Is General Motor's Recovery Plan Too Ambitious?

General Motors has already received $13.4 billion in loans from the U.S. Treasury and is seeking an additional $16.6 billion in federal assistance aid to avoid a potential bankruptcy. Critical to the restructuring plan the struggling automaker submitted to Congress in December was an underlying assumption that vehicle sales would begin to recover in 2010. Amid an uncertain economic environment and planned reductions in dealer count, is it realistic to believe that GM can generate positive sales and gains in earnings and cash flow for its North American operations next year?

Management calculates that ongoing operating and balance sheet restructurings, including reduction in the number of model nameplates, union labor cost issues, and the closing of manufacturing plants, combined with minimum U.S. industry sales rates of 11.5 â€" 12.0 million units, could lead to an operating turnaround in 2010 (assuming a U.S. market share of 20.5 percent). This could prove to be a stretch, with jobless claims accelerating, continued difficulty in accessing auto financing, and sizable losses in housing and stock market assets adversely affecting discretionary consumer purchases.

Cost cutting and restructuring issues aside, the bottom line is that the success of its recovery plan and GM's ability to continue as a 'going concern' are highly dependent on sales volumes, according to the 2008 annual report:

The deteriorating economic and market conditions that have driven the drop in vehicle sales, including declines in real estate values and household incomes, rising unemployment, tightened credit markets, weakened consumer confidence and volatility in oil prices, are not likely to improve during 2009 and may continue past that year. Our Viability Plan is based on assumptions that vehicle sales will decline further in 2009 but that they will begin to recover in 2010. Sales volumes may decline more severely or take longer to recover than we expect, however, and if they do, our results of operations and financial condition and the success of the Viability Plan will be materially adversely affected.

According to the recovery plan, GM's dealer count is to be reduced by about 25 percent to 4,700 by 2012, and to 4,100 by 2014. Management said that consolidation would likely occur in metro and suburban markets, where dealership overcapacity is most prevalent. The expectation is for a smaller, but healthier GM dealer network. Nonetheless, with a smaller footprint, reaching its targeted 20 percent domestic market share will require the remaining dealers to sell more cars or perish.

GM said it could run out of cash as soon as the end of March without the additional funding, and warned members of Congress in its filing that a bankruptcy could cost as much as $100 billion to execute. My guess is that to give in to the automaker's demands -- in the long run -- would end up costing taxpayers more than that.