Running on fumes: GM could soon run out of cash

[November 08, 2008]  DETROIT (AP) -- The American auto industry is running on fumes. General Motors, the nation's largest automaker, warned Friday that it may run out of money by the end of the year after piling up billions in third-quarter losses and burning through cash at an alarming rate. Ford sustained heavy losses, too.

The situation is so severe, GM has suspended talks to acquire Chrysler and is appealing to the government for help as the slumping economy drags cars sales to their lowest level in a quarter century.

GM Chairman and CEO Rick Wagoner said the company will "take every action" possible to avoid bankruptcy.

"We're convinced that the consequences of bankruptcy would be dire," he said, adding that the company would use every source of potential funding. "We need to find a way to get through this, and that's really our focus," he said.

GM also planned more job cuts, including another 5,500 salaried and factory workers. But company officials cautioned that those measures alone would not be enough and that federal aid is essential.

Ford saw its cash supply decline rapidly and announced its own job cuts Friday. But it's in better shape because the company borrowed billions of dollars in 2007 by mortgaging its factories. The Dearborn-based manufacturer said it had enough cash to make it through 2009.

Friday's events called into question the future of Detroit's three automakers and heightened pressure on the government to take action.

President-elect Barack Obama on Friday indicated that help may be on the way. At a Chicago news conference, he said Congress must pass an economic stimulus measure either before or just after he takes office in January, and he mentioned aid for the auto industry.

Top executives of General Motors, Ford, Chrysler LLC and the president of the UAW met with Congressional leaders Thursday to discuss some $50 billion more in loans, participants said. The loans would include $25 billion to help the companies withstand the weak economy and another $25 billion for future. The money would be in addition to the $25 billion in loans that Congress passed in September to help retool auto plants to build more fuel-efficient vehicles.

IHS Global Insight analyst George Magliano said the cash problems reported by GM and Ford were worse than experts had thought. And that raised the risk of bankruptcy.

"It's close," he said about the possibility of one of the U.S. automakers filing for Chapter 11 protection. "Up until now, we knew the cash numbers were tough, but we didn't know how bad."

Companies that run out of cash generally can sell assets, cut costs or file for Chapter 11 bankruptcy protection to keep creditors at bay while they reorganize.

GM had said previously it could fall short of cash needed to operate in the first few months of next year, and Ford has said it has about seven months of money, Magliano noted.

If GM files for bankruptcy, Fitch Ratings analyst Mark Oline said there is "a very high risk" that it would pull in Ford and Chrysler, too, because GM probably would be forced to discount vehicles deeply to generate cash for creditors, and other automakers would be forced to follow.

GM said it lost $2.5 billion in the third quarter, but more important, it spent $6.9 billion more than it took in - nearly double the spending rate of the second quarter.

The news came just hours after Ford announced it had lost $129 million for the quarter. The company burned through $7.7 billion in cash, but said it could keep going through 2009. Ford also said it would cut another 2,260 white-collar workers in North America.

GM called off talks with Chrysler to concentrate on its own business.

Privately held Chrysler wouldn't comment on GM's remarks, but said it remains focused on returning to profitability. It also said it will continue to "explore multiple strategic alliances or partnerships."

GM's cuts included the indefinite layoff of about 3,600 workers beginning early next year as it slows production at 10 assembly plants to match anticipated weaker sales.

"We are cutting to the bone," said Fritz Henderson, GM's president and chief operating officer. "What we want to try to do is size the business for this kind of volume level ... and frankly, put us in much better shape when the industry improves."

GM reported a net loss of $4.45 per share during the quarter, compared with a record-setting loss of $39 billion, or $68.85 per share, a year earlier. Its automotive operations saw an adjusted loss of $2.8 billion.

Revenue fell to $37.9 billion from $43.7 billion.

The results exceeded Wall Street estimates. Analysts surveyed by Thomson Reuters predicted a loss of $3.70 per share on sales of $39.4 billion.

The company announced it would bolster its cash reserves by $5 billion by the end of next year through reduction of sales promotions and further production cuts in the first quarter.

GM will cut capital spending to $4.8 billion from $7.2 billion and delay several vehicle models. But GM said it will continue funding for the Chevrolet Volt electric car and the Chevrolet Cruze, a small fuel-efficient model. Both are due out in 2010.

GM also suspended its matching contribution for employee 401k plans, and suspended tuition reimbursement. In addition, salaried employees will not receive incentive pay next year for their work in 2008, GM said.

GM, which has about 123,000 employees in North America, will also cut another 1,900 salaried jobs on top of the 5,100 announced last summer.

But the cuts and delays may not be enough to keep the company's cash supply from falling dangerously low.

"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.

And the company's cash shortage in the first two quarters of 2009 could fall significantly short of the minimum amount unless industry conditions improve or GM gets government funding, GM said.

GM shares fell 44 cents, or 9.2 percent, to $4.36 in Friday trading. Ford shares rose 4 cents, or 2 percent, to $2.02.

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AP Business writers James Prichard and Jeff Karoub in Detroit and Vinnee Tong and Bree Fowler in New York contributed to this report.

[Associated Press; By TOM KRISHER]

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