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How GM can avoid bankruptcy
The company is bleeding billions, but management is beginning to see the light. There are a few bold steps -- including the scrapping of one of its brands -- GM execs should take to keep the auto giant running.
By Robert Walberg
According to some analysts on Wall Street, General Motors (GM, news, msgs) lost credibility last week when the company said that it would be restating 2001 earnings.
Thats what it took for GMs management to lose credibility? How about years of mismanaging its production effort? Or refusing to aggressively streamline its product offerings, recklessly pursuing incentive strategies, failing to address ballooning health-care and pension liabilities?
In order for something to be lost you must have possessed it to begin with, and GMs management team hasnt had any credibility for years.
So now, as speculation mounts that General Motors will be forced into bankruptcy, are we really going to believe management when it says that it has no plans to file for bankruptcy protection? Of course not. Lets at least hope management has begun to realize that it's a possibility.
Bleeding billions
General Motors is in a world of hurt. Even after the United Auto Workers announced Friday that it had ratified the deal to curb health-care costs, General Motors still faces a big uphill battle if it wants to avoid bankruptcy. One analyst has upped his odds for GM filing for bankruptcy protection within the next two years from 30% to 40%. Others have said it's almost a certainty.
Why all the pessimism? GM has been running through cash faster than Paris Hilton at a La Perla store. The company burned almost $10 billion over the past couple of years as the combination of high health care/pension costs, restructuring charges and soft sales slashed its cash horde by about a third.
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The bleeding isnt going to stop any time soon. Sales remain very soft, and now the company faces the potential of a strike at its chief parts supplier, Delphi Automotive. By most accounts, if Delphi strikes it will shut GM down within a couple of weeks. The cost of closing its plants is estimated to run about $2 billion a month, according to Goldman Sachs. It would take eight or nine months to run through all of GMs remaining cash.
Even though I have no faith in GM's current management, I dont think the company will end up in bankruptcy. Not if management can stop pointing fingers and making excuses for its poor performance and can start making the hard choices needed to get the company back on track.
Management has already said it will pursue selling a majority stake in its finance arm, which could generate proceeds of $13 billion. Add that to the $19 billion or so the company currently has on hand, and you have a nice war chest to fund a revival. However, management needs to understand that selling the finance arm cant be a Band-Aid that allows GM to go on ignoring the bigger structural problems.
No time for meek measures
Assuming that management finally sees the light -- and I do think the light bulb finally went on -- GM will use its available assets to more quickly and more aggressively reduce the size of its operations. One of its brands -- Chevy or Pontiac -- should probably be scrapped altogether. Remaining product lines also need to be downsized.
There will be costs associated with such a restructuring, much as other recent restructurings have pulled about $10 billion out of the coffers. But the Street will cut GM slack if it makes bold and, more importantly, smart moves.
Management must commit to designing unique, attractive vehicles that satisfy consumer demands in todays competitive marketplace. Future vehicles will have to be stylish and built well enough that they hold their value like a Honda or a Toyota. When a design succeeds, the company can't simply copy that design across its product lines, which only dilutes the brand. Producing a truncated lineup of cars that consumers actually want would help GM wean itself from its profit-wrecking incentive strategy.
If GM pursues such a course immediately, there should be no need for a bankruptcy filing. Not in two years, not in five, not even in 10. General Motors still has a powerful brand name and a relatively large share of the world auto market. It just needs to take a page out of Apple Computers (AAPL, news, msgs) book and start being an industry leader and innovator again.
The course ahead is not an easy one. Management will have to make tough, often unpopular decisions. Short-term concerns over a possible strike at chief parts supplier Delphi Automotive, combined with the financial restatement, will weigh on the stock. Lingering bankruptcy worries will put a virtual lid on GM's stock price.
Nevertheless, there is a road to restored profitability that doesnt take a detour into bankruptcy. Lets just hope management doesnt waste any more time with quick fixes and finger pointing before getting down to the business of salvaging this once great company.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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