Reality bites

In December, GM approached the federal government and claimed that they were within 30 days of bankruptcy with ~$10 billion in the bank because this was minimum liquidity required to fund operations. As private investors were unwilling to provide them with any more debt or equity investment, they asked taxpayers for an $18 billion bridge loan, saying that if they got this, then they could restructure rapidly enough to become profitable without further assistance.

GM provided a plan to accomplish this restructuring. It was not obvious that the operational assumptions embedded in the plan were achievable. Specific goals that seemed (and seem) very difficult to achieve, and about which the plan provided essentially no credible operational roadmap included:

1. a large reduction in non-legacy costs per person, when GM has been unable to achieve such cost reductions over the past several years

2. the assertion that so-called "structural costs" will decline from 34% of revenue to 25% of revenue, when they have cycled between 30% and 35% of revenue for the past five years

3. the change in forecast 2009 unit market share of 20.9% made one year ago to a forecast for 2009 unit market share of 22.5% made at the time of the plan

4. the implicit assumption that GM will be able to renegotiate itself out of at least about $16 billion of debt.

But even if we assume that GM achieves these and all other operational and financial improvements asserted in the plan, the company would still remain extremely vulnerable to the absolute level of auto sales in the U.S. market. According to GM's plan, if total U.S. sales are about 12 million units for 2009 (what GM refers to as the "Baseline" scenario), they will draw-down $10 billion of government-provided debt by the end of March, and then be self-sustaining. In the event that industry sales are 10.5 million units in 2009 (what GM refers to as the "Downside" scenario), GM projects that they would draw down $15 billion of government-provided debt by the end of March, and have a cash balance at that time of about $13 billion. If industry demand stays at this lower level for the next quarter, they would presumably burn through about another $6 billion of cash in the second quarter, and would therefore consume the last $3 billion of the $18 billion they have requested, plus drive their cash balance down by $3 billion (to about $10 billion) or right where it is now.

In other words, we'd be right back to same place we were last December by the end of June. What would we do then?

Unfortunately, but unsurprisingly, demand is currently running slightly below even the GM Downside scenario. Actual sales for December have come in at an annualized rate of about 10.3 million units. By January 15th, GM had lowered its expected case for 2009 to 10.5 million units--the "Downside" case from the December plan.

Of course, nobody really knows what sales will be with precision.  When Chrysler was asking for money in December, the company forecast that 11.1 million light vehicles would be sold in America in 2009 (the figure excludes about a third of a million heavy trucks in the GM number.   Chrysler reduced that forecast to 10.1 million units recently. As of mid-January, Ford was forecasting 12.5 million units, and J.D. Power about 11.5 million units. What we do know is that the forecasts have been marching downwards at a frightening clip over the past few weeks. Over the past few days, GM and other industry participants have now begun forecasting that industry sales are most likely to be slightly below 10 million units for 2009.

There is an outside chance that GM will achieve all of the operational improvements assumed in its plan, and that industry demand will come in at the very high end of the current range of forecasts for 2009, thereby allowing GM to squeak by with only the currently-envisioned bailout. But I sure wouldn't be willing to bet on it.