What began as a whisper on Wall Street became a deafening roar at the end of last week. Could General Motors, the largest carmaker in the world and the backbone of American industry, be preparing to file for bankruptcy?
Shares in the company skidded to their lowest level since 1987 amid fears for its future. The firm is in a quagmire; partly of its own making, partly due to the challenges of globalisation, but a mess nonetheless that GM is sinking into fast. The company has lost almost $4-billion so far this year. It now has a market capitalisation of $12-billion. By comparison, the market values Wal-Mart at $204-billion and Google at $112-billion.
If GM were forced into bankruptcy it would be a deep psychological blow for the United States. It would also help to redefine the already shifting expectations of ordinary working Americans: the decent healthcare, wages and pensions that GM and its rivals in the Detroit car industry pioneered are likely to fade into memory.
As GM and Ford suffer, so do suppliers. Michigan and the surrounding states that rely on the car industry have already seen thousands of job losses and slashed wages.
The speculation had gathered enough momentum at the end of last week for Rick Wagoner, chairperson and chief executive, to send a highly unusual letter to staff: ”I’d like to just set the record straight here and now,” he wrote. ”There is absolutely no plan, strategy or intention for GM to file for bankruptcy.”
The comments gave the shares a brief fillip — they rose 4% on Friday — but Wall Street remains jittery. Bank of America recently raised the odds on GM filing for bankruptcy in the next two years to 40%.
The biggest problem is in the company’s core north American division. In the most recent quarter, the carmaker narrowed its losses in Europe to $105-million from $236-million a year earlier. In the US, it lost $1,6-billion. Amid intensifying competition from Asia, GM’s market share in the US has fallen to 25,6% from 28,5% a year ago.
Wagoner, in charge since 2000, is looking increasingly vulnerable. Kevin Tynan, an analyst with Argus Research, said: ”If there is a continued dip in US market share, board members will have to say enough is enough. Even though it is not completely Wagoner’s fault, you just have to shake things up.”
In the US, GM has found it difficult to wean buyers off the profit-eroding incentive deals it first introduced to get sales moving after the terrorist attacks in 2001. Without incentives in October, sales dropped 23%. The company has also been heavily reliant on the sport utility vehicles that generated much of its profits in the 1990s. As petrol prices have risen, sales of the gas-guzzlers have plummeted. In the meantime, GM has been slow to invest in the petrol and electric hybrids that are becoming increasingly popular.
GM’s biggest difficulty is the soaring cost of pension and healthcare liabilities for workers and retirees in the US, which add $3 500 to the price of each vehicle. Unions fear that under bankruptcy, GM could cancel worker contracts to sharply reduce its liabilities, erasing decades of hard-won gains. It insures 1,1-million Americans and healthcare costs this year will be about $5,6-billion, up from $4-billion four years ago.
The killer blow could be dealt by Delphi Corporation, the vehicle-parts maker spun out of GM in 1999, which filed for bankruptcy last month. GM could be liable for up to $12-billion of the pensions and healthcare of Delphi workers, under a contract signed when the supplier was spun off.
More urgently, Delphi’s attempts to lower its costs could lead to a strike that would disrupt GM’s production line. Delphi is seeking to halve the average hourly wage for its factory workers from $25 to $12,50 as well as eliminating 18 000 jobs — an offer that unions have balked at.
GM’s cash pile is shrinking alarmingly fast, from $24-billion a year ago to $19-billion today. A strike at Delphi could cause it to burn through reserves even faster. A note from Deutsche Bank last week suggested that a three-month strike could use up $13-billion of GM’s cash.
Wagoner admitted in his letter to employees that the ”large losses at GM North America are unsustainable” but for now he is sticking with a turnaround plan announced in October.
The firm is accelerating a programme to reduce costs by $5-billion by the end of next year. It is planning 25 000 blue-collar job losses and will announce plant closures shortly, in addition to further cuts among office workers and a continued freeze on salaries. It has a deal with unions to reduce healthcare liabilities by $1-billion a year. It is also fast-tracking development of its hybrid cars.
In addition, GM is exploring the sale of a controlling stake in the firm’s finance arm, which these days generates most of the company’s profits. That would buy some time, generating perhaps $12-billion but reducing the annual cash flow into its cars division.
Ceding control would also allow the finance division to escape the burden of the company’s poor credit rating, which increases borrowing costs. The firm’s debt rating was recently downgraded further to junk status. But GM will need to get back on its feet before that one-off cash dividend runs out — there is nothing else to sell.
Brian Ropp, a motoring analyst at investment manager T Rowe Price remains sanguine about GM’s future. The market, he said, had over-reacted, noting that the company had further credit facilities of $8-billion and little debt maturing in the next two years.
”I personally think a bankruptcy is very unlikely, particularly over the short term,” he said. ”They are very focused on bringing capacity down to meet demand. The healthcare cuts definitely help. They have talked about globalised purchasing and manufacturing, which will help, but you don’t see the results of these things at the bottom line immediately. These are big, complex companies with a lot of moving parts and people just get a little impatient. With the liquidity they have, they will get there.”
There remains another complication. Waiting on the sidelines is the veteran corporate raider Kirk Kerkorian, who built a 9,9% stake in the business this year. That bet is currently deep in the red and Kerkorian, who engaged in a ferocious public battle with Chrysler in the mid-1990s, is not the type to watch idly as his investment tanks.
Underfunded
GM is not the only US firm struggling to cope with its pension and healthcare liabilities while still competing with rivals from low-cost countries.
Employer-paid pensions in the US are estimated to be underfunded by $450-billion (£262bn). GM says its deficit is $10-billion but official figures suggest its pension is underfunded by $31-billion.
United Airlines and US Airways used bankruptcy this year to dump $9,6-billion of pension liabilities on the federal agency that insures private pensions — itself facing a $22,8-billion deficit. The agency usually makes good on the basic pension but pays no other benefits and has an annual upper limit. Delta Airlines and Northwest Airlines, which both filed for bankruptcy in September, are likely to do the same – their pensions are underfunded by $16,3-billion.
The number of Americans with healthcare paid for by employers is also steadily falling, according to the Census Bureau. For most workers, the trend has become known as the downsizing of the American dream. – Guardian Unlimited Â