Fork In The Road


General Motors' fourth quarter earnings report is simply breathtaking. Not in a 1960 Corvette kind of way. Think 1961 Corvair.

GM reports losing $9.6 billion at the end of last year. The company lost $30.9 billion for all of 2008. Throw in all of GM's charges and you are looking at a loss of nearly $85 million a day. It's a loss of $3,700 for every vehicle GM sold around the world last year. That's not red ink. That's the Red Sea.

It was no accident that three hours after GM reported its earnings CEO Rick Wagoner and the rest of GM's top management went to the Treasury Department for a meeting with President Obama's Auto Task Force.

"Today's meeting with the presidential task force on autos was just the beginning of the hard work ahead for GM and the president's team," GM said in a statement shortly after the daylong sit-down.

Wagoner has already asked for $16 billion more in government loans to help GM survive what has become the worst crisis in company history.

"They probably need twice that", says John Wolkonowicz of IHS Global Insight. "But if you compare that to what a government financed structured bankruptcy would cost – about $100 billion for GM – it's still cheaper than bankruptcy."

It's not unreasonable to think that sound's like a devil's bargain. But to be fair, GM was gaining some momentum early last year. Granted, the company made bad decisions for years and depended far too long on highly profitable and gas-guzzling SUVs. However, the company was preparing to roll out its strongest product line-up in years. What nobody could predict at GM's Renaissance Center headquarters was the Dark Ages was just around the bend. Within six months, gas prices skyrocketed to $4.00 a gallon, the credit markets had a nervous breakdown and unemployment shot up 2 percent. Unfortunately for GM, the airbags did not deploy.

Can General Motors be a viable business while hemorrhaging billions every week? It's the central question in the Detroit drama. Some analysts believe GM can pull a U-turn if it continues to get government help and at meets least three conditions:

  • First - GM has to make cars people want to buy.
  • Second - GM needs relief from its labor agreements.
  • Third - The economy must begin to improve quickly.

    GM has already made great improvements in vehicle quality and dependability. Most of its vehicles are just as good as Japanese makes. In the upcoming April auto issue, ConsumerReports gives a number of GM cars and SUVs high marks – including the Cadillac STS, the Buick Enclave and the Chevy Malibu. The electric plug-in Chevy Volt sparks the imagination and the new Chevy Camaro pumps the adrenaline. Another year or two of vehicles like them and GM could gain some traction with Generation X and Y.

    GM and the UAW are already deep in negotiations to amend the union's labor contract. The healthcare entitlements in the contract for GM retirees are simply burying the company. It is horrible that UAW members who have dedicated their lives to GM are now being asked to give back valuable benefits. But the reality is the benefits package would be among the first things torn to shreds by a bankruptcy judge. The UAW leadership knows it. The trick will be convincing the membership.

    The third condition that would make GM viable is something beyond their control. Nobody knows how long it will take for the recession to end. The auto industry is on pace to sell 10 million cars and trucks in 2009. Any annual sales rate below 12 million units cannot sustain General Motors, Ford and Chrysler. The most optimistic annual sales estimates the 12 million unit rate is achievable no earlier than 2010.

    "So GM needs a bridge over this water to get them to 2010, when the stimulus package kicks in," says Wolkonowicz. "These auto companies are salvageable. Getting them through this horrible year will prove to be the right decision, but they will need an indeterminate amount of money over and indeterminate amount of time."