GM Reports $2.5 billion Q3 Net Loss
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After a two hour and twenty-five minute delay and a resultant halt in trading by the NYSE, General Motors released a dismal quarterly report. The losses are staggering, at $25 billion during Q3 of 2008, although on the positive not as bad as Q3 of 2007, when the General admitted to losing $42.5 billion.
“Volatility in the world’s financial markets, tightening of consumer and business credit and historically-low consumer confidence has created a very challenging environment,” said Rick Wagoner, GM chairman and chief executive officer. “Given the current lack of credit availability we must take further difficult ’self-help’ actions.”
How does a company lose so much money and remain in business? That’s a good question, and one that GM, its shareholders and hundreds of thousands of employees, both directly employed by the Detroit automaker and indirectly through suppliers and support businesses, need answered.
No matter where you go in the world, GM is a major player. In North America it remains number one, in South America it’s in the top three, and Europe, Asia, Africa and elsewhere in the world it enjoys a solid footing in the market. But lately sales have been down in general, with most companies suffering onerous slumps, plant slowdowns and shutdowns either immediately being felt or on the not too distant horizon, and an overall scrambling by the powers that be in the automotive sector. Specific to General Motors, the company’s North America revenue is down substantially, while GM Europe and GM Asia Pacific, previously profit strongholds, are suffering, and, of course, its financial division, GMAC, partially owned by Cerberus Capital Management, is weathering the housing crisis, et al.
In detail, GM’s burn rate has been much worse than initially reported. Where most reports have cited a billion dollars of losses per month, the company is actually went through $6.9 billion of its cash reserves in the three months of Q3 alone, bringing the balance from $21.0 billion to $16.2 billion. While $16 billion sounds like a lot to most individuals, such reserves will only sustain the company a little beyond two additional quarters at the same burn rate, causing GM to announce the creation of an additional $5 billion in liquidity by the end of 2009, but truly, there’s only so much it can cut or sell.
A press release by GM outlines sixteen separate initiatives to stem the tide, staring with an announcement that the operating actions stated on July 15 will remain on track, $10 billion in cash improvements targeted through 2009, that its asset sales of $2-4 billion will remain in process, including the divestment of Hummer, ACDelco and its Strasbourg facilities, the addition of the aforementioned actions targeted at further improving liquidity by $5 billion by end of 2009, a 2009 capital spending reduction by $2.5 billion, with key product and technology programs remaining on track (read Volt and Camaro, amongst others), additional GMNA structural cost reductions of $1.5 billion (which will include plant closures), further working capital improvements of $500 million, further salaried employment cost reductions of $500 million, engaging the federal government to aid the domestic auto industry (now more likely with a Democrat as president, retiming select vehicle programs in North America and Europe by three to 12 months (i.e. lengthening product lifecycles), deferring capacity expansion projects, lowering sales promotion spending (i.e. less advertising), less support of dealer network activities and channel consolidations, scaling back production, curtailing discretionary spending (travel, consulting, over-time, etc.), increase reduction in force from 20- to 30-percent. Yes, a lousy time to be working for GM.
“These tough actions, though very difficult to make, demonstrate our commitment and determination to weather this economic downturn and emerge a stronger and more competitive company,” said Wagoner. “We remain focused on retaining our focus on product excellence and our commitment to advanced propulsion technology leadership and returning the business to profitability despite the current market conditions.”
General Motors made three items particularly clear in its press release. First, that its Chevrolet Volt program would not only continue forward, but spending on fuel efficient, environmentally friendly initiatives would increase; second, that its talks with an unnamed automaker (Chrysler LLC) had ceased for the time being; and thirdly, that it needs government assistance to keep going. Now President Bush can leave a lasting legacy of assisting the auto sector, for better or worse, or President Elect Obama can put plans in place to be exercised January 20, when he officially takes office, which would be good timing for GM. Of course, such assistance couldn’t merely be for GM alone, but would need to include all of the Big 3. Difficult times for a new president. And to think that he fought for the job.
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