GM and Ford Burning Cash, Seek Emergency Government Loans

By Jason Simpkins
Associate Editor
Money Morning

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 suspenspending 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 blank.’”

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.

News and Related Story Links:

  • Detroit Free Press:
    At current rate, Ford has about 7 months of cash left