GM's Crippling Burn Rate

The carmaker loses $4.2 billion in the third quarter and without government help or asset sales could run out of cash next year

By David Welch

It was worse than Wall Street expected. (GM) lost a colossal $4.2 billion. But more dire is the company's cash burn of $6.9 billion, which has GM delaying some new models, cutting deeper into costs and—most important—putting a possible acquisition of rival Chrysler on the back burner.

The dismal results, which were driven by plummeting sales amid a recession and credit crunch (BusinessWeek.com, 11/3/08), show just how precarious GM's financial position is. Without an injection of funds or a bridge loan from the government, GM's $16.2 billion in cash could shrink this year to the minimum the company needs to run the business, which analysts estimate to be between $10 billion and $12 billion.

And the picture could get even uglier. GM announced a series of cuts to save $5 billion in cash, but even with those moves the company could run short in the first half of next year. Standard & Poor's cut GM's credit rating (BusinessWeek.com, 11/7/08), to CCC+ from B- on Friday, citing the company's accelerated cash burn rate. "We expect cash outflows to quickly reduce the company's liquidity during the next few quarters, perhaps to levels that would force GM to consider a financial restructuring, even if it does not file for bankruptcy," said S&P in a statement.

If GM can't complete asset sales, raise money in the financial markets, or get government assistance, the company will be short next year. A financial collapse isn't out of the question.

GM's Top Priority

CEO G. Richard Wagoner Jr., said boosting liquidity is the company's top priority, so GM will at least temporarily drop talks for acquiring rival from its owner, private equity firm Cerberus Capital Management. "At this time, it's important that we put our emphasis on liquidity," Wagoner said. "Carmakers can't get credit to complete restructuring actions, or develop advanced technology, or put new vehicles to market. Liquidity is a top priority for the company and the industry."

Sources inside GM say that the company also put Chrysler talks on the back burner because executives didn't want the potentially huge job losses the merger would require to stop some lawmakers from agreeing to a Detroit bailout.

Without any firm commitment from the federal government, GM is moving to save cash with what Wagoner called "self-help" measures. The company will save $5 billion in 2009 by cutting $2.5 billion from capital spending and reducing more salaried staff and benefits.

While GM is delaying several future models, President and COO Frederick A. "Fritz" Henderson said the Chevrolet Volt electric car and Chevy Cruze compact will remain on schedule to go on sale in 2010. GM had considered delaying the Cruze until 2011 (BusinessWeek.com, 10/23/08), sources said, but the new round of cash savings will enable the company to keep that vital car on track.

Detroit CEOs in Washington

GM's biggest problem remains its home market. Its car sales fell 19% in the quarter, and revenue dropped $4 billion, or 15%. The result was a $2.3 billion loss in North America. GM's European business lost $1 billion, while operations in Asia-Pacific broke even and the Latin American operations made $514 million.