Offering a rare bit of good news on Thursday, General Motors told the U.S task force on the automotive industry that it will not need $2 billion in loans this month. According to a Detroit News report, GM Vice Chairman Bob Lutz said the better-than-expected cash position reflects cost-cutting measures and "some of it is perhaps sales volumes and mix being a little bit better than we assumed."
This is reflected in the retail sales of the Chevy Malibu, which are up 33 percent from last year. However, no one should believe the worst is over for General Motors. It still believes it could need up to $18 billion to fund operations for the second quarter and expects to need the full $22.5 billion in loans this year that it asked for in a report submitted to the U.S. Treasury last month.
Will it be worth it? General Motors and Chrysler have been arguing against declaring bankruptcy, saying that it would not only be more costly than a bailout but would result in a significant drop in the sales of their vehicles. However, according to Friday's Detroit News, GM dealers say that under current conditions, vehicles are stacking up on their lots and they are reluctant to order more, especially with the future of various brands and the company in doubt.
There are some experts who say that a structured bankruptcy might actually help GM and Chrysler. Maryann Keller, a widely known and respected industry analyst said in the March 2nd edition of Advertising Age, "that a government-backed bankruptcy or Chapter 11 filing 'takes a huge source of uncertainty out' of American's minds and could actually improve sales."
There is an historical precedent that suggests an auto company can declare bankruptcy and survive. The Ad Age article also reported that Studebaker declared bankruptcy in 1933, during the Great Depression. It dropped a number of models and dealers, and emerged from bankruptcy in 1935 a stronger business, with lower costs and increased market share. Part of that was due to an aggressive, (for the time) $100,000 ad campaign themed "Studebaker Carries On."
Studebaker survived another 30 years, and was still perceived positively when its last vehicle came off the assembly line in 1966. Today, union contracts, debt financing and more complicated dealer and supplier networks would make a bankruptcy filing more complex. But it would remove some of the uncertainty that is currently paralyzing the manufacturers and their dealers. According to most financial pundits, the markets are looking for some sense of certainty and predictability. Bankruptcy would at least define the risk for stakeholders still involved with GM and Chrysler. And U.S. taxpayers would know how their billions in support were being applied.
Comments
Only a pessimist would say that the fact that GM does not need $2B in March and anticipates paying back $2B in September should go into bankruptcy!! Plus dealer inventories nationwide are at their lowest level in years, despite the antidotal example of a couple of dealers, due to the systemmatic reduction in production. The only thing GM, Toyota, Ford, Honda, etc. need is for SAAR to increase, at least, to 12.5B. Selling vehicles at 9.3B SAAR for an extended period will have ALL car manufacturers losing money. Let's just see how the second and third quarters go. My bet is that fleet sales will increase and credit will loosen further, adding 2M to 3M to SAAR. Remember, when all of GM's cost cutting that they have done over the last few years takes full effect in 2010, they will be saving the $5,000 per vehcile built--that's accurate, $5,000 per vehicle. That puts them in the best competitive position in several decades. With the Camaro going into production in less than a week, a 30MPG 2010 Equinox arriving by summer, a hot new Buick LaCrosse arriving this summer, and an absolttely beautifully redisigned Cadillac SRX arriving this summer, look for GM's market share to actually INCREASE this year.
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