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David Bailey, Kevin Krolicki08 Nov 2008 07:08
General Motors and Ford reported far deeper-than-expected quarterly losses on Friday and said their rate of cash burn had accelerated, as an extended slump in car sales raised questions about the future of the United States auto industry.
Both companies said they would take aggressive steps to cut costs further. The two largest US carmakers reported third-quarter results after the world’s number one carmaker, Toyota, slashed its profit forecast for the year.
President-elect Barack Obama said on Friday that help for the US auto industry was a high priority and urged the Bush administration to do “everything it can” to accelerate disbursement of $25-billion of loans to the industry previously approved to make fuel economy improvements.
“I have made it a high priority for my transition team to work on additional policy options to help the auto industry adjust, weather the financial crisis, and succeed in producing fuel efficient cars here in the United States,” Obama said.
GM shares fell more than 9% while Ford rose 2%.
The two burned through a combined $14,6-billion in cash in the face of deepening global downturn.
Ford and GM both expect their rate of cash use to decline in the fourth quarter.
GM also indicated it had set aside consideration of an acquisition of smaller rival Chrysler—without mentioning the company’s name—saying it was focused on cost-cutting and other steps to free up $20-billion in liquidity through 2009.
Cash preservation has become crucial for GM, which said its cash holdings would fall short of the minimum needed to run its business without new funding or other drastic action. Analysts saw that as presenting two alternatives, a government rescue package, or a potential bankruptcy if a bid for aid fails.
“We’re convinced that the consequences of bankruptcy would be dire and extend far beyond GM,” chief executive Rick Wagoner said. “We are going to take every action we possibly can to avoid it, and we are going to use every source of funding.”
The news came the day after the heads of Ford, Chrysler and GM—once called the Big Three, due to their dominance of the industry—as well as the head of the United Auto Workers union went to the US Congress seeking $50-billion in federal aid to help them ride out the crisis.
“Today’s deeper-than-expected quarterly loss at GM accelerates the need for government help for the sector,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group, of Greenwich, Connecticut.
Hefty losses, burning cash
The shelving of talks between GM and Chrysler parent Cerberus Capital Management raised more questions about the future of Chrysler, widely seen as the weakest of the Detroit-based automakers.
People with knowledge of the talks said Cerberus has had talks with Hyundai about a potential acquisition of Chrysler’s Jeep brand and other assets. Cerberus also plans to restart talks with other potential partners, including Renault-Nissan, the sources added.
GM, the largest US automaker, reported a $4,2-billion quarterly loss and said it would cut white-collar jobs and slash next year’s capital spending budget by $2,5-billion to try to cope with a sharp sales slowdown.
Ford posted a $2,98-billion quarterly operating loss on Friday and told investors that it would look to cut salary expenses by 10%, a move that follows a 15% cut earlier this year.
Credit rating agencies cut GM and Ford ratings deeper into junk status following the reports, or said they could do so given the rapid cash outflows.
“We expect cash outflows to quickly reduce the company’s liquidity during the next few quarters, perhaps to levels that would force GM to consider a financial restructuring, even if it does not file for bankruptcy,” Standard & Poor’s said.
Moody’s Investors Service, meanwhile, said it expects the severity and duration of the US auto market downturn to hamper Ford’s ability to slow its operating cash consumption.
“There will be a considerable degree of downside risk in the U.S. auto sector through 2009,” said Bruce Clark, senior vice-president at Moody’s.
Demand for cars is collapsing around the world, as fears of a deep recessions in the United States and Europe prompt consumers to put off big-ticket purchases and a worldwide credit crunch makes it harder for those who are interested in buying cars to get loans.
Shares in GM and Ford have tumbled dramatically this year, with Ford down 71% and GM down 83%, far deeper slides than the 43% fall of the global Dow Jones Automobiles & Parts Titans 30 index.
BMW, Porsche and Toyota also tank
In Germany both Bayerische Motoren Werke AG—BMW, the world’s largest premium carmaker—and its rival Daimler AG, maker of Mercedes, posted sharp sales declines in October, citing weakness in the United States and western Europe.
Both BMW and Daimler have reduced profit forecasts for their automobile businesses in two consecutive quarters following a sharp drop in demand.
Porsche SE posted a 46% rise in pretax profit for the 12 months ended in July that easily topped analysts’ forecasts. The growth was largely the result of better-than-expected returns from hedging strategies on shares of Volkswagen AG.
Analysts said Toyota’s policy of breakneck expansion has left it especially exposed to an industry crunch brought on by the global financial crisis. - Reuters
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