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What's Killing General Motors?

December 10, 2005

Its balance sheet, for starters.

Toyota is catching up to General Motors in terms of sheer size, but has passed up the Detroit behemoth in many respects.

The proof of looming disaster is in the balance sheet. Here is GM's balance sheet, full of bullet holes. Here is Toyota's balance sheet, which is bulletproof. Focus on a few items, like long-term debt and equity. Note that General Motors has a $480 billion balance sheet, and only $28 billion of equity. (Balance sheets as of Dec 2004)

Toyota has a $142 billion balance sheet, with $84 billion in equity. And it has one-sixth of the debt load as GM does. Rumor has long been that Toyota will/may acquire the GM behemoth. That is unlikely to happen in any straight sort of business sense. Perhaps GM has two options for survival: a bailout by the Feds, which Leviathan likely couldn't afford, or, an acquisition by a foreign company such as Toyota. But why would Toyota, with its masterful financial outlook and its vastly different culture, want to acquire an inefficient, union-laden abnormality with $300 billion in debt? It wouldn't, unless of course, the acquisition was bankrolled by the US government, which would be far less costly than a total bailout. Bankruptcy is one way in which Big Guv could subsidize a merger/acquisition, but a dangerous move for an auto manufacturer that relies on brand loyalty.

Despite turning cash flow-negative, GM has cash, and a lot of it, and that is its only ace-in-the-hole. Right now, GM's cash comes from its GMAC financing arm, its VEBA (pre-funded retiree account), and large-sum bank lines. GM may soon have to hold back dividends to keep ahold of its cash. Another huge cash drain for GM would be a Delphi strike, which could drain $10 billion+ over the span of a quarter.

Though it is only Business Week magaize, this is a fantastic rundown of the current General Motors scenario.

All said, it explains some of what I have been arguing about GM's potential for bankruptcy—that it would be a deadly move on GM's part, considering that it could lose a major portion of its customer base due to the reasons described therein. People don't want to buy cars—a long-term purchase—from an auto manufacturer in Chapter 11. The rental market—another way the American automakers stay afloat—would also cave in, due to the liquidation factor that car rental companies would be faced with were GM to claim bankruptcy.

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