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Never Too Big to Fail

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05/10/2005

From a pre-junk bond demotion piece on GM, sent to me by Robert Blumen:

 

GM reached a watershed in its four-decade decline in market share. After losing two percentage points of share over the past year to log in at 25.6%, GM has reached the point at which it actually consumes more cash than it brings in making cars, for the first time since the early '90s. GM, once the world's premier auto maker, is now cash-flow-negative. That's a game changer. Without growth, GM's strategy of simply trying to keep its factories humming and squeaking by until its legacy costs start to diminish is no longer tenable. If market share continues to slip, its losses will rapidly balloon.

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"It's difficult for us to see, if volumes and share continue to fall, how they're going to get the significant cost cuts necessary to stabilize cash flows," says Mark A. Oline, an analyst at the Fitch Ratings service, which has GM debt at a BBB- rating, one notch above junk, with a "negative" outlook. "Having that kind of cash drain is unsustainable over the long term."

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In a March report, Merrill Lynch estimated that with a 24% share and the current annual U.S. auto sales rate of 16.9 million vehicles, GM would bleed $2.4 billion in cash per year. If share plummeted to 20%, the cash burn would be $4.5 billion a year. Merrill analyst John A. Casesa estimates GM can last five years before it hits a liquidity crisis. "We believe that 25% market share is the threshold," Casesa says. "If GM falls below that, things get ugly fast."

 

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