General Motors CEO Fritz Henderson in his second day on the job held a news conference that reaffirmed his commitment to “go deeper and go faster” in preparing a revised viability plan with “a clean balance sheet” that will pass muster with the President’s Auto Task Force. If not, Henderson said “we will do it in court.”
He acknowledged the sweeping criticisms of the President and the U.S. Treasury Department as “painful,” but quickly added that “we got it” and sketched in broad outlines the areas of the strategy that need improvement by June first.
More job cuts and plant closings will be required, and bondholders and retirees will see commitments made to them by GM trimmed or eliminated. The decision on the sale or closing of Hummer will be made shortly. Saturn’s future remains in doubt beyond 2011, but Henderson said that it is still being studied with no immediate need to take action. Few details emerged, as Henderson said he was not going to conduct negotiations in public that are properly done at the bargaining table.
Henderson also claimed not to be concerned about his own future beyond 60 days, “I don’t really worry too much about that,” he said. “If we get our job done it’s going to be okay,” he added. In a press briefing yesterday, Robert Gibbs, the President’s Press Secretary, denied that Rick Wagoner’s resignation as GM’s chairman was a quid pro quo for the continuation of aid. He also refused to speculate on what happens to Henderson or GM beyond the current 60-day deadline.
Treasury is in the process of appointing two directors to the board of General Motors Acceptance Corporation, and is expected to have a significant, if not dominant role, in the remaking of the GM board of directors so that a majority of its members are new by the August meeting. Henderson now has the unenviable task of reporting to two constituencies – the changing GM board, with its new interim chairman, Kent Kresa, and Treasury through its Auto Task Force, headed by Steve Rattner and Ron Bloom. Treasury continues to be involved with any GM decisions that involve taxpayer funding on a “daily basis.”
Henderson said that the need for further cash is being evaluated, and would not say how much more liquidity from U.S. taxpayers would be needed during the next two months. The need for the $2 billion in support that was skipped in March and the $2.6 billion requested for April are still being evaluated. He would not say when taxpayers could expect to see repayment of the loans.
The aura of confidence projected by Henderson during his first leading role belies the enormity of the labors in front of him and his management team that has careened and crashed through an unending series of emergencies. Henderson worked for virtually his entire career for Rick Wagoner, and he did not really say what would be different now that he is boss in spite of multiple questions on the topic.
Perhaps the biggest issue in getting through the next two months is the core problem of fleeing customers. It’s lights out, if an even worse sales collapse occurs than GM is currently enduring as car buyers shun its brands. The President’s warranty program announced yesterday will be of some, as yet unknown, help. GM also announced — just prior to Henderson speaking — that it will start a plan called “GM Total Confidence,” that it says protects a customer’s paycheck, investment and vehicle for 24 months.
The question at Treasury remains taxpayer protection. The Loan and Security Agreement of December 31, 2008 between the General Motors and Treasury required that various agreements needed to be met by March 31, including compensation reductions; work rule modifications from union members; all necessary approvals of modifications to the Voluntary Employee Benefits Association; and the beginning of an exchange of outstanding bonds for equity. As of today, none of these have been accomplished in Treasury’s view.
Treasury’s analysis of the money GM is burning through is frightening. Its cash needs from legacy liabilities continue to grow, reaching about $6 billion per year in 2013 and 2014. To meet this cash outflow, GM needs to sell 900,000 additional cars per year, something it has repeatedly proven it cannot do. GM under its own assumptions — which Treasury rejects — remains breakeven, at best, on a free cash flow basis throughout the period, thus failing the fundamental test of viability. Under its own plan, GM generates -$14.5 billion (negative) free cash flow over its six year forecast period (2009-2014). Even in 2014, GM is still losing money.
Treasury also notes: “Since the company has built a plan with little margin for error, even slight swings in its assumptions produce significant and ongoing negative cash flows. For example, a 1% share miss in overall global sales, all else being equal, in 2014 would lead to a $2 billion cash flow reduction in that year.”
GM continues to earn a disproportionate share of its profits from high-margin trucks and SUVs and is thus vulnerable to energy cost-driven shifts in consumer demand. Of its top 20 profit contributors in 2008, only nine were cars. And, of course, the hemorrhaging of market share, going on for decades, continues. (In 1980, GM’s U.S. market share was 45%; in 1990, 36%; in 2000, 29%; in 2008, its share was 22%. GM has been losing 0.7% per year for the last 30 years.)
It also remains vulnerable to the upcoming regulatory increases in fuel economy – many of its products rank in the bottom quartile of fuel economy performance, compared with other automakers. Worse, the company has devoted significant resources to the Chevrolet Volt electric car in an attempt to catch up with Toyota in green car credibility, but at its currently projected price, it’s much more expensive than gasoline-fueled hybrid competitors, and needs substantial reductions in cost – or taxpayer financed incentives - to become viable.
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