GM State of Mind Revealed in New Restructuring Plan
February 23, 2009
By Bill Visnic
Details in the hundred pages-plus of General Motors Corp.'s 2009-2014 restructuring plan submitted to the U.S. Dept. of Treasury last week show the General to be confident and optimistic on several matters regarding its survival and planned revival. Perhaps exceedingly so.
And GM offers more than a few intriguing strategic and business-plan revelations that are worthy at least of a raised eyebrow.
In the document, GM claims it is pessimistic in many assumptions about certain economic factors -- future increases in U.S. gross domestic product or the sales forecast for the total U.S. market through 2014, for example.
But GM's cautionary positions balanced optimistic projections on many fronts -- including the likelihood of restructuring the billions in liability GM has to the United Auto Workers union's Voluntary Employee Benefits Association fund and significant debt-to-equity exchanges with GM bondholders.
Projecting Market-Share Gains for Main Brands
In the matter of market share and industry volumes, for example:
-- GM predicts market-share gains for the Buick, Cadillac and Chevrolet divisions due to future product plans "as well as reduced competition from Hummer, Saab, Saturn and Pontiac." This disclosure, in black-and-white, comes after GM has insinuated for decades its divisions do not significantly pirate sales from one another.
-- The company projects a downward trend of retail market share, however, from 2008's 20.1 percent to 18.4 percent by 2014 -- seemingly attributed mainly to GM's projected reduction in its number of nameplates. GM says market share per nameplate will improve from 0.49 percent in 2009 to 0.55 percent in 2014.
Revenue Projections
From a revenue standpoint, GM presumably plans to offset the loss of market share largely through a reduction of structural cost (as percent of revenue) from 39 percent in 2009 to just 23.3 percent in 2014.
-- In tandem with the above, GM now predicts its break-even will occur at U.S. industry SAAR of 11.5 million to 12 million units. Perhaps not coincidentally, GM's "downside" market forecast calls for a minimum of 11.5 million sales next year.
No Net Liquidity, Years of Big TARP Balances
In some of its financial projections, GM says:
-- It expects automotive adjusted operating cash flow -- and net cash flow -- to be positive in 2012.
GM does not predict net liquidity to be positive at any time between now and 2014.
Repaying Taxpayers
The company projects funding from the Treasury's Troubled Assets Relief Program (TARP) to be present on its balance sheet every year from 2009 to 2014 (see chart), with a total government support figure of $34.4 billion in 2014.
GM's "baseline" economic scenario projects a TARP-loan balance every year from 2009-2014, still needing to repay some $13.7 billion in 2014.
The difficulty in projecting what may be happening in the economy -- and the auto market -- is evident in GM's projection for the potential wide range of TARP balances. If the environment is operating under the parameters of GM's "upside" forecast, the company predicts having no TARP balance in 2014; if the situation is worse than its baseline projections, the TARP loan balance could be $29.4 billion.
Pension Problems Brewing
There could be trouble brewing in terms of pension funding.
Although projecting the value of pension-fund assets is tricky, GM says recent market downturns mean that after years of overfunding, the company's pensions may now be underfunded to the tune of $12-$13 billion.
GM raises the possibility it "may need to make significant contributions to the U.S. Hourly Pension Plan in the 2013-2014 timeframe," but added an optimistic rejoinder, "At this point, it is premature to conclude that the company will need to make additional pension contributions in 2013 and 2014."
Dealer Reduction Plans
The restructuring document makes it evident GM seemingly has written off its Hummer, Saab and Saturn divisions.
In the matter of dealer reductions, GM projects a paring of its dealer ranks from 6,246 in 2008 to 4,100 by 2014, "inclusive of reduction from Saturn, Saab and Hummer."
The document also pegs a broad figure on the losses incurred by these divisions, indicating GM has lost $1.1 billion in aggregate annually on Saturn, Saab and Hummer (based on earnings before interest and taxes).
Also, GM evidently has factored in the cost of shutting down the three divisions -- even the likely high cost of compensating abandoned dealers:
"Provisions have been made in the pro-forma financial statements for all brand-related
restructuring costs related to an assumed phase-out of the Saturn, Saab and Hummer
retail channels and brands, should a sale or spin-off prove unachievable," the document
says.
No Surprises in Future Product Plan
There is nothing of revelation in the future products GM presents in the document, with no mention of any new-model introductions beyond 2010's Chevrolet Volt extended-range electric vehicle and Cruze compact car.
GM says the restructuring plan calls for a 25 percent reduction in nameplates by 2012. After it's all implemented, GM's nameplate count will have wound down from a ponderous 63 in 2004 to 48 last year -- and ending up at 36 nameplates in 2012.
New-vehicle launches in 2012 dwindle from a previously planned 12 to just five; likely an effect of jettisoning Saturn, Saab and Hummer.
Embracing a "Merger"?
In the days following submission of its restructuring plan, rival Chrysler LLC revived the possibility of merging or otherwise consolidating with GM, and GM's restructuring document seems to leave open this possibility. Here's the verbatim:
"This plan is confined to the significant value created through restructuring of General Motors' business, there is unquestionably additional value that could be obtained through consolidation of the domestic industry," the document flatly states.
"The company has been involved in very detailed evaluations of consolidation potentials over the past few years, and its capabilities -- for example, purchasing -- most often are the lever pulled to create joint value," it continues, adding, "The recent, rapid deterioration in economic conditions have made investment in the up-front costs associated with such consolidations an obviously lesser priority than addressing the immediate restructuring needs of General Motors. If the U.S. Department of the Treasury desires to explore the topic of industry consolidation, the company would certainly be prepared to share its thoughts."
Photos by GM
1 - The Chevrolet Volt is one of GM's major product launches in the next few years.
2 - The Chevrolet Cruze is another major product launch for GM.
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