At the time of this writing, GM is worth just short of $2.49 billion. The company was worth about $4 billion on the day of the 1929 stock market crash that triggered the great depression -- in non-inflation adjusted dollars. Adjust for inflation, and you'll find the automaker is now worth about 1/7th of what it was on the day of the 1929 market collapse.
Is Bankruptcy on the horizon for America's largest automaker?
The company insists the answer is no. A statement issued at the close of business yesterday read, "Clearly we face unprecedented challenges related to uncertainty in the financial markets globally and weakening economic fundamentals in many key markets. But bankruptcy protection is not an option GM is considering. Bankruptcy would not be in the interests of our employees, stockholders, suppliers or customers and we believe speculation about a possible filing is exaggerated and unconstructive," according to the Washington Post.
So, clearly, the question has come up.
Business Week reports, "GM, its dealers, and would-be car buyers are all suffering from lack of access to credit." The worldwide reluctance of banks to lend money has sent car buying to 15-year lows.
There is little hope for a sales recovery on the horizon. Jeff Schuster, executive director of automotive forecasting for industry analyst J.D. Power and Associates, recently told Reuters "While the global automotive industry is clearly experiencing a slowdown in 2008, the global market in 2009 may experience an outright collapse." J.D. Power is predicting that "a pronounced recovery is more than 18 months away."
J.D. Power Senior Vice-President Gary Dilts pointed out to Business Week that "buying a new car is something that can be put off indefinitely" for most consumers. The question for automakers desperate for cash, then, "is how long consumers will stay out of the car-buying market."
The company probably has enough cash to continue operations for some time, but it isn't clear how long. Business Week reports that "S&P said it believes both automakers [GM and Ford] have enough cash for at least the rest of 2008." GM "lost a stunning $15.5 billion in the second quarter, and its cash stood at $24 billion. At that time, it was burning $1 billion a month of its reserves, but the rate of burn is thought to have increased in the recent Wall Street meltdown," making it difficult for analysts to predict how long the company can hold out in this market.
Raising more cash has proven nearly impossible for the company. Business Week says "the automaker is beating the equivalent of corporate couch cushions for cash." The company is attempting to refinance its headquarters building in a cash-raising move. If that move fails, company officials have said they may sell the building and attempt to lease space from the buyer. Either way, the move is unlikely to raise enough cash to float the company for long -- in better times, GM bought the building for only $626 million.
GM can't borrow money, either. MarketWatch notes, "Standard & Poor's Ratings Services on Thursday placed General Motors Corp. debt on CreditWatch with negative implications, meaning the automaker's credit, which is already in junk territory, could face another downgrade."
The federal government recently authorized $25 billion in loans to automakers -- but as the law is structured, the money won't be made available until late 2009.
The consequences of a GM bankruptcy are so large, they're hard to measure. Hundreds of companies depend on the automakers for work, and the economies of some cities and states are tied to their fate. The Washington Post reports, "U.S. auto companies and suppliers cut 18,000 jobs last month, with many of the losses coming in firms that produced components for trucks and sport-utility vehicles, whose allure plummeted as gas prices reached $4 a gallon. The ripples are real. The city of St. Clair, about an hour north of Detroit, lost more than $100,000 in annual tax revenue. Among the contractors that lost business were trash haulers, carpet and laundry cleaners, shippers and vending machine operators."
That's why, the Los Angeles Times says, "Financial and industry experts are speculating that the automotive giants may simply be too integral to the economy to go under."
They may need to hold on only until 2010. Not only does J.D. Powers' forecast predict a recovery then, but a Washington Post article notes, that year the automaker will "begin seeing the cost-savings negotiated into the 2007 labor contract (largely retiree-related), which analysts estimate will take as much as $5,000 out of the cost of producing a new GM vehicle." The company also hopes to roll out products like the Chevy Volt that year, which might give it an edge with consumers looking to save fuel.
The question for analysts is simply whether the company can cut enough expenses and raise enough cash to get to 2010...or, for that matter, to get through 2008.
By the way, in the 25 minutes it took us to write this article, the giant's market capitalization recovered to $2.85 billion. Still well below 1929 levels, but a sign of how volatile GM's situation really is.
Tough times for automakers, though, have led to some great buying opportunities for consumers. Research the best car deals for October to take advantage while you can.
