GM's Not the Only One: Ford Burning Through Cash

By Jason Simpkins

America’s two leading auto manufacturers, Ford Motor Co. (F) and General Motors Corp. (GM), reported heavy third-quarter losses Friday and are under a severe liquidity strain. Both are seeking emergency loans from governments in the United States and Europe. 

Ford posted a $2.98 billion operating loss for the quarter ended Sept. 30. Revenue fell 22% to $32.1 billion, forcing the Dearborn, Mich.-based automotive icon to burn through $7.7 billion in cash.

The automaker’s cash reserves dropped from $26.6 billion at the end of the second quarter to $18.9 billion at the end of September. If the company continues to burn cash at this rate, Ford will run out of money by April 2009.

“Cash burn is the No. 1 issue,” Rebecca Lindland, an analyst at IHS Global Insight Inc., said in an interview with Bloomberg Television. “We associate cash burn with General Motors. It has not always been a problem with Ford. That is potentially a new problem.”

Ford Chief Financial Officer Lewis Booth insisted that the company has adequate liquidity and said Ford is taking steps to fortify its position going forward.

“We’re comfortable with our liquidity,” Booth said. “We are putting in place a lot of actions to make sure we stay comfortable with our liquidity situation.”

Those measures include: Reducing inventory, eliminating merit-based pay increases for salaried employees in North America, cutting performance bonuses for salaried employees worldwide, and the suspending matching contributions to salaried U.S. employees’ 401(k) retirement accounts.

Ford will likely cut more jobs as well. Ford dismissed 1,500 salaried employees in the third quarter, after shedding 200 in the second quarter. The company hopes to reduce salaried personnel costs by another 10% by the end of January.

At the end of September, Ford had 22,600 salaried workers and 57,600 hourly workers in North America. That is a total of 80,200, a 41% reduction from 2005, the Detroit Free Press reported.

Cash Strapped GM Waves White Flag

General Motors is facing a similar dilemma. The nation’s largest automaker reported a third-quarter operating loss of $4.2 billion. GM also said that the amount of cash it has on hand fell from $21 billion at the end of June to $16.2 billion at the end of September.

GM said that it could very well run out of cash by year’s end.

“Even if GM implements the planned operating actions that are substantially within its control, GM’s estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business," the company said in a news release.

"Looking into the first two quarters of 2009, even with its planned actions, the company’s estimated liquidity will fall significantly short of that amount unless economic and automotive industry conditions significantly improve, it receives substantial proceeds from asset sales, takes more aggressive working capital initiatives, gains access to capital markets and other private sources of funding, receives government funding under one or more current or future programs,” the statement read.

Like Ford, GM outlined a plan to boost liquidity with the goal of generating $20 billion in cash by the end of next year. The company hopes to cut capital spending to $4.8 billion in 2009 by delaying the debut of select vehicle programs, Bloomberg reported. GM will also save $1.5 billion by slashing its advertising budget and dealer promotion support.

The plan will also include job cuts. GM aims to cut 30% of its salaried-workforce expenses. 

The company also has suspended merger talks with Chrysler LLC – a division of Cerberus Capital Management LP. While it did not specifically name Chrysler, GM said it was setting aside considerations for a "strategic acquisition."

“GM is making a pretty direct plea for help,” Pete Hastings, a fixed-income analyst at Morgan Keegan Inc., told Bloomberg. “The message is, ‘We’ve done all the things we can do, and we need help. And if we don’t get help, fill in the blanks.’”

GM, Ford, and Chrysler all asked to be included in the U.S. government’s $700 billion bailout plan, but were denied. They are currently seeking $50 billion in federal loans in the form of a package that would devote $25 billion to healthcare costs and $25 billion to aid general liquidity. Congress earlier this year approved a $25 billion loan program to assist in the development of more-fuel-efficient vehicles.

Detroit’s Big Three have also requested $51 billion (40 billion euros) in loans from the European Commission (EC).

“Either the federal government provides money for a bailout and lets the industry retool, restructure, and move ahead, or the industry dies,” Dennis Virag, president of Automotive Consulting Group in Ann Arbor, told Bloomberg Television.

Original post

Comments

[Paul Killinger:]

This is not as complex a problem as some people make it out to be. All these companies need to do is to bring there COSTS in line with their REVENUES. Business 101, if you will.

But those who needlessly complicate this issue are simply attempting to blind us to the emotion of the moment. So if the government gives these automakers $50 or $100 billion to stay afloat in their present structure, what's next? Another $50 or $100 billion, that's all. Deja vu all over again.

It is regrettable that this has happened. It will surely ruin people's lives and families. But having the taxpayers foot the bill FROM NOW ON isn't logical. The answer lies in taking the steps necessary to restoring these companies to PROFITABILITY. Why not start today?

2008 Nov 09 09:45 AM

[John D:]

Why are GM, Ford & Chrysler burning through cash - because instead of closing the doors and throwing employees out into the cold they are looking ahead and hoping that the crisis in all areas of the economy will start to rebound soon which takes CAPITOL. They all need North Americans to do the same - not turn their backs and run - If there is NO automotive industry here in a couple of years - where does everyone think all of the profits that normally filter back into our economy will be going - NOT HERE !!! Support your industries & businesses - like they are trying to support YOU!!

2008 Nov 09 09:51 AM

[Paul Killinger:]

It was government meddling, intervention, mandates and regulations that caused the problem in the first place. That and an archaic management structure and shortsighted union leaders. How can ANYONE believe MORE of the SAME will fix it? It will only make things that much worse!

2008 Nov 09 09:52 AM

[Paul Killinger:]

This all traces back to unrealistic union contracts and company lobbyists exploiting CAFE standards to exempt SUV's as trucks. Had those involved chosen NOT to deploy these tactics, they wouldn't be in the dilemma they find themselves today.

So who's next? The airlines perhaps? Why not homeowners and state and local governments? Or how about those who've lost money in the markets? Why not ALL of us?

The only problem is this never turns out well. Indeed, it only ever serves to make things that much worse.

2008 Nov 09 10:13 AM

[archie crofoot:]

GM keeps slashing everything from salaried white collar workers. The management at GM doesnt have enough guts to tackle the main issue the union. They are the ones that have gone on strike at plant even as GM has been struggling. Why has the salaried employees lost everything and the union employees lost nothing. This just goes to show how gutless the top management is at GM. They will receive their millions in pay for these actions. I was promised i would receive health care if I retired early. Is their no breach of promise.. or is that just to people who can aford to fight for it. If GM goes bankrupt I may lose my pension Top management will take their money,
and say Oh Well"

2008 Nov 09 04:11 PM