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A Bad Week for GM

GM’s financial difficulties continued to come the fore this past week, with its shares falling to their lowest price in 13 years after the company said it will restate 2001 earnings and that it lost more money in the second quarter than it first reported.

In a research note to investor clients, Banc of America analyst Ron Tadross increased his estimated probability of GM filing for bankruptcy in the next two years from 30% to 40%. “We think it [bankruptcy] is inevitable.” (Detroit Free Press) GM adamantly contested that prediction, calling it “sensational speculation.”

Fitch Ratings on Wednesday pushed GM further down into junk territory by downgrading its debt to ‘B+’ from ‘BB’. The GM downgrade primarily reflects Fitch’s concerns potential liabilities with supplier Delphi, and worries over the potential of non-operating items to further degrade GM’s cash flow.

Fitch projects that GM will remain cash flow negative at least through 2006, and in the event of a weaker economic environment, sees the company struggling to stop losses from accelerating.

The company’s operating profile has become increasingly vulnerable to volume declines that could arise as a result of a decline in macroeconomic conditions, consumer purchasing power, or an extended payback period from recent incentive-driven sales spikes.

In addition, the migration to lower-priced vehicles has a particularly adverse impact on GM’s revenue and profitability, and the company’s inflexible cost structure will make it difficult to ratchet down their cost structure in parallel in order to stabilize cash losses.

Fitch believes that this will necessitate further agreements with the UAW on facility closures, headcount reductions and other issues, prior to the 2007 contract re-opening, in order to accelerate the company’s restructuring.

The company has been in hot water before. In 1992, facing possible bankruptcy, the GM board seized control of the company from Chief Executive Officer Robert Stempel and put Jack Smith in charge.

But in the 90s, the SUV phenomenon came to the rescue. The financial reliance on the full-size vehicles that provided the lifering in the 90s is becoming one of the weights now dragging the company down.

The Detroit Free Press is naturally and parochially concerned about GM’s future:

Lower wages, less generous benefits and fewer jobs would not only be devastating for the automaker’s 142,000 U.S. employees. It would hurt everyone who makes parts for GM cars and trucks, sells furniture and homes to GM workers, or treats their children for the flu. Almost everyone in Michigan has a stake in GM’s future.

Given the financial realities of its manufacturing operation in the US, it seems likely that GM will continue to work to find ways to maintain the larger, higher margin vehicles by incrementally improving fuel economy, and working very hard on positioning.

(The Free Press notes with hope that “Falling gas prices could help sales of the [new] trucks, which are crucial”.)

Some of those efforts are already evident in the company’s deployment of cylinder deactivation (earlier post) and its focus on deploying the upcoming two-mode hybrid first on its revamped full-size SUV line. E85 flex-fuel versions of its full-size lineup will also gain more prominence.

GM has already floated the argument that a 15 mpg E85 Tahoe SUV is actually equivalent to a 100 miles per gasoline gallon vehicle. (While arithmetically true, that still leaves the driver filling up a fuel guzzler.)

Elizabeth Lowery, GM Vice President, Environment and Energy, positions it this way:

E85 can cost less than gasoline; it’s clean-burning, reducing sulfur and aromatic hydrocarbons; and it’s domestically sourced and renewable, since it’s typically corn and sugar cane-based. If you compare a vehicle using E85 to a typical hybrid vehicle, the hybrid may get better gas mileage but the E85-powered vehicle saves hundreds more gallons of petroleum per vehicle per year, because only 15 percent of what you put in the tank is petroleum-based, compared with 100 percent in the hybrid’s tank.

Which of course begs the question of building a flex-fuel hybrid.

There was some good news for the company this week, as the UAW agreed to a proposal that would increase the amount retirees and active workers pay for their health care. GM says the new agreement will cut its annual health care expenses by $1 billion after taxes and would lower its retiree health care liabilities by 25 percent.

More cuts and reductions will be necessary, but ultimately, the company has to build and to sell great cars that people want, not cars that the company needs to sell to make its numbers. More than any other automaker now, GM’s future is bound to the public acceptance of its full-size line. It’s not that GM doesn’t produce anything else—they do, of course, and some of the smaller, more efficient models are doing well. But in the aggregate, the company needs that financial contribution from its full-size line to keep it aloft.



The inputs required to produce ethanol are not renewable and, in fact, will only make our petroleum situation worse. The individual and the planet is better off driving a high mpg hybrid. Unfortunately, a lot of people will probably fall for GM's hype.

Mikhail Capone

"GM’s financial difficulties continued to come the fore this past week, with its shares falling to their lowest price in 13 years"

I might be misremembered, but I think I read a few times that it was a 23-year low.


The ethanol questions seems to be in constant deabte. Some do believe that ethanol is beneficial:

Argonne researcher Michael Wang, a world- leading expert in this field, recently presented the results of his research at the Ethanol Energy Open Forum.

Conclusions from Wang's presentation include:

Energy balance value alone is not meaningful in evaluating the benefit of ethanol or any other energy product. For proper evaluation, a product's energy balance must be compared with that of the product it replaces.

Compared to gasoline, any type of fuel ethanol substantially helps reduce fossil energy and petroleum use.

Ethanol produced from corn can achieve moderate reductions in greenhouse gas emissions.

Ethanol produced from "cellulosic" plants, such as grass and weeds, can achieve much greater energy and greenhouse gas benefits.



The official USDA EROEI figure for ethanol currently stands at what, 1.34:1?  Given that, the .85 gallon of ethanol in a gallon of E85 took .634 gallons of fossil fuel to make it, which raises the fossil fuel mileage of that 15 MPG guzzler to.... 19.1 MPG!

That's pathetic, not substantial.


Nope, adjusted for dividends and splits, it's a 13-year low (actually, 12+ years.) The adjusted close price on 10 Nov was $23.51--the lowest price since 23 July 1993 ($23.48).

Mikhail Capone

Ah, my bad.


As I said before gm america is planning to go under its simply the only true option left for the company. Go broke sell off its worthwhile bits and likely its name in north america and use the money to fuel growth in china where they can afford to make small cars for people who actauly buy small cars from them...


So what US car brands would be left after GM dissapers?


Definitely Ford.  Dodge/Chrysler/Plymouth, if you still count them.


Since when is a 27.3 increase in anything "Pathetic"? The problem is the engine/vehicle consuming a lot of energy and wasting more that 80% of that as heat. THAT's pathetic not the fuel. What are you looking for, somekinda magic vehicle that makes it's own fuel by being driven? 100% conversion of energy to work? What sort of fuel do you have in mind? Perhaps you'd like to go everywhere via horse and buggy.

Since when is a 27.3 increase in anything "Pathetic"?
When it's being touted as a 570% increase.

GM has a management problem, period. By now, GM could have been leading the market IF THEY HAD ANTICIPATED HIGHER CRUDE OIL PRICES!! There is no reason GM could not be making a Prius or a Camry. Instead, they are cranking out Hummers and Suburbans. No one looks to GM for technological innovations; the American consumer must wait for them to come from Japan and Germany. Then, MAYBE, GM will make a shabby copy at the same price. GM is a dead man walking. Sell your stock.


Ain't it the truth.


Foo.  Maybe that will fix the italics.


2 liter petrol/ethanol engines get ~25mpg and are better suited to short trips. 2L diesel/bioDs get ~40 and prefer heavier, commercial use. Ms. Lowery's position is most ridiculous piece...
Shame on EPA and oil co's for pushing ULSD mandate back another 3 months. There is no excuse for this foot-dragging. Europe has had ULSD since 94.

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