Cash-strapped General Motors Corp. said Monday it will delay reimbursing its dealers for rebates and other sales incentives, an indication that the company is starting to have cash-flow problems.
Company spokesman John McDonald said payments due Nov. 28 will be delayed for two weeks until Dec. 11, while those due Dec. 4 will be paid Dec. 18. The normal weekly schedule will resume after that. He would not say how much money the company will save from the delays.
GM said Nov. 7 that its cash situation was so dire that it may reach the minimum required to run the company by the end of the year. Executives from GM and its Detroit-area counterparts are scheduled to appear at congressional hearings this week to seek $25 billion in loans from the federal government.
Van Conway, a mergers and acquisitions expert and partner with Birmingham, Mich.-based Conway & MacKenzie, said the delay is a sign that the company knows it will run low on cash, and dealers may be most able to take the hit without hurting the company.
“They must have weekly projections here that show them bumping on their minimums,” Conway said. “I think they’re scraping the bottom of the barrel here.”
Erich Merkle, lead auto analyst at the consulting firm Crowe Horwath LLP, said GM wouldn’t delay payments if it had enough cash.
“I don’t even think they’ve got 60 days,” Merkle said. “Their cash position is probably getting pretty weak right now, and it’s cutting into those minimum reserves that they need on hand.”
McDonald would not say whether GM was having a short-term liquidity problem during the period that the payments have been delayed, nor would he say if the company would reach its minimum cash requirements.
“I wouldn’t take it to that level of detail,” he said. “It’s one of a number of efforts that were doing to bolster our liquidity.”
McDonald declined to say how much GM would save during the month it delays the payments. He said he assumed that the company’s legal department approved the move as legal.
“Clearly it’s painful for everybody,” he said. “This is something that you don’t want to do if you don’t have to do it. I think our dealers are keenly aware of what’s going on from our standpoint. It doesn’t help anybody if we go out of business.”
Conway said he counsels clients in situations where they’re running low on money to generate short-term cash where it won’t hurt them. Parts suppliers, if not paid, might stop shipping parts to GM, he said.
“If you don’t give the dealer an incentive. what’s he going to do to you?” Conway asked.
GM makes millions in payments to dealers to reimburse them for customer rebates and dealer incentive cash.
Dealers, though, may not be upset about the delay because it’s helping the company make it through a tough time.
“If that’s a small piece that I can do to keep things going, I’d be OK with that,” said Jeff Crippen, owner of Crippen Buick-Pontiac-GMC in suburban Lansing, Mich. “Two weeks doesn’t bother me.”
GM, Ford Motor Co. and Chrysler LLC are lobbying Congress for $25 billion in loans from the Wall Street bailout program. But many Republican senators are against the loan and could thwart the request in a special session this week. That would force GM, which may be in the most critical condition, to wait for government aid until after a new Congress convenes and Barack Obama is sworn in as president on Jan. 20.
The nation’s largest automaker said Nov. 7 that it had $16.2 billion in cash at the end of September, raising the possibility that GM will fall below the minimum of $11 billion to $14 billion needed for day-to-day operations by the end of the year.
If that happens, GM will be unable to pay some creditors, which could seize assets that were pledged as collateral or even try to force the company into bankruptcy, experts say.