May 2, 2010

Contrasts in Carland

ToyotaFordYesGMchryslerNo1109Despite government and media assistance, GM and Chrysler can only pretend to be performing well, while Ford and Toyota really are.


Note: This column went up at Pajamas Media and was teased here at BizzyBlog on Friday. The title at PJM is “Fun with Numbers: GM ‘Payback’ of Taxpayer Loans.”

I have added the subtitles within the column.


Whitacre’s Whoppers

On April 21, Government/General Motors Chairman Ed Whitacre went to the pages of the Wall Street Journal to crow about how well the company is supposedly doing. In “The GM Bailout: Paid in Full,” he told readers the following:

We’re paying back—in full, with interest, years ahead of schedule—loans made to help fund the new GM. Our ability to pay back these loans less than a year after emerging from bankruptcy is a sign that our plan for building a new GM is working.

Whitacre then took to the airwaves to announce the payoff as a done deal, saying we “have repaid” the loans.

There are two “little” problems with Whitacre’s presentation. First and foremost, the “Bailout Paid in Full” headline in the Journal doesn’t pass the truth test no matter how far you try to stretch it. As Forbes Magazine’s Jerry Flint reminded readers:

That still leaves $43 billion. GM can say they paid us back because of the $50 billion in total support, only $7 billion was counted as a loan and the rest was traded for equity in the company that emerged from bankruptcy. But that is really an accounting trick so that GM doesn’t have to pay interest on that money.

That’s a great point. The government poured tens of billions into GM in return for a 61% ownership stake. Unless and until GM goes public and the government cashes out its shares for at least the $43 billion cited plus at least 5% for each year of delay to account for the time value of money, taxpayers will be getting the short end of the stick.

What’s more, the funds for GM’s loan “repayment” did not come from cash generated by operations. In fact, the company’s latest available financial information indicates that from September 30 (Page 2 at link) to December 31 (Page 123 at link) it burned through $2.4 billion in cash and equivalents, while its working capital (current assets minus current liabilities) fell by $2.75 billion. TARP Inspector General Neil Barofsky has asserted, as paraphrased by Fox News, that GM “only repaid the bailout money by dipping into a separate pot of bailout money.” Good luck finding that critical piece of information anywhere else in the establishment press.

Chrysler Cratering

The situation isn’t any better at GM’s fellow bailout recipient Chrysler, nor is the press coverage.

Chrysler lost $3.8 billion during the 205 days after it emerged from bankruptcy last year. It lost another $197 million in the first quarter of 2010. Here was the Associated Press’s headline about those contemporaneous announcements: “Chrysler Posts $197M Loss But Cash Balance Grows.”

One analyst is justifiably unimpressed: “Positive cash flow is being driven by dealer restocking and stretching payables.” The available information bears him out. Chrysler’s December 31 balance sheet showed negative working capital of over $6.5 billion, and a stunning in context $5.6 billion in trade liabilities. The company’s first quarter 2010 financial release included no formal financial statements, but given that its sales during the period trailed last year’s disastrous first quarter by over 5%, it’s hard to see how it generated $1.5 billion in cash without even more interest-free borrowing from suppliers and vendors.

Situation and Outlook

The two bailed-out companies had better hope that industrywide sales ramp up sharply, and soon. That’s because, despite the press’s attempts to minimize the impact, their competitors are eating their lunch in the U.S. market. A smaller piece of a fast-growing pie may be GM’s and especially Chrysler’s only hope.

GM’s March sales were barely ahead of Ford’s and Toyota’s, the latter in spite (maybe because?) of what has from all appearances been an orchestrated media-government campaign to discredit the company’s safety record. Chrysler’s puny first-quarter market share of 9.2% trailed Honda, and was barely ahead of Nissan.

Press and Government Water-Carriers

The press continues to carry GM’s and Chrysler’s water, even when reporting poll results. Last week the Associated Press, after sitting on the information for 40 days, excitedly told readers that “Buy American” is back in the car business. Upon closer examination (i.e., looking at the actual poll data), I learned that Toyota’s loss of 10% in best-quality mind share during the past four years was essentially offset by a 9% gain at Ford. GM’s best-quality mind share dropped by 3%, while Chrysler’s stayed the same. So the only so-called “Buy American” beneficiary has been Ford. Since the early March AP poll seems to have been timed to hit Toyota when it was most vulnerable, it’s reasonable to expect that the Japanese company’s best-quality perception will come back a bit — and when it does, it will likely hit GM and Chrysler much harder than Ford.

The government’s efforts at propping up its two weak wards even extend to its fuel-economy benchmarks, also known as greenhouse gas (GHG) emission standards. GM and Chrysler, with their heavier mixes of light trucks, have been given lower miles-per-gallon and GHG targets to hit in 2016 than their competitors. If saving the environment is so important, why do they get a break?

The GHG standards also have loopholes that would appear at least initially to benefit GM and Chrysler. Of particular interest is the so-called “super credit,” whereby a manufacturer’s sales of electric and plug-in hybrid vehicles (e.g., the Chevy Volt and a portion of whatever teeny-tiny cars Chrysler part-owner Fiat will try to foist on the public) might be counted multiple times in determining fleet-wide miles per gallon and GHG emissions. Further, a number of lawmakers believe that the two companies’ competitors may have been browbeaten last year into accepting stricter standards while GM and Chrysler were going through their bankruptcy proceedings. Tellingly, the Obama administration is refusing to release documents relating to those negotiations.

What is not yet known is the real wild card in the deck: How many more outraged Americans will refuse to buy GM and Chrysler vehicles because of the health care monstrosity foisted on the nation in March by the same government that controls them? We’ll begin learning the answer to that question when April’s figures come out.



  1. [...] Allison didn’t emphasize something I noted in a Friday Pajamas Media column that also went up at BizzyBlog today when looking at the company’s financial statements: … the funds for GM’s loan [...]

    Pingback by BizzyBlog — May 2, 2010 @ 6:33 pm

  2. I for one will NEVER buy a government truck. I have owned Ford and Dodge trucks in the past, going forward, any vehicle I buy will be Ford, Toyota, Subaru, or Honda.

    Comment by John Cunningham — May 2, 2010 @ 7:27 pm

  3. Here’s a question, when will the government put up it’s shares of GM and Chrysler stock? Is there some kind of time frame? Or is it only when the price of the stock exceeds the $43 billion the taxpayers were forced to invest?

    The reason I ask is, isn’t it a violation of SEC rules to make false public statements that will influence the price of a stock? Beyond simply trying to get good press for the company, isn’t Whitacre’s attempts to put a happy face on GM’s financial picture actually a criminal act of fraud IF the stock price is artificially propped up to induce any sale of GM stock? I have to wonder if those who currently hold stock options and stock in GM who are company officers are looking to sell off some of their positions to get out while the getting is good?

    It would be interesting to know which corporate officers are unloading GM stock. I can understand why government handlers would not be interested in challenging Whitacre’s statements since, they are looking for political cover. Talk about your conflict of interest, the government stands to recoup billions without losses if they prop up the stock and unload it on unsuspecting investors. The unions would take the same opportunity to unload their positions as well. Then when the stock tanks, oophs, that’s the risk of investing and it’s only rich people anyway… I smell gangster government.

    Comment by dscott — May 3, 2010 @ 2:02 am

  4. #3, the cynical answer to your opening question is “when they can intimidate the brokerage community into underwriting it at that price.”

    The problem is that a company in an established industry where the industry itself isn’t growing much, and which itself isn’t profitable, or even in its very best moments might be somewhat profitable, doesn’t command a $70 billion valuation ($43 billion divided by 61% ownership) when it goes public.

    Fat chance. Ford’s valuation right now is $43 billion — for 100% of the company. But that’s because Ford is growing. GM has seriously contracted in past year (no Saturn, no Hummer, no Pontiac, etc.), its revenues are lower than Ford’s, and there is serious doubt as to whether it can grow domestically (overseas, it’s doing much better).

    As a matter of fact, if it weren’t for the government owning it, no underwriter would even think about taking a company like GM public at the kind of valuation it is fantasizing over. Companies that go public are “supposed” to either have long track records of double-digit growth in revenues (almost always) and profits (usually), OR be speculative plays in brand-new industries and clearly marketed as such (e.g., dot-coms in the late 1990s, though it got to the point where they were clearly overhyped and the Clinton SEC did nothing to stop companies that were doing nothing and were probably not going to do anything from getting tons of unearned money from gullible investors). Recall that Ford was worth at least 80% less just 18-24 months ago, and you get an idea of how utterly ridiculous the idea of GM going public at full taxpayer recovery without serious coercion of some sort by the government really is.

    As to the SEC rules violation, as I noted at NB, GM is currently a “private” company that is not subject to SEC rules, and technically doesn’t have to issue financial info to the public at all. GM’s stock is not “publicly held,” its stock is not publicly traded, and its execs don’t have stock they can currently unload. Execs are probably getting stock or stock options which would be redeemable/exercisable if/when GM goes public.

    Comment by TBlumer — May 3, 2010 @ 7:26 am

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