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GM Staggers Under Losses


The end of America's love affair with SUVs hit General Motors hard. Even aside from huge one-time costs, the company lost over $6 billion

General Motors (GM) lost a staggering $15.5 billion in the second quarter as the company struggled to come to grips with a weak economy and a head-spinning change in consumer tastes.

GM said on Aug. 1 that $9.1 billion of the losses came from one-time charges and writedowns. But the one-timers stemmed from restructuring moves taken because GM's business is out of step with the car market. Take those away, and GM still lost $6.3 billion.

The freefall in sales of SUVs and pickup trucks continues to hammer GM's revenue and profits. In North America, revenue fell $10 billion in the quarter, to $19.8 billion. Discounting one-time restructuring charges, GM lost $4.4 billion in its home market.

Even GM's overseas operations, while mostly profitable, didn't have such great news. GM's rebounding European business made just $20 million, a far cry from the $315 million the unit made in the second quarter last year. The automaker's Asia-Pacific business lost $163 million, though much of that was due to a one-time accounting charge. Latin America was GM's one bright spot: Profits grew 50%, to $445 million.

Losses Nearly Everywhere

Since GM has long relied heavily on pickup trucks and SUVs for its profits, the consumer shift to smaller, thriftier vehicles has thrown the company into its second financial crisis in three years. And whereas investors and analysts usually discount one-time charges, in this case they are too big to ignore. Of the $9.1 billion GM calls one-timers, $3.3 billion came from buying out hourly workers to cut payroll. Cutting production and closing plants ate up $1.1 billion. Then there's GM's former parts unit, the bankrupt Delphi. GM had to set aside $2.8 billion to help bail out the parts maker.

Even GM's lending operations have turned up snake eyes. GMAC, which is now 51% owned by Cerberus Capital Management, lost $2.5 billion in the quarter. GM's share of that loss comes to $1.2 billion.

To make matter worse, GM had to write down about $2 billion in automotive leases. Many carmakers are taking hits in their leasing portfolios, mostly because of a drop in value of SUV prices. Over the past decade, carmakers leased millions of SUVs. Now the gas guzzlers are coming back with resale values lower than executives anticipated when they leased the car. So the companies are selling them at a loss.

Focus on Conserving Cash

Add it all up, and GM continues to burn through a lot of cash. The company said it spent $3.9 billion in cash in the quarter, leaving it with a reserve of $21 billion. That may seem like a lot of money, but analysts say GM needs at least $10 billion on hand to keep parts coming in and plants rolling. Since the end of last October, GM has eaten up $10 billion. That's why the company announced moves last month to save $10 billion in cash through various cost-cutting moves, and to raise $5 billion. GM Chief Financial Officer Ray Young said the company's primary focus is on conserving cash. GM Vice-Chairman and Chief Operating Officer Frederick "Fritz" Henderson said GM knew how bad its second quarter results would be when the company drafted that plan. So he believes GM's cash should last through the current downturn.

J.P. Morgan analyst Himanshu Patel said in a research note that GM's overseas operations were weaker than expected. If its international businesses are weakening, the company will have a very tough time getting back in the black.

Business Exchange related topics:

General Motors

U.S. Automakers

U.S. Auto Sales

Welch is BusinessWeek's Detroit bureau chief.

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