Rick Wagoner: Seeking bigger bailout
General Motors’ updated plan to the United States Department of Treasury not only asks for another $4.5 billion above the $18 billion it requested in December, but it expects billions more from Canadian and European governments. It is assuming that U.S. banks will renew its $4.5 billion line of credit in 2011, otherwise more funding will be needed. The company also wants another $7.5 billion in loans that year if sales don’t improve.
Partial repayment of U.S. funding by GM is now due to begin in 2012, a year later than previously, when it says it will achieve competitive labor costs with transplants, but GM admits that the current plan does not achieve them. GM also says that it has not resolved bondholder debt conversion to equity or how to fund healthcare commitments for its workers. Still, GM promised that U.S. taxpayers would eventually be paid in full and that this is a good investment since it directly and indirectly supports 1.3 million U.S. jobs. Even so, the latest plan would lead to significant job cuts.
“Today’s plan is significantly more aggressive because it has to be,” said Rick Wagoner, Chairman and CEO, “In the 11 weeks since our initial plan was filed with Congress the condition of the U.S. and global economies, as well as the auto industry, has significantly deteriorated.”
The ongoing global financial market crisis, dramatically weaker economies, is causing a “precipitous decline” in vehicle demand. These conditions have impacted the entire auto industry, which in the U.S. is down approximately 40 percent from its peak in 2005, to the lowest per capita sales rate in 50 years. Though the impact has been most severe in the U.S. and Western Europe, automakers around the world are reporting large losses. GM also said public speculation about a GM bankruptcy, has further reduced volumes, revenues and cash flows.
GM now forecasts 2009 U.S. industry sales of 10.5 million units, down radically from its projected industry sales rates of 12.5-13 million last December. Unlike Chrysler’s estimate of a flat market in the 10-11 million range for the next four years, GM assumes growth to 11.5-12.0 million units annually starting in 2010. GM says it will then achieve breakeven levels in 2011, and have a positive cash flow of more than $6 billion in 2012-2014. Several caveats could change this, including a need for GM to put more money in its pension funds in 2013 if the financial markets and its investments don’t recover by then.
The plan also calls for future reduction of GM’s vehicle brands and nameplates in the U.S., further consolidation in its workforce and dealer network, more factory closings and changes in work agreements. Five more U.S. factories will close by 2012, up from 9 previously. In all, the plan would lead to the loss of 47,000 more jobs at GM operations around the world.
The automaker assumes that it can maintain a 20% share of the U.S. market in 2012, and 13% globally. Restructurings will also occur in Canada, Germany, Sweden, Thailand and India. Talks are under with those governments for additional support.
Unless private equity or further government support or purchases occur, the Saab, Saturn and Hummer brands would be dissolved. While GM hopes to reach agreement with the Swedish government, the Saab Automobile AB subsidiary could file for reorganization this month. Saturn would be dissolved in 2011 when its current product life cycle ends. GM will retain its core brands, Chevrolet, Cadillac, Buick and GMC. Pontiac is being reduced to a niche provider within the Buick-Pontiac-GMC channel. GM will have a total of 36 nameplates in 2012, down 25% from 2008 levels.
GM’s U.S. dealer count is also projected to be further reduced, from 6,246 in 2008 to 4,700 by 2012, and to 4,100 by 2014. Most of this reduction will take place in metro and suburban markets. GM expects that dealers in these markets will provide most of the financing needed to close retail stores.
The revised GM plan is the first of two status reports required by the loan agreement signed by GM and the U.S. Treasury on Dec. 31, 2008. The next one is due on March 31. At that point, the Treasury will have to decide how to proceed, which could mean more assistance, or, at the other extreme, calling in the current loans, something that would almost certainly force the automaker into bankruptcy that GM estimates would cost $100 billion. President Obama will ultimately make that decision, and the administration said earlier today it hadn’t ruled bankruptcy out.