Can General Motors come back?

Fortunately for GM, only about $6 billion of that debt comes due in the next five years. (If you use the $500 million burn rate of the March quarter, the situation looks a bit better, with GM’s cash balance falling to $13 billion.)

In early July, reports from analysts at Merrill Lynch (MER, news, msgs) and Citigroup (C, news, msgs) argued that the $4 billion margin, the start-of-2010 projection from GM's current burn rate, would not be enough. Yet the most recent auto sales numbers show the plunge getting worse. GM managed to hold its June sales decline to just 18.5% by staging a 72-hour sale with 0% financing during three days at the end of the month, for example.

If the slowdown is deeper than projected and the turnaround doesn't come until 2011 or later, these analysts say, GM might be headed for bankruptcy.

Piffle, responds GM CEO Rick Wagoner. GM has plenty of cash to make it to a recovery. And if necessary, the company can raise more.

GM moves to hold on to cash

Perhaps realizing that investors aren't likely to take the word of a CEO who has presided over a 61% drop in the price of GM shares from Dec. 31 to July 14, Wagoner announced July 15 a package of measures to cut costs and raise capital designed to demonstrate that GM wasn't in danger of running out of cash.

Here's what General Motors announced:

• An end to the 25-cent-a-share quarterly dividend.

• Cuts of about 20% to the company's salaried work force of 32,000.

• The elimination of company-paid health insurance for retired white-collar workers older than 65.

• The closing of four truck plants, with more plant closings on the way.

• Plans to raise an additional $2 billion to $4 billion through asset sales and an additional $2 billion to $3 billion through new financing secured by company assets.

• The elimination of cash bonuses for executives.

• A delay in paying $1.7 billion owed to the union retiree health care fund.

• A reduction in capital spending of $1.5 billion in 2009.

Total savings: $10 billion a year. Total new financing: $4 billion to $7 billion.

That, Wagoner said, will be enough to get the company through 2010. In its projections, the company is assuming that U.S. auto sales will fall to 14 million units in 2008 and 2009 and that oil will cost $130 to $150 a barrel.

Betting on high fuel economy

Crucially, the cuts seem to preserve all the new models that GM needs to drive a sales recovery. The product development cuts are a result of delaying plans to design future large pickups and SUVs.

The company plans to bring five new products to the U.S. market by the third quarter of 2010, including a small Chevrolet, the Cruze (a replacement for the current Cobalt); the Buick Invicta sedan, a new sports wagon; and a coupe version of its Cadillac CTS sedan. A new direct-injection turbo four-cylinder engine is a critical element of the turnaround. The goal, according to Bob Lutz, the vice chairman in charge of product planning, is to give GM best-in-class fuel economy in every market from small to big models.

And if everything goes according to plan, GM's electric car, the Volt, will go into production in 2010 and hit full production in 2012.

• Talk back: Can GM overcome its huge problems?

And 2010 is critical for General Motors in another way. The 2007 agreement with the United Auto Workers set up a voluntary employee beneficiary association that, if approved by the courts, would transfer $40 billion in health care liabilities off GM's balance sheet. The savings, the company estimates, would run about $2.6 billion to $3.4 billion in 2010 or 2011. Court approval is expected in 2010. The savings would go a long way toward bringing GM's costs in line with other carmakers operating in North America.

Continued: New small models

< previous |  1 | 2 | 3 | next >