On the Sorry State of General Motors

This is a very well done piece, presented as a letter from the chairman of GM, that gives an overview of the fall from grace of what was once America’s premier corporation.

The real source is Porter Stansberry of Stansberry & Associates Investment Research (via colleague Paul S) . The article ran last year, but from what I can tell, hasn’t been all that widely circulated. It provides a clear, fact based analysis in an engaging form. I hope this will inspire more revealing chairmen’s letters:

Dear fellow shareholders:

Being the captain of the Titanic is no fun.

I am the CEO and the chairman of General Motors, what was, until recently, one of the largest and most powerful corporations in the world. For decades, GM was a model of capitalism. Our bonds were the highest quality you could purchase. Our dividend was the safest. Our jobs were among the best in America. Our operations shaped accounting standards. What was good for GM was said to be “good for America.”

Today, only a thin veneer of optimistic statements, crafted by my lawyers so that they can’t be definitely called “lies,” keeps this firm from slipping into bankruptcy.

For example, I told the world in our press release we saw “steady improvement in our financial results” and “strong evidence that our commitment to great cars and trucks is being embraced by consumers around the globe.” Luckily for me, “steady improvement” and “strong evidence” are meaningless puffery that can’t be proven to mean one thing or another.

Instead of living the life of a captain of industry – where I’d take credit for the hard work of our thousands of employees – I find myself leading an expansive game of financial charades. I have become nothing more than a dressed-up street hustler, running a shell game on you, our loyal shareholders. But at least I have this outlet. As I have done for nearly a
year, I will again tell you the sad truth about our operations and our helpless financial situation.

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First, as I have told you before, “We have infrastructure and employee obligations that outpace what we can afford given our greatly reduced profit margins and debt load.” Specifically, we have long-term debts of $36 billion, retirement benefit obligations of $60 billion, and another $16 billion in various other long-term liabilities.

How did we end up in this position? It didn’t happen overnight. For 19 out of the last 20 years, GM operated at a capital deficit. We simply didn’t make enough money selling cars to maintain our asset base, make new investments in future capacity, and pay our cash dividend. If you look at the numbers carefully, you see our total capital deficit over the last 20 years was $275
billion. After we worked through our accumulated savings, we began borrowing money – more and more of it every year.

So far this year, we’ve paid approximately $4 billion in interest on these various liabilities. I estimated, in an earlier letter to you, that we would require about $5.81 billion in cash from operations merely to pay the interest on our debts. I still believe that’s an accurate forecast. Our global cost of borrowing continues to increase, as I thought it would. It now costs us 6.3% year, on average, to borrow money, up from 5.84% last year. As more debts “roll over,” this number will increase until it eventually strangles us. We are trapped, unable to let go of our legacy obligations and unable to pay for them.

We know we will not produce anything like $6 billion from operations this year. Likewise, it is very unlikely we will ever generate regular, ongoing profits from operations in excess of our interest expenses. As a result, our accountants have forced us to “write down” the value of most of our tax losses, which had been on our books as an asset. We’ve told the public this
doesn’t really matter because the $37 billion charge is a “noncash” expense.

It does matter though: It means we know we are unlikely to ever again record a profit. If we had any reasonable expectation of reaching profitability, we would not have been required to take the write-off. (You won’t hear me explain this fact anywhere else…)

Our core problem is simple enough to understand: We can’t make enough money selling cars to pay for our debts, or even our interest payments.

This quarter, on a worldwide basis, we earned $122 million from our ongoing automotive operations, which we claim is a terrific accomplishment. In fact, we make a pitifully small amount of money from selling cars – even in the huge global boom we’re now experiencing. You should remember: Our third-quarter revenues have never been bigger. Our rival, Toyota, which sells essentially the same number of vehicles, posted operating earnings of $11.2 billion! That’s a record for Toyota and a 16% increase over last year. Investors ought to be seriously concerned about the future of the company when, even in a quarter of record global car sales, GM can’t turn a profit.

Things are especially tough on us in the developed markets. We lost $248 million on our North American operations and another $90 million in Europe. This doesn’t include all of the corporate overhead, legacy costs, and most of our interest expense.

In total, we lost $2.5 billion – in cash – on our automotive operations in the quarter.

As I’ve explained before, our only chance to avoid bankruptcy was to experience a big jump in the total number of cars sold and to cut expenses tothe bone. That hasn’t happened. Our total worldwide car production has actually fallen year over year. Likewise, our global market share continues to slip, bit by bit. In 1992, we made 30% of all the cars in the world. Today, we
make 13.3% of all the cars in the world, down from 13.6% last year.

As our production falls, the scale of our business shrinks, making it harder and harder to earn a profit on every car sold. Production is very likely to continue to decline. Even after all of the plant closures and cutbacks, we are still operating below 90% of our current capacity.

I know… all of this seems like bad news. But actually, our automotive business is only slowly bleeding to death. The big hemorrhage is in mortgages…

Our CFO was foolish enough to tell securities analysts that GMAC was “leaning away” from residential mortgages. Not exactly… Actually, GMAC lost $1.6 billion, mostly on subprime mortgages, in the last quarter. Our share of these losses totaled $803 million. We actually don’t know how much more we will lose in this business going forward, but as our write-off of those tax assets shows, we certainly don’t expect to make any money here for a long time.

What does all of this mean? It’s not good news. Let me show you the cold, hard facts.

According to our most up-to-date balance sheet, we have about $37 billion in cash and receivables. That sounds like a lot of money. But we have matching liabilities for all of these assets – and more. Over the next 12 months, $5 billion of our long-term debt will come due. We have current accounts payable of $30 billion and other accrued expenses that mature in the next year of $34 billion. All totaled, we owe $70 billion within the next 12 months. (That’s not including all of the rest of our long-term debt, pension liabilities, etc.)

If you have $34 billion in your checking account and you’ve got $70 billion worth of bills on your desk, you’re not exactly “cash rich” are you?

How will we pay for these obligations? How will we come up with the money we need to finance our long-term debts? There aren’t any easy answers. And all of the possible solutions will be extremely painful to existing shareholders.

The simple fact is, we’re going bankrupt. It’s only a matter of time before our accountants force us to insert “going concern” language into our filings. That means they won’t approve our audit unless we admit publicly that we know we’re heading for a bankruptcy filing.

That won’t be a good day to be a shareholder.

Best regards,

Your Chairman