General Motors (GM)

Michigan-based General Motors Corporation is the largest automobile manufacturer in the world and is one of the leading U.S. automakers apart from Ford and Chrysler. The company also has substantial exposure to financial services. The company's business is segregated into automotive (over 90% of revenue), and financing and insurance operations (10%). The automotive business is divided into four regions: GM North America (GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM) and GM Asia-Pacific (GMAP). The finance division consists of General Motors Acceptance Corporation (GMAC), and other financial services. The company has sold off 51% interest in GMAC. Since the GMAC transaction, GM controls 49% ownership in GMAC using the equity method. GM has grown by drawing upon technological expertise that has enabled the development of new vehicles with advanced features for the global auto market. GM is also one of the largest U.S. exporters of cars and trucks, with a significant global presence. It has manufacturing operations in 33 countries and its vehicles are sold in 200 countries. The company continues to leverage numerous alliances in order to expand its worldwide scope by capitalizing on low-cost opportunities available in different regions.

GM operates in a highly competitive environment with other foreign and domestic manufacturers such as Chrysler LLC, Ford Motor Company, Toyota Motor Corporation, Honda Motor Co., and Nissan Motor Co. General Motors had plans to take over Chrysler LLC which, however, it has set aside on liquidity grounds. GM owns 49% of the loss-making GMAC, with the remainder owned by Cerberus Capital Management LP. Cerberus also owns a majority stake in Chrysler and has reportedly been in talks about selling the Chrysler auto operations to GM, possibly in exchange for a part of GM's stake in GMAC. Over the last few years, GM and other domestic automakers have given up their market share to foreign rivals. The global automobile market is growing, especially in developing economies such as China and India. While GM has the leading market share in the U.S., some of its competitors have greater market shares in other countries where GM also operates. Industry-wide manufacturing overcapacity is putting pressure on GM as also on OEMs such as Ford and Chrysler. This overcapacity is expected to continue its negative impact on vehicle pricing, market share and operating results. It also presents a significant risk to the company's ability to enhance per vehicle revenue.

The company is at a disadvantage compared to its competitors owing to huge pension and health care costs. GM provides pension, health care and life insurance benefits to more than 400,000 retirees and their families in the U.S. The company has also agreed to take on $3.4 billion of pension debt from its former subsidiary, Delphi Corp. However, the company recently decided that on January 1, 2009, it will cease to provide health care coverage for more than 100,000 retirees and their dependents and will instead add $300 to their monthly pension checks to purchase insurance.

Most domestic automakers, including GM, have been offering significant incentives to stimulate sales and keep inventories lean. Furthermore, GM sales prices are hampered by poor resale value. GM cars on average fetch $3000 less per vehicle than their counterparts. Historically, auto sales have tracked consumer confidence closely, which has been falling in recent months. Higher raw material costs are another serious problem facing automakers. The prices of commodities have risen dramatically in the past few months, and GM is facing a very difficult time trying to pass this on to customers.

GM is undertaking operating actions to improve cash flow by approximately $10 billion through the end of 2009. The company recently revised the cash flow estimate to $20 billion. These include headcount reductions structural cost reductions of approximately $2.5 billion in GMNA by capacity reductions of trucks and related components, stamping, and powertrain downward revisions of capital spending plan from $8.5 billion to $7 billion in 2009 and suspension of future dividends on stock (which is expected to improve liquidity by approximately $800 million). The company is planning structural cost reduction to 25% by 2010 and 23% by 2012. GM will reduce and consolidate sales and marketing budgets, with a focus on product launching and brand advertising. These operating actions combined with the benefits of the 2007 GM-UAW labor agreement are targeted at reducing North American structural cost to approximately $26 $27 billion in 2010. In addition, the company plans working capital improvements, driven by inventory reduction. The company is taking actions to improve working capital by approximately $2 billion in North America and Europe, primarily related to the reduction of raw material, work-in-progress and finished goods inventory levels. The company announced to trim 15% of its North American work force by November 2008 and has planned a reduction in salaried employment costs in the US and Canada by 20% or $1.5 billion in 2009. To this effect, it has started offering early retirement packages to workers. The company will also reduce health care coverage for white-collar retirees over 65 years old, and eliminate cash bonuses for executives. The company estimates an expense of over $900 million over the next few years to adjust its manufacturing capacity, including plant closures and output reduction. It plans to spend $100 million in 2008, $200 million in 2009, and $600 million thereafter. Due to falling truck sales in the U.S., GM plans to slash its production. The company is scaling back truck production by 300,000 units in 2009 by closing 4 truck and SUV plants in North America and boosting production of smaller, more fuel-efficient small cars. In addition, the company is undertaking a broad global assessment of its assets for monetization, which is expected to generate approximately $2 $4 billion of additional liquidity sale of Hummer and feasibility study of other GM brands sale of Detroit headquarters and manufacturing facilities in Strasbourg, France and accessing global markets to raise additional liquidity of $2 $3 billion. The company has received interest from two separate investors from the Gulf Arab region to buy its Hummer brand.

The Department of Energy is mulling over $25 billion loans to the automakers. However, DoE stated certain criteria to be fulfilled by the automakers for the loan to be granted. As per the rules, the $25 billion aid from the government will cover up 80% of the cost of developing and ramping up production of qualifying advanced technology vehicles (defined as a vehicle that will achieve 125% of the average fuel economy). However, General Motors is facing a severe liquidity crisis for its day-to-day operations. The loan, which is focused on technology upgrading, might not be helpful for GM at this point of time. The company in its recent release cited that despite implementing the planned operating actions, General Motor's estimated liquidity during the rest of 2008 will approach the minimum amount necessary to operate its business. The company had initially stated that it requires a minimum of $11 billion to $14 billion in cash to run its auto operations. Looking into the first two quarters of 2009, even with its planned actions, the company's estimated liquidity will fall significantly short of that amount unless economic and automotive industry conditions improve considerably, GM receives substantial proceeds from asset sales, takes more aggressive working capital initiatives, gains access to capital markets and other private sources of funding, receives government funding under one or more current or future programs, or some combination of the above factors. The success of GM's plans necessarily depends on other factors, including global economic conditions and the level of automotive sales, particularly in the U.S. and Western Europe. Financial viability is another criterion. DoE will determine GM's solvency during the period of the loan to be granted. Severe liquidity constraints and depleting resources make us apprehensive about GM's ability to meet this criterion. Moreover, even if the company qualifies for the loan, it will come for a cost, which remains uncertain as of now.

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