General Motors Corp., for 77 years the world's largest automaker and an icon of American industry, revealed a dire financial outlook Friday that has the company teetering on the edge of bankruptcy.
Ford Motor Co. delivered its own grim forecast -- although not immediately as dire as GM's position.
Hemorrhaging cash and with sales dropping to 25-year lows last month, the Detroit automakers announced financial results that show they each are burning through more than $2 billion a month to maintain operations. GM warned that its cash reserves could sink below the minimum level it needs to operate by year's end unless it gets federal aid or can tap other resources.
GM Chairman and Chief Executive Officer Rick Wagoner said the company will take every step possible to avoid bankruptcy -- which GM continues to insist is not an option -- as the automaker attempts to survive the squeeze of a global credit crunch on vehicle sales.
"We're convinced that the consequences of bankruptcy would be dire," Wagoner said. "We need to find a way to get through this, and that's really our focus."
GM, Ford and Chrysler LLC are seeking federal loans to help them weather the financial crisis and move forward to retool their companies.
GM reported a net loss of $2.5 billion in the third quarter and said it burned through $6.9 billion in cash to end September with $16.2 billion in cash. That is just barely above the $11 billion to $14 billion GM said it needs to operate and doesn't include its cash burn from October.
The mounting losses led GM to announce:
? It's putting merger talks with Chrysler LLC on hold.
? It will cut 3,600 hourly workers and eliminate about 2,000 more salaried jobs.
? It will cut costs by $5 billion in addition to its July plan to cut $10 billion in costs and raise another $5 billion through new debt and asset sales.
Immediate assistance needed
"Even if GM implements the planned operating actions that are substantially within its control, GM's estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business," Chief Financial Officer Ray Young said during a conference call with analysts.
By no later than next June, the automaker said, it would fall significantly short of the amount needed to operate.
GM wouldn't say how much cash it had on hand at the end of October, but analysts say they believe the automaker is operating very close to its minimum level and must receive substantial government aid to avoid bankruptcy. GM shares closed Friday down 44 cents, or 9.2%, at $4.36 per share.
Top executives of GM, Ford and Chrysler and the UAW president met with Congressional leaders Thursday to discuss getting a reported $50 billion in loans to help the companies withstand the weak economy and pay for future needs. The money would be in addition to $25 billion in loans that Congress passed in September to help retool auto plants to build more fuel-efficient vehicles.
GM and other U.S. automakers need such aid or the domestic auto industry will fall, taking with it nearly 3 million jobs and demolishing the retirement funds of people throughout the country, analysts said. For every job in an assembly plant, there are 7.5 jobs with auto parts suppliers and other companies.
A traditional bankruptcy wouldn't work for GM, said Jim Hall, director of analysis for 2953Analytics.
"Their contingency plan is they need a government bridge loan," he said. "As soon as they announce a bankruptcy, their buyer base will dry up. Their supplier base will dry up. As soon as the sales drop, there would be dissolution."
Perceptions of running out of cash can quickly turn into reality at a company like GM. At year's end, GM's outside auditors have to say whether there's substantial doubt about the company's ability to be, in business parlance, a going concern. If the auditors make such a statement, GM will violate a number of credit agreements, including at least $6 billion in loans -- which banks could call back immediately. The automaker would either have to get a waiver from its lenders or secure even more loans.
Liquidity plan
In the meantime, GM said it is doing everything within its power to conserve cash without seriously damaging the product plans it views as vital to generating future revenue.
Because of the seizing of credit markets and the precipitous drop in U.S. sales in the last few months, GM has said the plan it announced in July to conserve and raise $15 billion in cash will no longer be enough for the automaker to survive through 2009.
The automaker said it is on track to or has completed most of the $10 billion in cost cuts it announced in July, but the company said it is unable to borrow the $2 billion to $3 billion it planned to borrow and can no longer count on raising $2 billion to $4 billion through asset sales.
The automaker is seeking buyers for its Hummer brand of SUVs, the ACDelco parts distribution division and a manufacturing plant in Strasbourg, France.
More cuts planned
The automaker announced $5 billion in additional cost-cutting actions Friday and said it is now basing its business plan on much lower U.S. sales expectations than it did for its original July 15 restructuring plan.
At that time, GM made its plans based on U.S. industry light vehicle sales of at least 14 million, which at the time seemed conservative to most analysts. In 2007, U.S. consumers purchased 16.2 million vehicles. So far this year, however, the U.S. auto industry is on track to sell only 13.8 million light vehicles.
So GM has adjusted its business plan to be prepared for U.S. light vehicle sales of 11.7 million in 2009 and 12.7 million in 2010.
Based on those new projects and its dwindling cash reserves, the automaker said it amended its July cost-cutting with $5 billion more in cuts. Those include:
? Cutting another $500 million in salaried costs for a total elimination of more than 7,000 U.S. and Canadian salaried and contract employees, including the approximately 5,000 announced July 15.
? Cutting capital spending in 2009 to $4.8 billion from a planned $7.2 billion by reducing program spending.
? Slashing structural costs by $1.5 billion in addition to the $2.5 billion planned in July by further cutting things such as spending to trim the dealer network and engineering expenses.
? Reducing working capital expenses an additional $500 million.
As part of its production cuts, GM on Friday also announced plans to indefinitely lay off 3,600 hourly workers at 10 plants beginning early next year as it slows the rate of production at those plants in response to the slackened consumer demand for new vehicles.
Still, absent a dramatic and unexpected turnaround in the global economy and auto industry, GM said it must have outside help to weather the credit crunch.
"The problems in the auto industry are a direct result of the credit crisis," Wagoner said. "The U.S. government's actions to help stabilize the credit markets and eventually ease the credit crunch are an essential first step to the economy's and the auto industry's recovery, but further strong act
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