GM's woes

Yesterday, General Motors management took the time to explain how it intended to preserve the group's liquidity in 2008 and 2009. This latest set of restructuring measures comes just six weeks after the previous one (four truck plant closures and sale of the Hummer brand). It involves reducing office worker costs by 20% -- which would presumably mean making several thousand people redundant. This and other measures (including -- pensioners take note -- lower retiree healthcare) would help meet a new target of cutting costs by $10 billion. GM will also stop paying dividend on its common stock for now, reduce capital expenditure by $1.5 billion vs. plan, and sell up to $4 billion worth of assets (e.g. Hummer) to generate liquidity. GM holds some $24 billion in cash, but has an amazing cash-burning track-record. None of the new measures goes beyond the short-term: on the contrary, further cutbacks on white-collars and capital expenditure may well completely jeopardize GM's chances of coming up with a constructive longer-term vision.

Debt and equity analysts alike do not appear to be fooled by GM's latest announcement. Yesterday evening, after market hours, Moody's placed GM's ratings on review for a possible further downgrade (out of solidarity, Chrysler Automotive LLC's ratings are also on review, and those of Ford Motor Co remain on negative outlook). GM's senior unsecured debt is already rated Caa1, highlighting a very high likelihood of default. With sky-high oil prices and a GM portfolio full of fuel-guzzling models, who will want to take up the $2 to $3 billion of new financing that GM intends to issue? Surely not your conservative portfolio manager, but an aggressive breed that is probably betting on a debt-to-equity swap several years (or quarters?) down the road.

Pushing metal and buying metal

Pushing it... In the United States, GM, Ford and their fellow carmakers are increasingly creative in their efforts to "push metal" out of their factories. For instance, on Monday, GM announced, among other things, 6-year 0% car loans aimed at slowing the decline in some its previously most-successful models, which have now become unattractive due to their fuel requirements and consumer demand sluggishness. The GM share price recently hit a 26-year low: maybe the market does not really believe these measures will help much?

Buying it... Audi, part of the Volkswagen AG group, warned on Sunday that it may need to raise prices faster than inflation in 2009 due to higher raw material and other costs. This will depend on what competitors do. Nissan said that steel groups (e.g. ArcelorMittal, world #1) were bound to raise their prices significantly, perhaps in 2009: the carmaker is therefore planning to reflect this in its car prices, starting with markets where Nissan is strongest, such as +2% or +3% in Japan. The timing will depend on when its competitors start to announce similar intentions. Conversely, Fiat's spokesman said today that its Auto division did not plan an increase its prices, especially in the current market of sharply declining Italian car registration numbers. A Credit Suisse analyst estimates that raising prices by 5% to 10% would result in a 10% to 20% loss in volumes and therefore (additional) over-capacity. Are we going back full circle with carmakers desperately trying to "push metal" at any cost again?