Thursday, March 05, 2009

The Inevitable: Part I, General Motors

There's something about Thursdays. If General Motors' announcement last Thursday that it had lost $30.9 billion in 2008 wasn't a milestone in the company's history, today's news surely is. In its annual report filing, GM's auditors expressed doubt that the company can continue as a "going concern," to sustain itself.

Whatever happens next — be it soon or not — could transpire very quickly. On June 1, $1 billion in convertible debts (which have nothing to do with open-air motoring) will come due. If GM's overall debt picture isn't redrawn by then, the game is likely over.

What are GM's odds at this point? I'd say next to zero. If it's any consolation — and it is to the Outsider — things have changed since this crisis arose last year, and it now appears that, if GM fails, it will happen for the right reasons. The wrong reasons involved the perception that American automakers don't know how to make good cars, and that the Japanese are geniuses.

Detroit's Three Stooges
When all of this began, the reaction stunned Detroit, illustrating a major reason they've been losing market share and stumbling for years: Many Americans, including much of the West Coast and Northeast, view the domestic automakers as our very own Three Stooges, whose products "no one" wants to buy. "All of the foreign brands make good cars and they're doing fine."

Chrysler and GM insisted that they were merely canaries in the coal mine, and that the whole industry was in peril, an argument that got them nowhere. They also made the case that they have some world-class cars, and here they did meet with some success, due in part to the uprising of people who live between Detroit and the coasts, as well as a full-court effort to educate lawmakers, a campaign whose effect was already evident when the second round of Congressional hearings took place.

As for the coal-mine argument, the rest of the industry has been making it for the canaries by coming down with a persistent cough and signs of disorientation. In the interim, one automaker after another has requested — and in many cases been granted — assistance from their home countries: Germany, France and the U.K. came first. Russia levied stiff tariffs on imported cars to prop up its domestic companies, leading to protests in Vladivostok last December at which riot police beat some of the estimated 500 demonstrators. (And you think you hate Pontiac? Drive a Lada someday.)

Need a Cough Drop, My Darling?
If none of that convinces you, Toyota has posted its first loss in history and begun layoffs. On Tuesday of this week, everybody's darling requested a loan from the Japanese government. Today Honda and Mazda followed suit. Bear in mind, Americans, that these are countries that have propped up their domestic automakers all along in ways we don't. At minimum, government-funded healthcare relieves a substantial burden that cripples our "Stooges" especially, because they have been shrinking for years and each of their current workers supports between three and six retirees.

The Detroit Outsider is quick to point out that a company's failure is a company's responsibility, and that's true for the Detroit Three. It's their fault that they've been shrinking. All the same, the situation seems less fair than ever.

What We're Waiting For
While Ford has been working out deals with the UAW and working its debt obligations — smelling even more like a rose than before — Chrysler and GM have been in a holding pattern. They're seeking concessions from the big, bad UAW (which is not the problem) and from their bond holders. The UAW ultimately will do whatever's necessary to stay alive, and have begun to do so. Bondholders, on the other hand, are holding out for more money in a debt-for-equity swap. They've been asked to take a third of the $27 billion owed. A sizeable contingent thinks Chapter 11 will bring a higher return. The foot-dragging has been blamed on the lack of a car czar or task force that the parties were counting on for arbitration. That is scheduled to begin today.

It doesn't matter.

The D.O. knew that Chrysler and GM would be back for more money. The amount requested, though, really spells it out for you. They want $16.6 billion on top of the $13.4 billion already granted. This will not end. You don't need an accountant to calculate what a third to a half of the $27 billion in convertible debts will mean. All the layoffs, closings and UAW concessions amount to a few hundred million here, a couple billion there — sometimes over the course of a year or more. GM is burning a couple billion dollars every month. (Bear in mind that the company's $31 billion loss last year included several months of decent, if not record, car sales before the bottom dropped out.) Even if the car market were to rebound soon, GM would be back for more money, time and again, just to stay afloat. The car market isn't going to rebound soon, for reasons I'll detail separately.

Numbers don't lie. Though people do, sometimes the numbers are so large, no amount of obfuscation can conceal them. I'm reminded of how President Obama helped to break the logjam on the stalled stimulus package. To paraphrase, he pointed out that opponents were holding it up over issues that represented a few percent of all the funds in the bill. Those are numbers that speak to anyone with grade-school math skills. The same is true here. No president wants to sign a major corporation's death warrant in his first 100 days (or his last 100, apparently), and I suspect Obama will continue to sprinkle funds here and there while the players work on a plan that's less likely to trigger the Great Depression II. Ultimately, GM will probably have to face facts and do the right thing: fall on its LeSabre.