Dear Fellow Shareholders:
Being the captain of the Titanic is no fun.
am the CEO and the chairman of General Motors, what was, until
recently, one of the largest and most powerful corporations in the
world. For decades, GM was a model of capitalism. Our bonds were the
highest quality you could purchase. Our dividend was the safest. Our
jobs were among the best in America. Our operations shaped accounting
standards. What was good for GM was said to be "good for America."
only a thin veneer of optimistic statements, crafted by my lawyers so
that they can't be definitely called "lies," keeps this firm from
slipping into bankruptcy.
example, I told the world in our press release we saw "steady
improvement in our financial results" and "strong evidence that our
commitment to great cars and trucks is being embraced by consumers
around the globe." Luckily for me, "steady improvement" and "strong
evidence" are meaningless puffery that can't be proven to mean one
thing or another.
of living the life of a captain of industry – where I'd take credit for
the hard work of our thousands of employees – I find myself leading an
expansive game of financial charades. I have become nothing more than a
dressed-up street hustler, running a shell game on you, our loyal
shareholders. But at least I have this outlet. As I have done for
nearly a year, I will again tell you the sad truth about our operations
and our helpless financial situation.
First, as I have told you before,
"We have infrastructure and employee obligations that outpace what we
can afford given our greatly reduced profit margins and debt load."
Specifically, we have long-term debts of $36 billion, retirement
benefit obligations of $60 billion, and another $16 billion in various
other long-term liabilities.
did we end up in this position? It didn't happen overnight. For 19 out
of the last 20 years, GM operated at a capital deficit. We simply
didn't make enough money selling cars to maintain our asset base, make
new investments in future capacity, and pay our cash dividend. If you
look at the numbers carefully, you see our total capital deficit over
the last 20 years was $275 billion. After we worked through our
accumulated savings, we began borrowing money – more and more of it
far this year, we've paid approximately $4 billion in interest on these
various liabilities. I estimated, in an earlier letter to you, that we
would require about $5.81 billion in cash from operations merely to pay
the interest on our debts. I still believe that's an accurate forecast.
Our global cost of borrowing continues to increase, as I thought it
would. It now costs us 6.3% a year, on average, to borrow money, up
from 5.84% last year. As more debts "roll over," this number will
increase until it eventually strangles us. We are trapped, unable to
let go of our legacy obligations and unable to pay for them.
know we will not produce anything like $6 billion from operations this
year. Likewise, it is very unlikely we will ever generate regular,
ongoing profits from operations in excess of our interest expenses. As
a result, our accountants have forced us to "write down" the value of
most of our tax losses, which had been on our books as an asset. We've
told the public this doesn't really matter because the $37 billion
charge is a "noncash" expense.
does matter though: It means we know we are unlikely to ever again
record a profit. If we had any reasonable expectation of reaching
profitability, we would not have been required to take the write-off.
(You won't hear me explain this fact anywhere else...)
core problem is simple enough to understand: We can't make enough money
selling cars to pay for our debts, or even our interest payments.
quarter, on a worldwide basis, we earned $122 million from our ongoing
automotive operations, which we claim is a terrific accomplishment. In
fact, we make a pitifully small amount of money from selling cars –
even in the huge global boom we're now experiencing. You should
remember: Our third-quarter revenues have never been bigger. Our rival,
Toyota, which sells essentially the same number of vehicles, posted
operating earnings of $11.2 billion! That's a record for Toyota and a
16% increase over last year. Investors ought to be seriously concerned
about the future of the company when, even in a quarter of record
global car sales, GM can't turn a profit.
are especially tough on us in the developed markets. We lost $248
million on our North American operations and another $90 million in
Europe. This doesn’t include all of the corporate overhead, legacy
costs, and most of our interest expense.
In total, we lost $2.5 billion – in cash – on our automotive operations in the quarter.
I've explained before, our only chance to avoid bankruptcy was to
experience a big jump in the total number of cars sold and to cut
expenses to the bone. That hasn't happened. Our total worldwide car
production has actually fallen year over year. Likewise, our global
market share continues to slip, bit by bit. In 1992, we made 30% of all
the cars in the world. Today, we make 13.3% of all the cars in the
world, down from 13.6% last year.
our production falls, the scale of our business shrinks, making it
harder and harder to earn a profit on every car sold. Production is
very likely to continue to decline. Even after all of the plant
closures and cutbacks, we are still operating below 90% of our current
know... all of this seems like bad news. But actually, our automotive
business is only slowly bleeding to death. The big hemorrhage is in
CFO was foolish enough to tell securities analysts that GMAC was
"leaning away" from residential mortgages. Not exactly... Actually,
GMAC lost $1.6 billion, mostly on subprime mortgages, in the last
quarter. Our share of these losses totaled $803 million. We actually
don't know how much more we will lose in this business going forward,
but as our write-off of those tax assets shows, we certainly don't
expect to make any money here for a long time.
What does all of this mean? It's not good news. Let me show you the cold, hard facts.
to our most up-to-date balance sheet, we have about $37 billion in cash
and receivables. That sounds like a lot of money. But we have matching
liabilities for all of these assets – and more. Over the next 12
months, $5 billion of our long-term debt will come due. We have current
accounts payable of $30 billion and other accrued expenses that mature
in the next year of $34 billion. All totaled, we owe $70 billion within
the next 12 months. (That's not including all of the rest of our
long-term debt, pension liabilities, etc.)
you have $34 billion in your checking account and you've got $70
billion worth of bills on your desk, you're not exactly "cash rich" are
will we pay for these obligations? How will we come up with the money
we need to finance our long-term debts? There aren't any easy answers.
And all of the possible solutions will be extremely painful to existing
simple fact is, we're going bankrupt. It's only a matter of time before
our accountants force us to insert "going concern" language into our
filings. That means they won't approve our audit unless we admit
publicly that we know we're heading for a bankruptcy filing.
That won't be a good day to be a shareholder.