After Loss, GM May Be Near Bankruptcy

General Motors drew closer to bankruptcy Thursday, acknowledging that its revenue fell by nearly half as car buyers worldwide steered away from showrooms for fear that the auto giant would not be around to honor its warranties.

The company lost $6 billion in the first three months of the year. The results were bad enough to bring a warning from Chief Financial Officer Ray Young, who acknowledged the difficulty of climbing out of a steep decline even if the company cuts costs.

"Once you start losing revenue, you get yourself into a vicious circle in which you cannot recover," he told reporters on a conference call.

GM is living on $15.4 billion in federal loans and faces a June 1 government deadline to finish a restructuring plan or join Chrysler in Chapter 11 bankruptcy reorganization. The company would prefer to restructure out of court, but even its own executives say the obstacles are formidable.

"I think bankruptcy is highly likely, not because the losses are so bad, but because everyone has realized that this company needs fundamental restructuring," said Douglas Baird, a University of Chicago law professor who specializes in bankruptcy cases.

Chapter 11 "seems the best way to clean up the balance sheet, clean up the problems, get a fresh start," he said.

Young conceded that the second quarter will also be tough for GM because it is shutting many of its U.S. factories for up to 11 weeks to slash dealer inventories. But he expects revenue to bounce back once the automaker gets through inventory cuts.

He said GM is making more money on new products than it did on their predecessors, including the Chevrolet Malibu and Cadillac CTS.

Today's bad news is more evidence GMs fate is still up in the air. The $6 billion loss comes after GM vehicle sales plunged nearly 50 percent from the same period last year, a decline that translates to nearly 400,000 fewer sold, reports CBS News correspondent Cynthia Bowers.

And the company's latest attempts to sell more cars caused a new public relations headache. The ailing automaker is entertaining 500 of its biggest customers - corporate and rental car companies who bought 27 percent of all GM vehicles last year - at an Arizona resort, Bowers reports.

"They need to convince fleet buyers that they will be around," Joe Weisenfelder of Cars.com told Bowers

General Motors Corp. spent $10.2 billion more cash than it took in from January through March, mainly because revenue fell by $20 billion from the first quarter of last year, to $22.4 billion.

Young expects GM to need another $2.6 billion in federal loans this month and $9 billion more during the rest of the year.

Meanwhile GM is going ahead with plans to cut 42 percent of its dealerships, targeting first those who sell discarded brands - Hummer, Saab, Saturn and Pontiac. In all, 2,600 dealers will get a letter telling them they're done.

At Bredemann Chevrolet in Park Ridge Illinois John Bredemann says he was told GM considered everything from location, to sales figures, to customer satisfaction, even debt load.

"I think everybody's already been graded. I think the letters are due to come out here around the 10th or 11th of May," Bredemann told Bowers."We're in good shape but that doesn't mean your heart doesn't go out to somebody who may not be meeting all those criteria."

What isn't known is how many of the 2,600 dealers - and their tens of thousands of employees -
will go quietly. Because dealerships are so vital to local economies, generating billions in tax revenue, every state offers them franchise protection which could prove costly to GM.

"A manufacturer can't just come and say, 'You know what, thanks for all the years of service, thanks for the investment you made in your facility, et cetera, we're done with you.' They have to pay," Wiesenfelder said. "Manufacturers pay dealers to close."

For GM it's a difficult situation; everything they do to save money in the long run costs money in the short term.

All the talk about bankruptcy, Young said, is scaring some car buyers away. Detroit rival Chrysler filed for bankruptcy protection last week.

"People are concerned about bankruptcy, and that's the reason why we want to avoid it if at all possible," he said.

Government guarantees of GM and Chrysler warranties were not revealed by President Barack Obama until March 30, so consumers did not know about them for virtually the entire first quarter, Young said.

Car buyers, he said, should be reassured by the government's warranty guarantee, but it might take time for word to spread.

GM's quarterly loss amounted to $9.78 per share, compared with a loss of $3.3 billion, or $5.80 per share a year ago.

Although huge, the $6 billion loss was nowhere near GM's worst. The auto giant lost $39 billion in the third quarter of 2007 due mainly to a write-down for unused tax credits.

Revenue tumbled a stunning 47 percent because of declining sales worldwide, as well as huge production cuts and a strengthening U.S. dollar that made income earned in other currencies worth $3.5 billion less to GM.

GM cut structural costs by $3 billion in the quarter mainly with staff reductions, but Young said that was not enough.

"We cannot cut costs fast enough to offset that revenue loss," he said.

Young said GM continues to prepare for bankruptcy while simultaneously pursuing its preferred option of restructuring out of court.

Chapter 11 does not necessarily mean a company goes out of business and liquidates its property. It also allows businesses to keep running and rehabilitate finances without the threat of creditors' lawsuits.

The "revenue implosion," Young said, was due largely to GM's effort to cut inventories, reducing production by 900,000 vehicles globally, or about 40 percent.

Automakers count revenue on their books when cars leave factories for showrooms. If they are not making vehicles, they do not make money.

GM ended the quarter with $11.6 billion in cash, down from $14.2 billion on Dec. 31.

GM reported an operating loss of $3.2 billion from its North American operations alone. In Europe, the operating loss totaled $2 billion. Italy's Fiat SpA is in talks to take over GM's operations in Europe - Germany's Opel, Britain's Vauxhall and Sweden's Saab.

Fiat confirmed Thursday that it is also interested in GM's operations in Latin America, where the U.S. company squeezed out a small profit in the latest quarter.

GM faces an almost impossible list of restructuring tasks before the June 1 deadline. It must get new cost-cutting agreements with unions, close factories, cut jobs and complete a debt-for-stock swap with 90 percent of its bondholders to prove to the government it can repay loans.

The government could wind up with 50 percent of GM's stock, while a United Auto Workers' retiree health care trust fund could get around 39 percent. Of the remainder, 10 percent has been offered to bondholders and 1 percent would go to existing shareholders.

GM shares closed down 6 cents, or 3.7 percent.