Image: 2008 GMC Acadia
David Zalubowski  /  AP file
GM is suffering from an industrywide crisis driven mostly by factors beyond the company's control, including high gas prices, the housing slump and the credit crunch.
By Roland Jones Business news editor
msnbc.com
updated 7/3/2008 9:44:15 AM ET 2008-07-03T13:44:15

The past week has been a stomach-churning ride for investors in General Motors.

Shares of the nation’s top automaker dropped below $10 to their lowest level in 54 years Wednesday as investors shrugged off this week's better-than-expected sales figures and focused instead on the possibility that GM could run of cash.

Merrill Lynch analyst John Murphy sent a shiver through the stock market when he said in a research note that GM is likely to burn through its cash reserves much more quickly than expected and that a bankruptcy filing “is not impossible.

Times are certainly tough in the auto business. Soaring gas prices have caused a veritable stampede away from gas-thirsty pickup trucks and sport utility vehicles toward smaller, more fuel-efficient cars.

But even though big is no longer beautiful for American car consumers, automotive analysts are skeptical that GM will be forced into bankruptcy any time soon.

“It’s not even a possibility in the short term,” said Jesse Toprak, executive director of industry analysis at automotive Web site Edmunds.com.

“It would take an even more dramatic downturn in the market; an even sharper move toward smaller cars than we’ve already seen combined with GM not being able to adapt to those changes over the next two or three years, and we don’t see that happening,” he said.

“GM isn’t perfect, but it’s working to become more flexible and able to adapt to changes in the market than before and can align its product mix to demand,” he continued. “It will take two or three years to fully align their product mix. The challenge is between then and now.”

Other analysts generally agreed that GM is not in any near-term danger and has enough cash to stay solvent at least through the end of the year and probably far beyond.

But the challenge to GM and other automakers is daunting. The shift in demand from big trucks and SUVs to smaller cars is the fastest change ever seen in the industry, Toprak said. Even mighty Toyota has been caught off-guard, he said.

“The interesting thing about June’s sales numbers is while GM sold 20,000 more vehicles than we expected, Toyota sold 20,000 less than we anticipated,” he said. “It looks like no one was immune, and Toyota missed an opportunity by not having enough gas-efficient cars available to meet the soaring demand.”

GM is suffering from an industrywide crisis driven mostly by factors beyond the company's control, including high gas prices, the housing slump and the credit crunch, Toprak said.

“GM was well on the way to a very successful recovery before all this happened,” he said. GM's new crossover GMC Acadia and new Chevy Malibu sedan have been well-received, he noted.

“GM has a good recovery plan and this decline won’t last forever,” Toprak added. “We think the second half of 2008 will be better, and once the housing crisis is over with there will be strong demand to propel GM to profitability after 2010.”

GM’s sales numbers also have been hurt by the company's decision to cut sales to rental companies, which end up hurting residual value, said Aaron Bragman, an automotive analyst at consultancy Global Insight.

“I think GM is doing the best it can in a difficult market,” Bragman said. The lower fleet sales mask the fact that sales to “average American consumers” are actually improving, he said.

Adjusting for fleet sales, for example, the Malibu saw sales rise 129 percent in June, he said.

But on the truck and SUV side of the business it’s a different story. Despite some hefty incentives, GM’s light truck sales fell 16 percent in June, which badly eats into profitabililty.

“Car sales might be up, but the average profit margin difference for trucks and cars is massive, so people are concerned about GM’s health,” Bragman said.

“If you have a Chevy Silverado Heavy Duty it’s not uncommon to make a $10,000 profit on each vehicle, but there’s a much smaller profit margin for the average Chevy Cobalt, which is the sort of fuel-efficient car people are looking for right now,” he said. A small car like that might yield only a $100 profit for the manufacturer, he said.

A significant bright spot for GM is its international business. While sales of its vehicles dropped 12 percent in North America in the second quarter, sales were up 9.7 percent everywhere else, with record quarters in Brazil, China and India. Eighty percent of all growth in the automotive business expected to come outside the North American market over the next 10 years, according to Edmunds.com.

What’s more, GM has 13 new models of cars and crossovers coming to market over the next 18 months, Bragman said, so by 2010 there will be a significant number of new, smaller, fuel-efficient GM cars on U.S. roads, he said.

“So I am still very bullish on GM,” Bragman said. “It’s not a good market for any of the American carmakers and the American car industry as a whole right now. It’s going to be a painful, drawn-out adjustment away from trucks, and it won’t be pretty to watch.”

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