This blog presents my comments on current events and recent publications.
Friday, December 05, 2008
Good Summary of the Big 3 Problem
GM'S FANTASY RECOVERY PLAN
By DAN CALABRESE
YOU know that $12 billion bailout, er, "bridge loan" we asked for? Can we make that $18 billion? So asks General Motors in its report to Congress, explaining that it needs $6 billion more than it wanted just two weeks ago - but not to worry, because it's really learned its lesson this time . . .
GM's "recovery" plan would be lucky to earn a C at a respectable business college. And what little substance it offers, the company is in no position to actually deliver. First, why is GM asking for $18 billion now, when it was only asking for $12 billion just last month? Well, this is hardly unprecedented - in a matter of weeks, this company went from reporting a cash-burn of $1 billion-a-month to reporting a $5 billion-a-month loss. Congress just might want to wonder what the figure will be next month. For now, anyway, GM says it needs to borrow the original $12 billion by March, just to keep operating, but wants access to another $6 billion line of credit just in case the economy gets even worse. Just in case? The rest of the proposal is rife with typical Detroit fantasy.
GM presumes that the auto industry, which is expected to see sales fall to 12 million units in 2009, will bounce back to sell 15 million units by 2012. What's the basis for that hope? * It insists that it will make its labor costs "competitive" with those of transplants like Toyota and Honda by 2012. One small problem - the United Auto Workers has agreed to no such thing.
As GM was submitting its plan, UAW officials were huddling in Detroit to consider whether they'd make further concessions to give GM a ghost of a chance of keeping this pledge.The UAW agreed only to delay an upcoming GM benefits payment. Other concessions? They'll think about it. And UAW President Ron Gettelfinger said last month that the union has already given enough.
GM's latest submission also raises a new, huge red flag. Until recently, GM financed more than half its customers' purchases through its GMAC financing arm, overwhelmingly for customers with credit scores under 700. Now that credit standards are far tighter, it can no longer finance those customers In other words, GM can now self-finance only 6 percent of its sales. That's sure to hurt those sales even more for years to come - unless the taxpayers take the financing risk.
The rest of GM's "plan" is typical political pandering and emotional appeals about GM's past - none of which make a bailout of the company from this point forward a smart business move. Missing are any actual profit projections - perhaps the plan's one bow to reality. But GM might as well have thrown in some fat profit numbers out of thin air - it would've been as feasible as anything else in the plan.
Is Congress really dense enough to use taxpayer money to prop up this fiasco? GM claims it needs the first $4 billion by the end of this month or it will collapse, so we'll find out soon enough.
Dan Calabrese, a longtime journalist and PR executive in Michigan, is the founder and editor in chief of North Star Writers Group.