A 'New' GM Still Needs to Sell Cars

GM bondholders agree to a debt-for-equity swap to allow a new GM to emerge, but the automaker still needs to sell more cars to be viable.
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General Motors

(GM) - Get Report

may have

reached a deal

to ease its path through bankruptcy, but ultimately the company will not be fixed until vehicle sales start to recover.

In the short term, May domestic sales figures are due to be reported Tuesday. Not only will industry sales trends be reported, but also results from Chrysler, which has operated under bankruptcy protection since April 30, could provide a sign of how GM might do under similar circumstances.

Longer term, the global sales slump is expected to continue into 2010, although next year could see a recovery in domestic demand, according to a recent report by Moody's.

"A recovery in (domestic) demand, to the extent that it occurs, will be helpful to GM, although things are going to be soft in Europe," says Bruce Clark, auto analyst for Moody's.

"At the end of the day, GM can only do so much restructuring on the cost side," Clark says. "In order for the company to really be revitalized, there has to be some uplift on the revenue side. That's a part of the equation that neither GM nor the other manufacturers have any control over."

By implementing its scaled-down viability plan, unveiled April 27 in response to pressure from the Obama administration, GM anticipates that it could break even with annual North American vehicle sales of just 10 million.

The last time North American sales slipped below 10.5 million was 1982, when they totaled 10.3 million, according to J.D. Power. The last time below 10 million was 1970, when sales totaled 9.8 million, the firm says.

In the report, issued by its Frankfurt, Germany, office, Moody's said the outlook for global automotive manufacturers is negative, "reflecting the industry's ongoing challenges surrounding decreased vehicle demand due to the global economic downturn."

The firm expects double-digit volume declines to continue this year, with "limited prospects for a meaningful recovery in 2010" in worldwide markets. Full-year 2009 worldwide sales are forecast to be 13% lower than 2008 sales.

As for the "scrapping" schemes enacted in several countries, and the "cash for clunkers" plan now being debated in Congress, Moody's says "the packages will only serve to bring forward demand -- not completely solve the problem."

Nevertheless,

Ford

(F) - Get Report

recently endorsed the measure, introduced by a bipartisan coalition of six senators, saying "it's good for consumers, jobs and the environment" and urging "rapid consideration and final approval of this measure to help jumpstart auto sales and the economy."