Can GM and Ford Scrape By?


Stocks of the two big U.S. automakers sink again as they face new questions about cash and credit

Just three months ago, General Motors (GM) Chairman and CEO Rick Wagoner said he was moving to secure $15 billion in cash through asset sales, borrowing, and cost cuts that would see the company through to 2009 even in the worst of times.

Barely three months later, with its stock trading at a 54-year low, GM is looking for more ways to save cash. The grim market conditions that underpinned its liquidity plan weren't downbeat enough, it turns out. Several sources inside the company say GM is looking at product delays to save cash, hoping the company can weather the weak economy and liquidity crisis and make it through to 2010.

All but essential programs are at least getting a review, the sources said. Even the next-generation Chevrolet Malibu could be on the table. GM wants each of its cars to get a makeover every 5 years, but it may have to stretch that to 7 years for some models to stay in the black. A GM spokesman says the company is delaying some product programs but that nothing major has been held up yet.

The war gaming around cash savings shows just how tough times have become for Detroit's Big Three. On Monday, Oct. 6, GM's shares fell 52¢, or nearly 6%, to 8.48, its lowest price since 1954, according to Bloomberg Financial Markets. Ford Motor (F) stock fell 36¢, or 9%, to 3.69, its lowest since 1984. GM, Ford, and Chrysler have had their credit ratings downgraded as they burn cash and sales plummet. Last month, every major automaker—except GM, which had a big slug of sales to rental fleets and a fire sale—saw sales drop at least 20% (BusinessWeek.com, 10/1/08). Some dropped 30%. With revenue sinking fast, Detroit's carmakers are trying to save every penny.

New Products Intact

GM executives and product planners say nothing is final and that they could reinstate some plans if the market turns around. But the company is still taking a hard look at what can be delayed as the company's shortfall in sales and revenue burns cash.

Sources inside the company say that all new products planned for 2009 and 2010 (BusinessWeek.com, 6/3/08) are intact, because most of the development money has been spent. But there could be a lull in new-vehicle launches in 2011 and 2012 if GM has to delay more plans.

That means GM would have some stale products just as the market is expected to turn around. But as a survival plan, it could work. GM would conserve cash now to make it through the recession and credit crunch. Around 2011 and 2012, when wage cuts and a big health-care deal with the auto workers union are expected to save GM several billion dollars a year, the company would have more money to market its cars while getting the product plan back on track, says James Hall, principal of 2953 Analytics, a Detroit consulting firm.

"By 2011, the union deal starts to pay off and hopefully, the market gets better," Hall says. "GM has cars people want to buy."

Moratorium on SUV Redesign

It's cold comfort, but GM isn't alone when it comes to swinging the ax. Last week, Chrysler cut 250 white-collar workers. Ford also has laid off salaried staff and shelved new models, including a rear-wheel-drive sedan for Lincoln. In addition, the company has delayed a redesign of its hulking Lincoln Navigator and Ford Expedition SUVs.

But those plans to slash costs and raise money haven't increased confidence among equity investors or lenders that the carmakers will be able to ride out the storm. While investors were selling off auto stocks, Fitch on Oct. 6 downgraded Ford's credit rating to deep-junk territory, CCC, where GM and Chrysler issues are already languishing. Fitch analyst Mark Oline says that the credit crisis, combined with an already tough economy, will keep car sales in the doldrums through 2009.

Oline says Ford had $26.6 billion in cash at the end of the second quarter. At its cash-burn rate, the company can stay flush for 18 months. Then it would hit its minimum of $10 billion to $12 billion needed to run the business. Ford could also tap some of the federal government's recently approved $25 billion credit line.

Cash to Last a Spell

Things are a bit trickier for GM. The company has tapped most of its credit lines. Its international operations were generating cash, but overseas economies are slipping now, too, says Oline. That means the company will almost certainly have to find a way to raise more money. GM had $21 billion in cash at the end of June. The company has a further $5 billion in available credit and cash and plans to save $10 billion from cost cuts. Assuming GM can also tap $5 billion to $7 billion in federal loans that the federal government has approved, GM has up to $21 billion in excess liquidity on top of the $14 billion it needs to run the company, says Gimme Credit analyst Shelly Lombard.

Given GM's cash-burn rate of more than $3 billion a quarter, the company has five to seven quarters before it gets down below the bare minimum it needs to buy parts and keep factories humming, Lombard says. GM's best bet is to tap the government's loan program and hope the market turns up.


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