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Wagoner Gives Further Assurances on GM's Liquidity as Shares Fall to 53-Year Low
27 Jun 08
GM's CEO is doing his best to allay market fears as the biggest automaker in the United States continues to face harsh operating conditions.
Global Insight Perspective | | Significance | GM's Chief Executive Rick Wagoner has repeated assurances that the company has sufficient liquidity to continue operations until the end of the year, despite the company's share price falling to its lowest level in 53 years. | Implications | The Detroit Big Three are all under immense financial pressure in their home market as a result of a slump in SUV truck sales due to rising oil prices and the slowing economy. This has seen GM, Ford and Chrysler's credit ratings slashed and a significant downward trend in share prices. | Outlook | While Wagoner is doing his best to reassure the markets and the company's investors, there is little doubt that trading conditions remain extremely difficult for GM and the company must find additional cost savings. To this end GM is also looking at increasing component sourcing from the domestic market. |
Wagoner Moves to Dampen Market Speculation General Motors (GM) CEO Rick Wagoner has once more affirmed his confidence in the ability of the biggest automaker in the United States to see out the difficult operating conditions the company is facing. Wagoner has said that the company has enough liquidity to maintain current operations until the end of the year and beyond that. Speaking on the sidelines of an economic summit with U.S. presidential candidate Barack Obama, Wagoner said, "As we've said before, we've got a very good, solid funding base under any scenario we see, solid through the end of this year," adding, "We have a lot of options to fund beyond that." However, the confidence of Wagoner is not shared by the stock market or debt re-financing markets. GM's share price fell further from a 33-year low earlier in the week to its lowest price since 1955. This follows a move earlier in the week by several U.S. financial ratings agencies to downgrade the credit ratings of GM and other domestic automakers (see United States: 23 June 2008: Automakers' Credit Ratings Downgraded After Stocks Tumble). Standard & Poor's (S&P) placed GM, Ford and Chrysler on its CreditWatch Negative rating, while Moody's has downgraded the company's from stable to negative. This will make the task of finding debt re-financing even harder, at a time when the credit crunch has increased the cost of borrowing and made financial institutions increasingly cautious about what they lend and to whom. GM is desperately trying to stabilise retail sales in the domestic market as it backs away from loss-making fleet sales, while at the same time continuing on an aggressive cost-cutting programme in order to re-energise its fortunes and profitability in its home market. It announced earlier this week that it will cut a further 170,000 units from its U.S. production forecasts for 2008 in the second half of the year with cuts coming from its truck and sport utility vehicle (SUV) production operations. Affected plants will include those in Arlington, Texas; Fort Wayne, Indiana; Janesville, Wisconsin; Shreveport, Louisiana; Silao (Mexico); and Oshawa, Ontario (Canada), which will be closed for between one and 10 weeks from July until the end of the year (see United States: 24 June 2008: GM Cuts Truck/SUV Production Plans, Adds Incentives; Stock Continues to Slide). However, GM will also increase its passenger car and crossover utility vehicle (CUV) production output by 47,000 units to partially compensate and improve the company's mix of dealer model offerings. This is at a time when GM dealers are sat on inventories of unsold SUVs and trucks and the company is looking to sell the Hummer brand, which has a model range that is increasingly out of step with the era of US$4 per gallon gasoline (petrol) prices. GM is looking at strategies to increase production efficiency and lower costs and to this end the company is looking to source more components from the U.S. market, both for domestic and overseas manufacturing operations. Rising shipping costs and a weak dollar have been the drivers for this strategy, which GM's head of global purchasing Bo Andersson says the company is looking at on a case-by-case basis. He said, "With the fall of the dollar, U.S. suppliers are more competitive on a global basis." Outlook and Implications The nightmare scenario that was posited by Global Insight in a special report more than three years ago appears close to becoming a reality (see United States: 11 February 2005: Challenging Scenarios: Could Detroit's Automakers Survive a Perfect Storm?). With the cost of gasoline in the United States having almost doubled to over US$4 a gallon in 18 months across the country, GM, Ford and Chrysler have found themselves increasingly out of step with market trends as a result of their heavy reliance on trucks and SUVs. These models have been the traditional "bread and butter" vehicles for the likes of GM, but rising oil prices and the worsening economic climate has seen a marked change in consumer behaviour. This change has led to the Honda Civic and Toyota Camry outselling the Ford F150 for the first time ever in May, after the F150 had been the best selling light vehicle in the United States for the previous 17 years. Despite Wagoner's attempts to calm the markets and dampen speculation on GM's financial foundations it appears that the options are narrowing for the company's management. The company has already sold credit arm GMAC and will be hard pushed to find a buyer for Hummer that will offer GM favourable terms. GM is also struggling to counter the increasingly strong presence of Toyota and Honda in the passenger car market. But some positives do remain on the horizon for GM. The company's bold investment in the Volt plug-in hybrid is undoubtedly the right strategic move for GM. The Volt's relatively untried technology retains some inherent risk, but the model is just what GM needs to give its brand an important boost and image makeover. However, it should be remembered that only 10,000 units of the model will be built in its first full year of production in 2011, rising to 60,000 in 2012 (see United States: 24 June 2008: Chevrolet Targets 60,000 Volts for 2012 Production). It will be some time before the Volt, and related models, are being manufactured in sufficient numbers to have a significant effect on GM's bottom line, but the model's value to GM should not be underestimated. In addition, the current presidential race to replace George W. Bush in the White House in 2009 could also prove decisive to GM's future. Any prospect of GM facing financial catastrophe in the final months of the Bush presidency would surely see some kind of intervention from the Federal government. Likewise, the symbolism of GM failing in the first term of either John McCain or Barack Obama's presidency would be disastrous for either man's future prospects, and would also likely generate some sort of state-funded financial bail-out.
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