Why GM Is Repaying Bailout Money

There are a lot of threads to tie together in today’s reporting of news in the auto sector.

General Motors has reported a third-quarter loss of $1.15 billion. But all indications are that car sales continue to outpace expectations in the United States. Meanwhile, there are conflicting stories that GM both plans to pay back its bailout money, and to use it to help its ailing European operations. I will try to tie all these stories into a common thread.

First are the earnings. This is the first report by General Motors since leaving bankruptcy. The results are decidedly mixed showing increasing sales, but a large loss and declining liquidity.

The video above points to losses and negative cash flow. But Bloomberg has reported that GM had significantly positive cash flow in Q3: $3.3 billion worth. Irrespective, sales are up.

The New York Times’ Deal Book says:

Excluding taxes and one-time items like the costs related to restructuring its dealership network, G.M. said its operations lost $261 million from July 10 and September 30. The loss in North America was $651 million.

For the entire third quarter, including the final 10 days of G.M.’s bankruptcy, the company said its revenue was $28 billion, up 21 percent from the second quarter.

In addition, retail sales have revealed that car sales in the U.S. are still relatively brisk for October despite the expiration of cash for clunkers. So, GM is benefitting from more sales, but is still not making money and still seeing cash go out the door. Obviously, they are going to need to cut costs even more, unless they count on sales returning to pre-crisis levels. However, all indications are that they do, as CEO Fritz Henderson says revenue growth is their number one priority.

“We have significantly more work to do, but today’s results provide evidence of the solid foundation we’re building for the new G.M.,” the chief executive, Fritz Henderson, said in a statement. “With a healthier balance sheet and a competitive cost structure, our focus is on driving top line performance.”

Meanwhile, in what should be seen as a PR move, General Motors has also announced it will begin repaying government money, the first $1 billion to be repaid in December. The company will make $1 billion payments to the U.S. government and $200 million payments to the Canadian government every quarter. Given the fact that General Motors is still losing money, it would make sense for them to delay repayment. However, I reckon they are going to repay early in order to tamp down criticism about their government-funded bailout.

The same is true in Germany as well as GM has also announced it will repay ALL German state aid before month’s close. That is big. It significantly reduces the German government’s leverage over GM plans for restructuring in Germany.

This makes the recent statements about using bailout funds to bolster European operations seem inexplicable. If GM is losing money and needs to use bailout funds to plug up holes in Europe because it has decided to renege on an agreement to sell operations, why is it paying back bailout funds? Is it not obvious the company needs the money?

My interpretation of GM’s actions is this: they are still a loss-making company and their cost basis is unprofitable at present sales levels. In order to return to profitability, they will need to further reduce costs or increase sales. At present, management have opted to grow the top line – and this makes retaining the European operations vital as the auto technology at Opel (OPELF.PK) is considered first class.

So, GM has reneged on the Opel sale, risking the political backlash, because it is flush with bailout cash. However, it knows that its desire to use these funds to stabilize the European business is likely to invite populist cries in North America. This is why they have announced the repayment schedule today; it is purely a public relations maneuver to quell any anti-bailout sentiment. As GM is not publicly traded, we do not have stock prices as a gauge of how receptive investors are to these latest moves. But, according to Bloomberg, GM 8 3/8 bonds maturing 2033 jumped significantly, adding $2.63 to move to $20.3 on $100 par value.

You can expect to see GM as a topic in both the business and political press for some time to come.

Comments

[ryanclarke]

Should the U.S. consumer purchase a new electric vehicle from GM next year? Where are the natural gas cars? How about hydrogen + oxygen = water powered cars GM was advertising a couple of years ago? Where is the consumer going to get $50,000 to buy one of these new cars?

THE REAL QUESTION IS : WHY ISN'T GM ABLE TO TURN A PROFIT EVEN AFTER GOING THROUGH BANKRUPTCY AND GETTING SOME RELIEF FROM ITS DEBT?

The answer is simple. Because there is still too much debt on GM's books to turn a profit. Fritz is counting on 15 million plus in car sales next year. I have my doubts ... unless they want to sell electic vehicles for $10,000 a car.

2009 Nov 16 02:16 PM

[Leftfield]

I'm sure more answers to these contradictory announcements from GM will come from the fine print. The 30-year-old lawyer/Obama campaign worker/car czar probably gave GM instructions on his specialty: Doublespeak. More useful in the US government owned and controlled economy now than industrial prowess would be.

2009 Nov 16 03:05 PM

[William Legrand]

GM's decision to start repaying TARP money is a marketing move. Far too many U.S. consumers will no longer consider GM or Chrysler vehicles after the very-public taxpayer-funded bailouts, union givebacks/gifts, and astronomical executive payouts/bonuses. More bailout money will only make matters worse. GM's only hope of reclaiming any of the lost U.S. consumer base is by shining bright lights on an attempt to repay the loans.

2009 Nov 16 05:08 PM

[TexasRedNeck]

Let's see, GM lost a billion last quarter but is still able to "pay back" a billion. Sounds like something only the government could do--OH wait GM is owned by the government that explains it--Great article Thanks

2009 Nov 17 01:07 AM

[Liz]

GM finally found its backbone and wants Uncle Sam out of its ... erm, hair?

2009 Nov 17 03:11 AM

[teejcee44]

Isn't it interesting that GM is criticized for having the government intervene on their half because the economy tanked, but it is OK for the Japanese to receive government subsidies for Years, and Years and Years, and no one will mention that they are owned by the Japanese government, and how wonderful the Japanese cars are, since the Japanese government handed them all they money they needed to make such great cars. I wonder how much money the Japanese car manufacturers got from their government over those many years, in comparison to GM? Hummmmm

2009 Nov 17 08:34 AM

[Glenn Mercer]

I applaud this poster for noting that revenue is as much a problem for GM as cost. For way too long Detroit has attacked the low-profit problem by working the cost lever only. That lever is pretty much used up by now: the problem is LOW REALIZED PRICE. From JD Power we have 2008 data showing similarly-equipped cars and transaction prices:

Chevy Cobalt $15,600
Ford Focus $15,600
Honda Civic $19,300

Now, throw in all the arguments about what is directly comparable and what is not, and what level of options are on or off, etc. etc., the challenge for Detroit is that its products head-to-head sell for thousands less than the Asian rivals. Which means GM must spend heavily and effectively now on improving product. Taking another $500 out of cost is great (with only 20 hours of UAW assembly labor in a Cobalt anyway you'd need a $25/hour wage cut to do that!), but until they can get PRICE UP, all the COST DOWN in the world won't help much.

2009 Nov 17 08:47 AM

[Moon Kil Woong]

I predict GM will be shilling for some other government money before the total is repaid. The author is correct that it makes little business sense to repay when they are still losing money save for the fact where it allows it to avoid some government obligation or another. This is bad for the taxpayer but cloaked as being quite good.

2009 Nov 17 09:03 AM

[teejcee44]

By the way, I am NOT giving GM an out here. I think they are totally responsible for the fact that they didn't control costs, and got into this mess by themselves. Being fiscally responsible comes at the very top of the list of businesses if they want to continue into the future. Sometimes there are extenuating circumstances, but the ultimate goal should be to sustain GROWTH and curtail losses in the long-term, something that they obviously don't understand in the short-term.

2009 Nov 17 09:04 AM

[doubleguns]

Glenn I see the problem as this. In ten years we will see 10 yr old civics, but probably very few 10 yr old cobalts. Thus the price difference. People will pay more for quality. GM CAN'T raise their prices.

Who would buy a cobalt priced same as a civic?

Frankly until they commit to pay back ALL (not just 6.7 billion) of the TARP money they borrowed who would buy a GM?

2009 Nov 17 09:04 AM

[robinjoe]

As one can always expect for GM, the focus in NEVER on making great products at a great price and making the buying experience the best.

2009 Nov 17 09:21 AM

[Mike from NYC]

More shenanigans from GM and another publicity stunt to get Americans to buy GM products. I'm sure that with the $50 BILLION they received from the US Taxpayer they should have been able to make at least a BILLION if they invested it with GS and used the proceeds to make the payment.

2009 Nov 17 09:25 AM

[Sharon Merkle]

When GM and Chrysler are finally dead and their bodies burned, the most politically powerful union in the country will turn on Ford because it has the only brains left to eat. When that organization drifts into the happy memory of history, then we can end the war and start building some American industry again. Until then - render up your skull. The zombies are still hungry.

2009 Nov 17 10:52 AM

[Positroll]

"GM has also announced it will repay ALL German state aid before month’s close. That is big. It significantly reduces the German government’s leverage over GM plans for restructuring in Germany."
More importantly, it means GM will get back control over all the green Opel intellectual property / patents they ceded to the German gov as securitiy for the loan ...

2009 Nov 17 11:02 AM

[Glenn Mercer]

I think we agree: with current product and current negative consumer attitudes towards GM (founded in years of poor quality), GM CANNOT raise prices. That is why I am saying they must figure out a way to do so in future, via dramatic product improvements. Between now and then cutting cost further is fine, but it will do nothing to claw the price back, and may even hurt brand image further. My whole point is that in Detroit everyone carries a cost hammer and so all problems look like cost. Time to focus as well on PRICE. But yes, they can't just raise price today, with what they have today.


On Nov 17 09:04 AM doubleguns wrote:

> Glenn I see the problem as this. In ten years we will see 10 yr old
> civics, but probably very few 10 yr old cobalts. Thus the price difference.
> People will pay more for quality. GM CAN'T raise their prices. <br/>
>
> Who would buy a cobalt priced same as a civic?
>
> Frankly until they commit to pay back ALL (not just 6.7 billion)
> of the TARP money they borrowed who would buy a GM?

2009 Nov 17 11:32 AM

[Jgib]

Somebody said GM has a great balance sheet. Where can I find one, as a stockholder. that is?

2009 Nov 17 12:47 PM

[xmichaelx]

99.9% of car buyers in the U.S. know absolutely nothing about such things. Despite what you read here in the echo chamber, SA is not representative of typical Americans. The idea that typical consumers know -- let alone care -- about bailouts, unions, or executive pay is absurd. Most consumers couldn't tell you who their Representative is, where Iraq is located, what socialism (or even capitalism) is, or the name of a single Wall Street executive. They buy a car that appeals to them aesthetically and meets their immediate needs -- period.

On Nov 16 05:08 PM William Legrand wrote:
> Far too many U.S. consumers will no longer consider GM or Chrysler vehicles after the very-public taxpayer-funded bailouts, union givebacks/gifts, and astronomical executive payouts/bonuses.

2009 Nov 17 01:29 PM

[jebuescher]

Glenn - Don't forget about Ford when you talk about price comparison to Asian model lines. If Ford has figured out how to be profitable at the same price points that GM is losing money at, then there are still cost issues.

Assume the Cobalt had equal quality/perception to the Civic, if they price it higher than the Focus, GM risks loss of sales to Ford because there are certain maximum prices consumers can/will pay regardless of value.

Furthermore if GM's goal is to increase top line sales I would expect prices to decrease further as the only lever they have to get people to buy their cars. The question is what is the variable cost to manufacture a car by GM compared to Ford, Toyota etc, not the standard cost, as the standard cost per car is directly linked to how many cars they sell.

My random 2 cents.

2009 Nov 17 01:58 PM

[billddrummer]

On Nov 17 12:47 PM Jgib wrote:

> Somebody said GM has a great balance sheet. Where can I find one,
> as a stockholder. that is?

Are you a stockholder of the 'old' GM, the one with all the bad assets? That's the only one that has published financial statements and traded stock.

The 'new' GM isn't publicly traded yet. They plan on an IPO next year.

2009 Nov 17 05:21 PM

[larmanius]

what are the so-called subsidies that the Japanese care companies get from the Japanese gov't?

in my studies, MITI actually discouraged Japan from getting in the car biz.

what form do the subsidies take? can you provide documentation?

the structure of the Japanese economy is vastly different from ours...banks are much different and the consumption cycle is impacted much by the lack of consumer credit and checking accounts. the structure may appear to be subsidized by the fact that giant zaibatsu groups are still allowed, thus having captive banks in giant groups that "always" loan.

seriously...as a former student of the Japanese economy, I would love to see your data about subsidies.

I suspect it is just like China...a gov't led banking sector that tightly controlls currency rates...which is a help...but can't fix everything.


On Nov 17 08:34 AM teejcee44 wrote:

> Isn't it interesting that GM is criticized for having the government
> intervene on their half because the economy tanked, but it is OK
> for the Japanese to receive government subsidies for Years, and Years
> and Years, and no one will mention that they are owned by the Japanese
> government, and how wonderful the Japanese cars are, since the Japanese
> government handed them all they money they needed to make such great
> cars. I wonder how much money the Japanese car manufacturers got
> from their government over those many years, in comparison to GM?
> Hummmmm

2009 Nov 17 05:27 PM