GM’s $39B Loss: Turnaround On Hold?

Last week's stunning announcement by General Motors that it had lost $39 billion in the third quarter put a halt to a lot of chatter about GM's ostensible comeback.

With the economy and new vehicle sales slowing, skepticism about GM's future was the order of day on Friday, despite the company's new labor pact, a revamped product line, and success inChina and Latin America.


The company still faces huge challenges. GM’s finance and public relations staff insisted the massive losses, the result of accounting changes, was something like a technicality.

Nevertheless, the big write-down had some serious consequences. One immediate result was a new dent in GM’s ongoing effort to rebuild the company’s credit rating, which was reduced to junk nearly two years ago. A better credit rating would have saved GM millions of dollars in extra fees and interest-rate payments but after the third-quarter loss, it's unlikely to happen any time soon.

GM's overall reputation also took another big hit. GM is spending millions of dollars on advertising every month to rebuild its image. The loss didn't neutralize it certainly but the negative news certainly has cast something of a pall over it, as company executives move into the auto show season.


The loss means that on paper, at least, GM has now lost $51 billion dollars in the past three years. On top of that, it owes the United Auto Workers $46 billion in the next four years to pay for the voluntary employment benefit association, or VEBA, that will assume responsibility for medical bills of GM retirees under GM's new contract with the UAW.

Most analysts were convinced this was a shrewd move that would only underscore GM's latent potential as the world's top automaker. But GM's cheerleaders on Wall Street, where the automaker's stock had enjoyed a boom over the last year or so, were disappointed.

“GM has reduced its hourly labor/benefit cost by about $8 billion between 2003 and 2007 and yet pretax profit has declined in North American auto during this time period,'' Jonathan Steinmetz wrote in a note to investors. “It is not just about cost reduction.''

Meanwhile, Joseph C. Amaturo of the Buckingham Research Group repeated the underperform rating on the stock, cautioning that GM might sink to $25 per share. He also predicted GM's 2008 North American production volumes will fall by 300,000 units, which would leave the company in a deep hole. “Additionally, we would not be surprised to see incentives rise if the U.S. economy were to weaken or oil prices remain at near-record levels, which will compromise profitability for its full-size trucks,'' Amaturo said.

GM’s huge losses in the past 36 months, which totaled more than $12 billion, set the stage for the write-off. Ford, while not calling a lot of attention to it, had taken a similar write-off last year with regards to the continuing losses at Jaguar, according to Ford chief financial officer Don Leclair.

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