The way GM in particular is burning through its cash reserves it could be on the verge of bankruptcy early in the new year.
General Motors and Ford Motor reported larger than expected quarterly losses and said their cash reserves were running down faster than previously thought as they used more cash to keep their businesses going and restructure for the future.
GM said it had a $US4.2 billion third quarter operating loss and that its available cash reserves fell to $US16.2 billion on September 30 from $US21 billion at the end of June. Merger talks with Chrysler LLC were suspended.
GM's news came less than two hours after Ford announced it had lost $US2.98 billion for the quarter. (It had a net operating loss of $US129 million before one off items.)
But Ford used up $US7.7 billion in cash. Ford also cut another 2,300 white collar jobs in its US and Canadian businesses as it seeks lop costs by another 10%, after a 15% cut last year.
Ford reckons it can get through next year with a total of $US29 billion in cash and credit lines; but for GM, based on the cash spend in the September quarter of $US6.9 billion, the company will be close to bankruptcy by early 2009 because it has to keep between $US10 and $US14 billion in cash on its books as working capital.
GM shares fell 44c, or 9.2%, to $US4.36 in Friday trading. Ford shares rose 4c, or 2%, to $US2.02.
On top of this, GM had slumping sales; off 21% for the quarter as a whole (and down 33% in October as well). That's adding enormous pressures on all three companies and on the US Government to bail them out.
GM's quarterly revenues fell $US5.8 in the quarter, to $US37.9 billion from $US43.7 billion as sales fell in the US, Europe, Australia and other markets, and the company also slashed prices to try and cut stocks of unsold vehicles. Ford's revenues fell by around $US9 billion to $US31 billion.
GM also abandoned talks with Chrysler, which is now said to be talking to Hyundai of South Korea.
Now President-elect Barack Obama on Friday has indicated that help may be on the way.
He told a Chicago news conference, (after meeting his group of economic advisers Friday) that the Congress must pass an economic stimulus measure either before or just after he takes office in late January, and he mentioned aid for the auto industry.
Work is underway on merging packages in the House and the Senate and there's talk the new houses will meet in early January and pass a stimulus bill, which will be the first thing President Obama will sign.
Top executives of General Motors, Ford, Chrysler and the car workers union, the United Auto Workers, met with Congressional leaders late last week to discuss some $US50 billion more in loans, on top of the $25 billion in loans that Congress passed in September to help the companies do what they should have been doing anyway: building more efficient cars in smarter factories.
US analysts said Friday that Ford and GM had a total market cap of $US7 billion, while the privately owned Chrysler probably has a minimal value, if anything at all.
The Associated Press reported that if GM files for bankruptcy, Fitch Ratings analyst Mark Oline said there is "a very high risk" that it would pull in Ford and Chrysler too, because GM probably would be forced to discount vehicles deeply to generate cash for creditors, and other automakers would be forced to follow.
In other words, a domino effect. And hundreds of large and small suppliers would also be threatened. Credit would dry up and an estimated three million jobs directly and indirectly would be affected, according to estimates released last week.
GM is in an unsustainable situation, according to its profit statement.
The cash burn accelerated in the quarter and has brought forward the day of reckoning.
All this news is bad for the Ford and GM businesses in Australia. It's the last thing HQ would want to have to deal with: red ink in a small and not so important market like Australia.
The greater the pressure on GM and Ford, the greater the pressure on their businesses here and even if the US government throws a lifeline, that will be to help the US companies stay afloat, not outriders here.
GM says it will boost its cash reserves by $US5 billion by the end of next year through reduction of sales promotions and further production cuts in the first quarter.
That will be bad news for the media and advertising industry and for suppliers, like tyres, steel, autoparts, plastics and other services.
GM said it will cut capital spending to $US4.8 billion from $US7.2 billion and delay several vehicle models.
The two companies reported a day after Toyota slashed its profit forecast for the year to $US6.1 billion, a cut of more than 60%.
Toyota has already earned $US5.9 billion in the first half to September, so it will only earn around $US200 million over the next six months, or about $US30 a million. In some months the group could be in losses!
BMW abandoned its 2008 profit forecast after a second downgrade and a 63% plunge in third quarter earnings. Nissan and Honda both cut forecasts after reporting sharp falls in sales and earnings.
Credit rating agencies cut GM and Ford ratings deeper into junk status following the reports, or said they could do so given the rapid cash outflows.
"We expect cash outflows to quickly reduce the company's liquidity during the next few quarters, perhaps to levels that would force GM to consider a financial restructuring, even if it does not file for bankruptcy,'' Standard & Poor's said in a statement, while Moody's Investors said it expects the severity and duration of the US auto market downturn to hamper Ford's ability to slow its operating cash consumption.
