Can GM Survive?

[WarrenJ]

It's more than slightly likely GM won't make it. Should that happen, the effect on Wall Street will be cosmic.

I like to buy good stocks when they are artificially depressed, but GM is currently roadkill. I'd dearly love to be wrong on this one, but I fear I'm not. I expect a GM bankruptcy.

[Bruce Nunnally]

The bankers took over GM in 1910, and William C Durant didn't manage to grab it back until 1916.

I don't think they will, but if GM does go under and stop operations, a huge number of automobile suppliers will follow, probably along with several other auto manufacturers.

[Cadillac Jim]

Don't count your chickens just yet. I didn't check it out, but I got an email last week from someone that GM goat a $50B subsidy to develop electric cars about a week ago, and that is just about what they need to weather the storm. The problem right now is that excess burn rate to expected return to profitability in 2011 or later will suck up more than cash available on a first-blush count, and there are no announced plans that would change that equation. The most hostile estimates that I have seen in the WSJ say that they would need $150B total, and that they have a current liquidity of $50B. I could go on, but I would expect that survival pressures will be met with appropriate action.

Since November 2007, GM's stock has changed gradually from an equity to a survival hedge, the transition apparently complete when the stock price dropped to about $10 in July 2008. A commodity stock trades according to the Merton or Jarrow-Turnbull model in which the stock as offered is viewed as a call option, with the strike price being the company's debt. When the debt exceeds the value of the company, the stock becomes worthless as a commodity and its value is determined by speculation that the stock will recover. That speculation is what is keeping GM stock trading in the $10 range.

Survival speculation is the mode of a lot of erstwhile blue-chip stocks because the mortgage crisis has destroyed easy credit that is the normal first recourse for large corporations to get through a crisis. GM is far from alone here. Survival speculation stocks are a high-risk, high-gain investment, where there is a high probability that the stock will eventually become worthless but an appreciable probability that there will be a large gain. The expected value model can be used to infer the investment community's estimate of the survival probability of the company by looking at the survival-speculation value ($10.50 for GM) against a par value that would represent the company after survival (say, $42 for GM). For GM this comes out to a 25% probability of survival. That's a lot higher than some would say, and a lot lower than I would say.

The up side is that we will likely see a change for the better in the GM culture that has ingrained itself since the Sloan period (1923-1956). Sloan followed the duPont leadership, in which the decision to move GM to ownership by duPont chemical company, then the dominant high-tech industry, was considered. Out of this period came a 19th Century arrogance that saw the GM Streetcar Scandal and a program to buy up used cars and scrap them, legal but embarrassing actions that used excess case from profits to decrease options available to the public and increase sales and prices of new cars. We still saw this through 2007 with GM building cars that they wanted to sell, not cars the public wanted to buy, to leverage their market position to increase profits; this very policy put GM in the position of depending on sport-utes and trucks for profits and simply maintaining a presence in smaller cars, where imports continue to attract entry-level buyers and build their brand loyalty and thus future market share. The other half of the coin is the joint failure of GM and the UAW to control long-term labor costs such as the Job Bank, pensions and medical care, which though seemingly laudable are unsustainable, and were committed to in a time frame that saw the piper coming to be paid long after those who made the deal were gone.

[KenD]

kill the union. They are as much to blame as anybody. Did you know that each GM employee is alotted a 3 hour washroom break per day if needed? LMAO.

[Ranger]

They won't kill the unions, nor will they cease operation. They'll go chapter 11 and renegotiate their contracts to something they can live with. The UAW will be in for a rude awakening. The other manufacturers will have to follow suit to stay on an even playing field. They need to look no farther than the airline industry to see their future.

[WarrenJ]

When the debt exceeds the value of the company, the stock becomes worthless as a commodity and its value is determined by speculation that the stock will recover. That speculation is what is keeping GM stock trading in the $10 range.

That pretty much says it all. "Reduced-form" ( Merton or Jarrow-Turnbull model ) not withstanding.

Regards,

Warren

[Marika]

What's odd about this whole thing is that while GM and other US car manufacturers are not doing very well here in the USA, they're doing very well over seas. So, they're not making money here, but that's our economy and the fact that everyone is tapped out on their credit cards and other debt that makes it impossible for anyone to buy a new car as often as they like. Yet over seas, GM and other US car manufacturers are making loads of money. Folks in England LOVE FORD, for example, especially their trucks, yet here in the USA, Ford is losing money in their truck division. GM is selling LOADS of cars and trucks in China, even high end cars like Cadillac. These companies have gone global and I like to look at that global picture. Things are bad for these companies here in the USA because of the American publics' bad spending habits and poor/improper use of credit, but not elsewhere.

[Regis]

What's odd about this whole thing is that while GM and other US car manufacturers are not doing very well here in the USA, they're doing very well over seas. So, they're not making money here, but that's our economy and the fact that everyone is tapped out on their credit cards and other debt that makes it impossible for anyone to buy a new car as often as they like. Yet over seas, GM and other US car manufacturers are making loads of money. Folks in England LOVE FORD, for example, especially their trucks, yet here in the USA, Ford is losing money in their truck division. GM is selling LOADS of cars and trucks in China, even high end cars like Cadillac. These companies have gone global and I like to look at that global picture. Things are bad for these companies here in the USA because of the American publics' bad spending habits and poor/improper use of credit, but not elsewhere.

That's pretty much what I was thinking. Aside from the credit abusive American public, there is the daunting issue of perception. US automakers have yet to get through many thick headed foreign buying Americans that domestic quality has come a long way since the 80s. As Marika pointed out, while domestically, US automakers are suffering, they are doing quite well in emerging/foreign markets. Apparently the old saying that "the grass is greener on the other side of the fence" has no language barriers.

[Marika]

What's odd about this whole thing is that while GM and other US car manufacturers are not doing very well here in the USA, they're doing very well over seas. So, they're not making money here, but that's our economy and the fact that everyone is tapped out on their credit cards and other debt that makes it impossible for anyone to buy a new car as often as they like. Yet over seas, GM and other US car manufacturers are making loads of money. Folks in England LOVE FORD, for example, especially their trucks, yet here in the USA, Ford is losing money in their truck division. GM is selling LOADS of cars and trucks in China, even high end cars like Cadillac. These companies have gone global and I like to look at that global picture. Things are bad for these companies here in the USA because of the American publics' bad spending habits and poor/improper use of credit, but not elsewhere.

That's pretty much what I was thinking. Aside from the credit abusive American public, there is the daunting issue of perception. US automakers have yet to get through many thick headed foreign buying Americans that domestic quality has come a long way since the 80s. As Marika pointed out, while domestically, US automakers are suffering, they are doing quite well in emerging/foreign markets. Apparently the old saying that "the grass is greener on the other side of the fence" has no language barriers.

I can't speak for other car manufacturers, but after spending a few months with my 2008 Impala I have to say I'm REALLY IMPRESSED with the overall quality of the car. When you consider that you can own a car that is roughly the same size and weight of a Cadillac Seville, handles nearly as well, is very comfortable and has an interior that no better or worse than most Japanese cars **costing twice as much**; a car that can cost you $22,000 IF you pay sticker price, you'll be hard pressed to find another car that will give you what the 2008 Impala gives you for the same price. For some odd reason, people have been brainwashed into believing that Japanese cars are the best value for the money and frankly, they are not. People see my Impala and they ask me all sorts of questions about it. I should receive a commission from GM for all the Impalas that have been sold because of me....

And did I mention the trunk space? It's mind boggling how much trunk space is inside the Impala. I can easily stuff two bodies inside of it.

[Cadillac Jim]

There has been an enormous amount of FUD about American cars since the 1970's, and I have heard much of it repeated by owners of imports. In particular, everything on American cars is supposed to break at xx,000 miles, the xx depending on who is talking. When my car hit 80,000 miles, one very good, very old, very smart friend asked whether "all that stuff" on my Cadillac was still working. At this late date, these people understand that my Cadillac will see 200,000 miles while I have it and be sold as a daily driver.

About 20 years ago, there was a pervasive rumor that GM was going to fold up Pontiac. When Pontiac sales and morale started to suffer, GM put a full-page ad in the WSJ that directly addressed the rumor, asked anyone who could substantiate its origin to call an 800 number, and pointed out that Pontiac outsold all imports combined. That killed the rumor flat.

The market share problem is another matter. GM must begin with a good selection of world-class entry-level cars from Chevrolet foremost, but also Pontiac, Oldsmobile, and even Buick, and perhaps Cadillac. They have them for sale overseas but are shy about bringing them here.

Most of my life I was a Chevrolet man, developing brand loyalty because a Chevy was my first car. For most Americans now, their first car is an import. My brand loyalty was broken by a very bad experience with a Chevrolet dealer and the loss of identity and class in Chevrolet models in the 1980's, but I was brought back to the fold by a Hughes employee pricing scheme while they were a subsidiary of GM -- on the way to buying a Taurus SHO, I discovered the Grand Am GT with Level 3 suspension and the Quad 4 HO, and I was shopping for a Corvette when I bought my ETC. World-class cars from Pontiac and Cadillac brought me back into the fold.

The underlying issue here is that GM has been run as a cash cow since the duPont days. The car people are still there on the division level but the best can easily get crossways with management (deLorean at Pontiac had a Pontiac Catalina coupe that was timed at 2.5 seconds, 0-60 mph by Car and Driver in 1965) and be forced out. Even Zora Arkus-Duntov had enormous difficulty with management, although he bore it quite well and with good humor, but he did reply, when asked in his retirement what his association was with the Corvette during his years with GM, replied "struggle." The business-comes-first thinking resulted in things like the streetcar scandal and use-car-scrapping of the 1930's, the neglect of Chevrolet in the 1980's, the rebadging era, when many GM models of various marques were essentially identical ("badge engineering"), and the heavy dependence on high-profit sport-utes and trucks that underlies the current unsustainable manufacturing infrastructure.