- The Washington Times - Monday, November 2, 2009

Congressional overseers and many analysts are skeptical about the post-bailout prospects of success for General Motors Corp. and Chrysler Group LLC, and some say they will need to raise more cash as early as next year.

Observers see little chance of another taxpayer bailout given the opposition to providing the automakers with $75 billion this spring and the administration’s statements that it does not intend to commit more money to the sector.

But that doesn’t mean they won’t need greater funding — and the capital markets may be no more receptive than the government, especially given the risk of “political interference,” as a congressional oversight panel put it.

Indicating its own concern for GM and Chrysler’s sales, the administration said last week it is in talks to provide a third bailout to GMAC Financial Services, GM’s former finance unit now 35 percent owned by the government. The lender is a huge source of auto loans, and its failure could decimate sales at the two automakers.

The company, scorched by subprime home loans and struggling with impaired loans to Chrysler dealers, has already received $12.5 billion in aid and might receive up to $5.8 billion more — possibly making the government the majority owner of another major corporation.

GMAC was unable to raise the necessary funds from the private markets. Taxpayers already own nearly 61 percent of GM, 35 percent of GMAC and 8 percent of Chrysler.

GM chief executive Fritz Henderson told reporters last week that the company has received sufficient funding and will not ask the government for more.

Although their costs have been reduced dramatically, the viability of GM and Chrysler depends on a rebound in sales and healthy market share.

The first is theoretical, and the last is questionable.

Merrill Lynch & Co. Inc. expects GM’s market share to fall to as low as 15 percent, meaning that “further restructuring actions could be necessary,” including the shuttering of two more plants.

Still, GM is better off than Chrysler, which will suffer from a dearth of new products for at least 18 months as Fiat rolls out a new lineup. Fiat is expected to announce its five-year product plan Wednesday.

“Chrysler’s product pipeline is dubious and likely to drive significant market-share losses. We anticipate that Chrysler will be roughly half its current size in a few years,” Merrill Lynch analyst John Murphy wrote in a research report.

Ford Motor Co. and Asian automakers, especially South Korean companies, will gain significant market share at the expense of GM and Chrysler, Mr. Murphy projects.

Congressional skeptics

In its September report, the Congressional Oversight Panel was also skeptical of GM’s projections, provided to federal regulators, that car sales will rebound to pre-recession levels of 16.8 million by 2014 and that it could retain market share of between 17.5 percent and 18.5 percent.

At the end of September, GM’s market share stood at 19.7 percent.

“The viability of these companies is still dependent on sales volume, which … remains at historically low levels,” the panel wrote.

If the companies’ “optimistic” projections do not pan out, “either the government will need to step in again, or the companies will need to liquidate, with much of the attendant misery that the government sought to avoid in 2008 and 2009,” the panel wrote.

Congress established the oversight body this year to monitor the use of federal bailout funds.

“GM has been steadily losing market share for decades, and it is unclear whether the projections provided adequately reflect this trend,” the panel said. The overseers also cited the Merrill Lynch forecast, expressed in the firm’s annual “Car Wars” report in July.

Government involvement in the automakers could impede their access to private capital.

“At the moment, in a still-constrained credit market and with the pressures associated with these two companies (not least the risk of political interference), it is unclear” whether the companies could obtain the funding they need on favorable terms from the capital markets, the panel said.

A better view

IHS Global Insight supports GM’s healthy industry sales projection but sees the automaker’s market share slipping to 17.5 percent, the lower end of GM’s range, if not lower, said analyst Chris Hopson.

“GM is certainly more promising than it was before,” he said. “It’s going to be a tough row to hoe” for Chrysler.

Chrysler declined to comment for this story.

Analysts at auto-information site Edmunds.com are also among the more upbeat researchers, expecting a strong — if temporary — uptick in GM’s market share in October. Still, analyst Michelle Krebs says GM’s funding assumptions are too rosy.

“They might need [more federal aid], but they won’t ask for it. They want to do an initial public offering within the next year. I think that’s optimistic. They think the economy will be better so they can go to the commercial market for it,” she said.

GM said in regulatory filings that with its reduced costs and slashed manufacturing capacity, it could be viable with an 18.5 percent market share and overall industry sales of 10 million vehicles, lower than this year’s projection of 10.5 million vehicles.

GM said many financial analysts have called the underlying assumptions behind its plan “attainable.”

“As the market improves, if we hold [an 18.5 percent] share, we improve dramatically. If we improve share, it gets even better, but we have a long road ahead of us and many challenges,” said spokesman Tom Henderson.

Indeed, as companies with lowered fixed costs, the automakers’ profits can rise sharply once revenue matches those costs.

‘Zombie Watch’

Robert Farago, founder of the well-regarded, irreverent Web site thetruthaboutcars.com, changed his five-year-old “General Motors Death Watch” running feature to “General Motors Zombie Watch” after the bailout.

“GM still has very severe issues and will likely need another bailout,” said contributor Paul Niedermeyer. “But I don’t think they’re going to get more money. They may fail or have to do some type of liquidation or breakup.”

GM continues to rely on longtime company insiders to engineer the automaker’s transformation, and “they are terrible in smaller cars,” Mr. Niedermeyer said — which will be a problem for GM if gasoline prices continue rising.

While the Chevrolet Malibu gets good reviews — even on his site — it is merely competitive with its rivals, not “intrinsically better,” Mr. Niedermeyer said.

“A company in terminal decline has to do something nearly impossible. It has to come up with something significantly better than the competition, and that’s very difficult to do. A lot of people won’t look at GM cars, especially in those [smaller-car] categories,” he said.

GM spokeswoman Renee J. Rashid-Merem dismissed Mr. Niedermeyer ‘s criticism, saying thetruthaboutcars.com is “a consumer opinion site and is not an industry or investment analyst.”

Task force tout

The man most associated with the auto industry bailout said forcefully last month that he was “optimistic” the two companies will prosper, thanks in part to lower costs and greater union flexibility.

Profits at the companies would soar if car sales rise because they could be running their plants at full capacity, as analysts at JPMorgan Chase & Co. predict, said Steven Rattner, original head of the administration’s auto task force. But the companies can survive even if car sales don’t rise, he said.

Independent auto analyst Tom Libby partly agrees.

“I think they look good,” he said of GM. “The company is a very different animal than it was before. But at a 10.5 million unit [per year] industry, it’s not going to work, not for any automaker.”

Mr. Rattner said his sense is that the administration wants to shed its ownership stakes as soon as possible — although it could take several years to avoid a sale at “fire-sale prices.”

Still, he conceded the automakers’ future was “far from assured,” that Chrysler is sorely lacking in new products and that it remains to be seen whether GM insiders can carry out the “cultural change” the company needs. The task force opted against bringing in an outsider to run GM after it ousted former chief executive Rick Wagoner in favor of his deputy, Frederick A. “Fritz” Henderson.

Mr. Rattner’s harrowing account of the challenges faced by his team calls into question his own optimism.

The task force was “shocked by the stunningly poor management that we found, particularly at GM” under Mr. Wagoner.

The need to oust Mr. Wagoner was “clear,” yet the choice of whether to replace him with another company insider was “less clear,” he said.

The group chose Mr. Henderson — a GM lifer — even though Mr. Rattner felt that “few major companies have effected the change GM needs without fresh blood.”

Mr. Rattner also said the group was “torn” about whether to let Chrysler fail, as it was smaller than its rival, had been “hollowed out” by previous management and had an “empty cupboard” in terms of new products. The administration also recognized that the failure of Chrysler would benefit GM’s sales.

Echoing a point made most vocally by Washington-area car dealer Jack Fitzgerald, also an outspoken critic of the task force for having no members with industry experience, Mr. Rattner said Chrysler “did not have a single car that was recommended by Consumer Reports.”

Out of the woods?

Asked if GM and Chrysler were out of the woods, Erich Merkle, author of the Autoconomy Letter, said, “GM might be at the edge of the woods, and Chrysler’s pretty deep in the woods, unfortunately.”

He said Fiat Chairman Sergio Marchionne might not have realized what he was getting into with Chrysler when he bought the company. At the Frankfurt Auto Show last month, Mr. Marchionne said he didn’t know how bad off Chrysler was, Mr. Merkle said.

Mr. Merkle wants to believe in GM. But he has his doubts.

“I think they’ve changed, and I’d like to think that they’ll be viable well after I’m gone. But I have my doubts. They’ve made changes that are radical — but only radical relative to General Motors.”


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