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GM's perfect storm
Many problems dog the No. 1 automaker, but CEO Wagoner says forget about bankruptcy.
November 18, 2005: 5:11 AM EST
By Chris Isidore, CNN/Money senior writer
GM Chairman and CEO Rick Wagoner.
GM Chairman and CEO Rick Wagoner.

NEW YORK (CNN/Money) - For General Motors, the hits keep coming.

Unfortunately for the troubled automaker, they're not the kind of hits that bring buyers into showrooms or keep cars rolling out of them.

Instead, the world's biggest automaker is getting hit by bad news -- seemingly from all directions. Some of the problems, such as gasoline prices, issues at its former parts unit, Delphi, and accounting questions, may be short-term. Others, such as health care and pension costs, are long-term and seem intractable.

Together it all adds up to a perfect storm for the automaker, battering its financial results, its debt rating and GM (Research) stock, which hit an 18-year low Wednesday.

GM has lost a stunning $2.2 billion in the first three quarters of this year, excluding special items. Company executives, including embattled CEO Rick Wagoner, won't say when they expect the automaker to return to profitability.

Investors have taken note. The stock has tumbled some 40 percent since July, though it regained some ground Thursday after Wagoner sent a message to GM employees via an internal Web site saying it was "just plain wrong" to talk about the automaker filing for bankruptcy.

"The large losses at GMNA (GM North America) are unsustainable, for sure, and require a comprehensive strategy to address them ... a strategy that must be implemented promptly and effectively, to get our U.S. business profitable again," Wagoner said in the note.

The three-month drop in GM stock has shrunk its market worth to about $12 billion, far less than the $19 billion in cash on its balance sheet. And its 9 percent dividend yield may seem tempting but is also a sign investors believe GM won't be able to keep paying $2 a year to shareholders much longer.

Here's an overview of the problems dogging the company whose roots stretch back to the late 19th century.

Delphi

Perhaps no problem is more immediate for GM than Delphi, which filed for bankruptcy last month. GM, which spun Delphi into a separate company in 1999, could be on the hook for up to $12 billion in payments due to GM's former employees and retirees.

Delphi is still GM's largest supplier, and a strike by the United Auto Workers union at Delphi could shutter GM's North American assembly plants, as happened in 1998. And the threat of a strike seems real after UAW officials called Delphi's demands for 50 percent pay cuts and layoffs "insulting."

Delphi management has said without an agreement on cost cuts by Dec. 16, it will ask the bankruptcy judge to have the current labor deals thrown out. That could prompt a strike by the UAW.

The Delphi bankruptcy raised the risk of a bankruptcy filing at GM within the next two years to 30 percent, according to a note by Banc of America Securities auto analyst Ron Tadross in October. He's since raised that estimate to 40 percent and now says that a filing at some point is "inevitable."

GM spokesmen and executives have repeatedly said the company has no plans to file for bankruptcy.

Accounting woes

The Securities and Exchange Commission is investigating how GM accounts for retiree health care and pension obligations and credits from suppliers.

The revelation in October that it had received a subpoena for records as part of those probes sent the stock tumbling 7 percent. A subsequent company filing saying it would have to restate 2001 earnings, cutting profits that year by as much as $400 million, shaved another 5 percent off the share price.

Health and retirement costs

The biggest victory for GM in recent months was reaching an agreement with the UAW to cut $1 billion a year from the $5.6 billion it now spends on health care costs for union members, retirees and their families. The news was enough to give GM shares a lift, even as it was reporting a much bigger-than-expected third-quarter loss.

But even with the cost savings, GM's at a disadvantage versus Asian automakers with plants here. Those companies have less extensive health plans, a younger work force and basically no health care obligations for retirees, meaning GM will probably still pay thousands more in health care costs per vehicle than Asian automakers.

And any advantage that GM has compared to Ford Motor Co. (Research) or DaimlerChrysler (Research) is likely to be short-lived, as those companies are seeking concessions from the UAW as well.

Even forgetting its competitors, GM is facing tougher new rules on pension accounting after the Senate passed a bill Wednesday that could change the status of GM's plans from fully funded to underfunded, which would significantly increase its costs.

Gasoline prices

While gasoline prices have been falling since hitting a record in September after Hurricane Katrina, they're still up about 16 percent from a year ago, and both GM and Ford saw a steep drop in sales of big SUVs and pickups in September and October.

Company officials insist not all of that is from pump prices. But GM officials concede they are seeing a shift, with more buyers seeking smaller, more fuel-efficient vehicles -- bad news when GM's gas guzzlers are its only profitable products.

"This really highlights one of the weaknesses of our business model is too much reliance on those products (large SUVs and pickups) for profit and not enough profitability from those other products," Wagoner said last month.

Weak sales

GM has seen its slice of U.S. vehicle sales slide steadily over the last 30 years, taking its share of the U.S. market down to 26.2 percent in the first 10 months of this year, compared with 43.8 percent in 1980.

As recently as 2001 and 2002 it had been able to stem the decline, posting slim gains, but the slide resumed in 2003.

To be sure, GM has seen sales jump from time to time, but always because of costly incentives, like zero-interest financing after the Sept. 11 attacks, or the "employee pricing" last summer.

Ford and Chrysler have been forced to follow GM's lead on incentives, though the Asian automakers have largely avoided them by offering more attractive vehicles.

GM said in August it would try to move away from incentives for the 2006 model year, offering lower sticker prices that were closer to actual sales prices. But buyers were slow to respond, figuring better deals were just around the corner.

A week ago they were rewarded when GM offered its newest incentive program, a "Red Tag" sale with prices offered to workers at Delphi and other parts suppliers.

-- Reuters contributed to this report

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For a look at Fortune magazine's take on Rick Wagoner's miserable month, click here.

For a look at more news about autos and automakers, click here.  Top of page

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