OKLAHOMA CITY -- Technically, General Motors ( GM) has already gotten most of the concessions that Congress wants to see. The automaker ratified a new labor agreement -- complete with deep wage cuts and reduced benefits -- more than a year ago. The company must wait another year to capitalize on those savings, however, unless it can convince the United Auto Workers to move forward with changes ahead of the contract's official January 2010 starting date. Once the deal takes full effect, the company expects to become a lean operator that's well-equipped to compete with foreign "transplants" such as Toyota ( TM) and Honda ( HMC). "Congress has been talking about GM as if it were the GM of 10 years ago," Gimme Credit bond analyst Shelly Lombard mused during a recent interview with TheStreet.com. "The company has been taking steps to remedy its problems. "It was very slow to do that, though," added Lombard, who has an underperform rating on GM's bonds. So "it ran out of time." Late last year, as car sales collapsed along with the overall economy, GM almost ran out of money as well. The company asked the government for $18 billion in emergency loans, but it has collected just over half of that amount so far. In order to land additional funding, the company must first convince lawmakers that it can support itself down the road. With its shrinking revenue base and staggering debt load, experts warn, GM faces clear challenges ahead. Even if GM secures the massive funding that it needs to survive, some experts predict, the company will need to make extraordinary sacrifices -- which could render its stock worthless -- along the way.
GM faces its next big test in a month. On Feb. 17, GM must prove that it has a "positive net present value" -- signaling its ability to repay government loans with expected future returns -- during a formal presentation before Congress. The company will then return to Congress at the end of March, when it needs to supply concrete evidence of its success. "I don't think they can do it," says Peter Cohan, a Massachusetts investment strategist and author of the recent book You Can't Order Change: Lessons from the Turnaround at Boeing. "If they can make cost cuts immediately -- in the next couple of months -- they might be able to prove that they can pay the government back. But I'm not optimistic." GM better hope that the government recognizes -- and appreciates -- the cost cuts it has already secured. After all, experts say, GM will soon operate under a new labor agreement that effectively addresses some of the harshest criticisms lodged against the company. Once enacted, they say, the new contract will quickly narrow the cost gap between GM and its foreign competitors and ultimately lead to a cost advantage for the giant U.S. automaker down the road. Indeed, that contract promises to reshape the entire company. It will overhaul the pay structure for GM's unionized employees, allowing the company to hire new factory workers at just $14 an hour -- about half the current pay rate -- and provide them with much cheaper health care and retirement benefits. GM can use that cut-rate labor to replace many of its current factory workers, two-thirds of whom will become eligible to retire over the next five years. The company will no longer face huge health insurance bills for its hourly retirees, either, because it has arranged for a union-controlled trust fund to start covering those costly benefits instead.
Based on analyst estimates, GM could save up to $5 billion a year once its new UAW contract goes into effect. If those number prove accurate, Cohan admits, GM could actually repay its government loans over the course of the next several years. Right now, however, the company needs to buy itself some time -- with taxpayers picking up the tab -- while it waits for those benefits to materialize. GM might need to make some sacrifices in the meantime. For starters, experts suggest, the company should close down its controversial "jobs bank." That program, long attacked by critics of the industry, allows idled factory workers to collect most of their pay while they wait, sometimes years, for other GM jobs. Thanks to recent employee buyouts, experts say, GM uses the jobs bank far less than it once did and should barely notice once it's gone. "It's going to go away," assures David Cole, chairman of the Center for Automotive Research, a nonprofit organization that publishes in-depth studies on the industry. "It's an easy thing to do (because) it's become irrelevant. It's more of a P.R. problem than anything." Still, Congress might want more. If so, GM could seek permission from the union to adopt its new wage structure early. Industry critics, including some powerful Republicans in Congress, have long complained that GM spends far too much on its unionized workforce. They offer eye-popping figures to support their argument, pegging the total pay for a typical GM factory worker at $73 an hour and beyond.
Those numbers look somewhat inflated, however, when broken down in detail by Cole's research organization. Almost one-quarter of that hourly sum goes to cover benefits for GM retirees, CAR studies indicate, so current factory workers earn something closer to $60 an hour instead. While that number still looks generous -- suggesting six-figure salaries for GM's blue-collar workforce -- much of it represents the value of employee benefits rather than actual take-home pay. In reality, the company's current factory workers earn about $28 an hour, or $58,000 a year. By this time next year, of course, GM expects to spend far less. All told, CAR studies show, the company should see its total payout for newly hired workers drop to just $25.65 an hour -- with actual wages for those workers hovering around $30,000 a year -- under its new labor agreement. If GM needs to launch that program early, experts predict, the UAW might very well agree. Meanwhile, they say, the company has secured a major concession from the UAW already. Notably, they say, GM managed to postpone nearly $2 billion worth of payments to the new union-controlled trust fund that will soon start covering health benefits for the company's hourly retirees. "That's the really important thing," Cole says. "It could buy the company a couple of years, while new health care policies can potentially be formulated. If the government comes up with some type of national health care program, it would dramatically alter the funding requirements" for the new trust fund.
Although GM has set aside $13.4 billion for that trust fund already, the company has promised to pour another $15 billion into the account over time. Chances are, experts say, GM will seek to use stock -- rather than cash -- to satisfy at least half of that obligation while asking its bondholders to accept similar terms. By doing so, they explain, GM can keep its promise to Congress to cut its $62 billion debt load in half without parting with huge sums of cash. Mark Zandi, the chief economist and co-founder of Moody's Economy.com, sees clear risks in that ambitious strategy, however. "The most significant new information in the restructuring proposals is GM's plan to cut its debt load roughly in half," Zandi stated in formal testimony before Congress. But "this would require significant concessions by GM's debt holders. And it is not at all clear they would be willing to make the necessary compromises, at least on the terms GM is hoping for." GM shareholders, including members of the company's senior management team, could suffer dearly if the company happens to succeed. With a current market value of less than $2.5 billion, GM will need to issue billions of new shares -- creating a float that's almost 15 times the current size -- in order to supply enough equity to cover some $32 billion in outstanding debts. The company's existing stock, which has doubled off its November lows to approach $4 a share, could lose almost all of its value in the process.
Credit Suisse analyst Christopher Ceraso sparked concern late last month when he issued a detailed report explaining the massive dilution -- and resulting losses -- that current stockholders may soon face. "Over the next two months, as bondholders, union representatives and company management meet to hammer out concessions, we think it will become increasingly clear that the enormous sacrifice of value on the part of the union and bondholders will require the complete or near-complete elimination of the existing GM equity," Ceraso wrote, as he downgraded GM from neutral to underperform and lowered the company's target price from $2 to $1 a share. "And that may be the best-case scenario. "It is by no means certain at this point that bankruptcy has been permanently stayed," Ceraso continued. "By our math -- and, indeed, even by GM's forecast under its 'downside' scenario -- it is likely that the company will need additional funds as soon as 2Q09. The need for additional funds could make it more difficult for GM to argue, by the end of 1Q09, that it has achieved or is on the way to achieving long-term viability." As a bond analyst, Lombard has taken an in-depth look at GM's finances as well. Based on that review, she feels almost certain that GM will need far more government funding than the $13.4 billion promised to the company so far. All told, she sees the company borrowing $20 billion to $25 billion -- and potentially even more -- during the recovery process.
Still, compared to figures compiled by CAR, that bailout looks like a bargain of sorts. Hurt by higher costs and lower tax receipts, CAR estimates, the federal government would lose at least $100 billion -- and as much as $150 billion -- following any failures in the domestic auto industry. "The president made it very clear that the country cannot afford this failure," Cole states. Meanwhile, "I think the UAW will step up and do whatever is necessary to help. "It's more a matter of moving things up than anything else," he concludes. "I don't see that as a problem."