been sold to Toyota). Separately, General Motors said its 2001 profits, previously reported at $601m, had been overstated by as much as $400m.
BANK of America analyst Ron Tadross believes that the restatements boost the likelihood of General Motors going bust within two years to 40%.
However, Wagoner insists the B-word is not on the agenda. Last week he told employees that speculation on the matter was “just plain wrong.”
“I’d like to just set the record straight here and now: There is absolutely no plan, strategy or intention for GM to file for bankruptcy, ” he wrote on an internal website.
In the posting, Wagoner added: “What we do not intend to do is file for a bankruptcy reorganisation. That is not only unnecessary, it would be clearly contrary to the interests of our employees, our stock and bond holders, our dealers, our suppliers and, importantly, our customers.”
Wagoner says that, unlike in the airline industry, where several US airlines have continued to attract good passenger numbers during spells in Chapter 11 protection, even speculation about bankruptcy is harmful in the motor industry. A quiet and considered player among the US’s brash car executives, he believes he can still salvage General Motors even as some believe it is entering its endgame.
Last month he trumpeted a deal with trade union the UAW which will shave $1bn off General Motors’ $6bn annual healthcare bill and around $15bn off its $77bn of future healthcare obligations. He is also expected, next month, to announce plans to close at least some of GM’s US car plants.
And he has pledged to lose 25,000 jobs by 2008, through natural attrition — though the jobs of the 4,500 people at General Motors’ Ellesmere Port plant in the UK, where it makes Vauxhall and Opel Astras for the European market, appear safe for now. Wagoner told NBC News last month: “In the high-cost manufacturing markets like the US and Germany, if you don’t run at full capacity or more, it is really hard to make money.”
Wagoner has also said he may sell a majority stake in the group’s financing arm, GMAC. This could bring in more than $10bn, but would leave a further big hole in General Motors’ profits.
Also, to Wagoner’s credit is the joint venture with Shanghai Automotive Industry Group (SAIG), which has become a significant contributor to profits, and his purchase of Korea’s Daewoo Motors, which became a key building block in Wagoner’s plan to globalise new product development.
Graeme Maxton of the Economist Intelligence Unit says: “There is a bigger risk right now of the asset-strippers coming in [than of Chapter 11]. The business has a market cap of less than $15bn and a break-up value of around twice that.”
One corporate raider waiting in the wings is 88-year-old Las Vegas-based billionaire Kirk Kerkorian, famed for his unsuccessful $22.8bn bid for Chrysler in 1995.
Kerkorian built up a 9.9% stake in General Motors over the summer at $37 per share, and could conceivably secure a takeover of General Motors for in the region of $15bn.
He could then sell off GMAC for $12bn, pocket whatever is left of General Motors’ $19bn in cash and stock, push the car making business into bankruptcy and walk away with an astonishing return.
Maxton adds: “No matter what sort of protection General Motors is given, I suspect it will get messy. The company will be subject to the laws of economics, which are not in its favour. General Motors will go the same way as Fiat or Mitsubishi without a radical change in approach, and that is currently impossible without a major financial restructuring.”
DELPHI STEERS INTO TROUBLE
WHEN Delphi filed the largest bankruptcy in US automotive history last month, it was seen as a dry run for something taking place at the car parts maker’s former parent, General Motors.
Delphi filed for Chapter 11 protection on 8 October, after failing to agree a restructuring agreement with the trade union UAW, and General Motors refused to bail it out.
The bankruptcy was described by Merrill Lynch analyst John Casesa as a “tipping point” for the US car industry, where the forces of globalisation and international competition are finally catching up with some archaic management practices stateside.
“The domestic auto industry’s structure is not stable,” Casesa said. “And, simply put, we expect it will get worse before it gets better.”
General Motors’ former parts division Delphi was spun off by the car giant in 1999. Now in Chapter 11, Michigan-based Delphi is seeking to persuade its unionised workers to accept savage pay cuts of more than 60%, a proposal that has infuriated UAW and other unions.
Delphi is also seeking to close its pensions plan to new recruits from 1 January and would also like to reduce benefits or terminate the pension plan.
Already some UAW members have voted for a “work to rule” and they are seen as increasingly likely to opt for a full-blown strike, raising the spectre that General Motors will not receive enough parts to continue assembling cars.
A three-month strike by UAW workers at Delphi could bankrupt General Motors, said Sanford C Bernstein’s Brian Johnson.
This article was published in the Sunday Herald on 20 November 2005