GM: Burning Cash Like Rubber

The carmaker will need to dig up fresh capital just to keep the wheels turning

by David Welch

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Investors who are bullish on the future of General Motors (GM) have a simple thesis. If the company can gut it out through today's miserable car market, GM will reap billions in savings from last fall's landmark labor contract and come out a real moneymaker in about three years.

Yet steering GM back to the sunny uplands of prosperity looks tougher all the time. The automaker is burning cash fast: Since last fall, its hoard has shrunk from $30 billion to less than $24 billion. And given the accelerating decline in sales of pickup trucks, which are a big chunk of Detroit's profits, one analyst figures that GM's cash pile could dwindle to $14 billion by the end of 2009. That's not much more than GM needs monthly to buy the parts and materials to keep its assembly lines rolling. "It's more of a concern than it was a month ago, because the environment is so uncertain," says Gimme Credit analyst Shelly Lombard.

GM says the company has the $18 billion to $20 billion in cash it needs to weather a downturn. It also has some options if it needs to raise money, though none are ideal. It could add to its $40 billion debt load. It could also suspend its $566 million annual dividend. One far-out idea, which sources close to the company say has been floated by a New York investment firm, would be to split off the troubled North American business from the profitable overseas units and issue stock in the latter. GM booked a pretax profit of $1 billion in the first quarter from international operations; it lost more than $600 million in North America. Yet most analysts say that carving up the company would be a difficult, last-ditch maneuver. One thing GM's managers won't countenance is scrimping on new models, something carmakers often do when they get tight on cash.

Sooner or later GM's top brass will need more money. Here's why. The carmaker's U.S. sales plunged 30% last month, vs. 10% for the industry as a whole. That caused its market share to slip to 19.1% from 23.5% a year earlier. Deutsche Bank analyst Rod Lache figures that every point of market share is worth $1 billion in profit. If the market stays this weak, he sees GM's cash pile dwindling to $9.4 billion by the end of 2009, not counting any new borrowing. Gimme Credit's Lombard estimates the figure will be $14 billion.

GM has a cushion: a $7 billion credit line it hasn't tapped. Once that's gone, it could issue new debt. Yet there's a danger that by adding to its existing $3 billion a year in debt-servicing costs, the company could erode some of the savings it expects to realize from its new labor contract.

LIFE AFTER PICKUPS?

GM has another big bill coming due at the end of the decade. In 2010 it has to come up with $4.7 billion in cash to top up the $37.5 billion union-led health-care trust that will provide medical coverage for its 450,000 union workers and retirees. Company insiders say GM might get the union to agree to let them pay its bill at a later date.

Even if the company manages to negotiate this obstacle course, it will have to learn, as President and Chief Operating Officer Frederick A. "Fritz" Henderson said last month, to generate bigger profits on smaller vehicles. GM's internal estimates say the pickup market will rebound, but sales will still be 30% to 40% lower than the peak of 2.5 million trucks in 2005. Says Lombard: "The security blanket is getting thinner."

Welch is BusinessWeek's Detroit bureau chief.