General Motors Brochure


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General Motors Brochure

  1. 1. May 2009 The end of the road for General Motors? What lies ahead for the automotive industry?
  2. 2. 1 BDO Stoy Hayward The end of the road for General Motors? GM’s decision to file for Chapter 11 bankruptcy protection is likely to have profound effects on the whole automotive industry, with both winners and losers emerging during a painful period of re-adjustment. Sid Hopper, automotive partner, considers the consequences of GM’s filing for bankruptcy protection and looks ahead to the future shape and size of the industry. The old model employees and politicians – may delay the phoenix’s creation, perhaps the more crucial current issue is how ‘old’ GM’s Over-capacity, under-investment and a drastic fall in demise will affect the broader automotive industry. And demand made GM’s problems insurmountable – perhaps the first place we should look for answers is a despite $19.4bn of US Treasury funding. recent precedent: Chrysler. As GM’s US market share halved from 45 per cent in the 1980s to 22 per cent in 2008, profits plunged. GM’s last quarter saw an astonishing $6bn loss. Lessons from Chrysler Chrysler entered into Chapter 11 proceedings on A radical restructuring plan put together by GM’s new 30 April, triggering immediate effects for suppliers, management team prescribed strong medicine for the ailing distributors and consumers. giant: slimming down models and brands, closing plants, selling subsidiaries, culling dealers, reaching compromises with $27bn Consumers lost confidence, resulting in residual values for cars of unsecured bondholders and funding up to $20.4bn of at dealerships falling by 9 per cent. Exiting dealers started to retiree healthcare liabilities. heavily discount inventories to clear stocks. There are also ongoing dealer concerns about potential liability for warranties Given the difficulties of achieving this scale of restructuring in and service contracts. such a small timescale – and the huge legacy costs it would trigger – it was perhaps inevitable that the only way GM Suppliers were immediately hit by credit downgrades. Harman could achieve its plans would be by entering into Chapter 11 International, Johnson Controls, Magna International, Shiloh proceedings. Industries, Stoneridge and TRW Automotive were placed by Standard & Poor onto Creditwatch. S&P also expects a number of tier 2 suppliers to fail. With suppliers buckling, vehicle Route 11: where will it lead for GM? production has been affected: a number of assembly plants have been halted due to parts shortage. Whilst it is too early to map out exactly how the Chapter 11 proceedings will run their course, it looks The other key effect can be summed up in one word: likely that GM will seek to sell its profitable assets to uncertainty. At a recent meeting with over 400 suppliers in a NewCo under Section 363 of the bankruptcy code. Detroit, Chrysler advised that it did not yet know what would be in its 2009 model programme, that supplier numbers would This will provide for the separation of toxic assets and be greatly reduced, and that although the Fiat buyout deal was liabilities, and attract a US government cash injection not definite, there was no contingency plan. Reports also (thought to be c.$30bn) to fund restructuring and essential suggest that some suppliers are being deselected purely on the suppliers. In return for this investment the US Government basis of their banks and that those in the supply chain will be will acquire a majority share ownership in the new company. paid much later, on 90-day terms, when production resumes. Other shareholders will include the UAW union, Bondholders and possibly the Canadian govenment. Many expect that eventually we will see a phoenix rising from GM Europe – left out in the cold? Detroit: a ‘new GM’ emerging from the ashes, able to leave its GM Europe will almost certainly have to fend for legacy liabilities behind and, backed by its US Treasury itself, left to firm up both a buyer and the necessary injection, capable of positioning itself to deliver long-term €3.3bn of state aid. Fewer production plants, fewer profitable growth. suppliers and a smaller distributor network look Although objections – from creditors, bondholders, sure to follow.
  3. 3. 2 BDO Stoy Hayward The end of the road for General Motors? Implications for European GM Europe key facts production Brands include Opel (Vauxhall in the UK), Saab, Radical restructuring will be necessary to align Chevrolet, Cadillac, Corvette and Hummer. production with reduced demand and new product Sales in 2008 of 2.0m vehicles (Opel/Vauxhall mix. Three or four assembly plants may close. represents 72 per cent). However politicians and employee industrial action are likely to limit the scale of restructuring to 54,000 employees (46 per cent based in Germany). preserve jobs. 10 wholly owned assembly plants in Europe, eight GM Europe advised that it has sufficient funds to last until joint venture/other production sites and four Quarter 4 of this year. To achieve this commentators believe locations where vehicles are assembled from GM Europe will require substantial cuts in production and component kits. reductions in finished inventories. Nine wholly owned powertrain plants, three It will depend which buyer acquires Opel, but we believe the 2 engineering centres and three design centres. UK assembly plants will be particularly at risk. If the Fiat or the Magna/Russian consortium acquire Opel then consolidation of transmission plants, design/engineering centres and admin How the restructuring will work functions is more likely. The future of technology JV’s and GM Europe is likely to be broken up and alliances also depend largely on the acquirer. Opel/Vauxhall acquired by a third party. Although The launch of the ‘all new’ Astra and other future cycle plan there have been three potential candidayes, including models are likely to be delayed as development funds are Fiat and equity fund RHJ International, the likley limited, this will impact future profit margins. An additional winner is a consortium made up of auto components hazard to production is that if supplier payments are missed, a group Magna, Russian conglomerate GAZ and a lack of part’s availability could stop or limit production. Russian bank. If Opel is acquired by a third party, GM US may retain a stake “ in return for relinquishing intellectual property rights, or this Given the projected lackluster may have to be purchased from the US government as part of growth in volumes for the next the transaction. five years, the chronic Saab is unlikely to be part of this acquisition and we believe the structural imbalance in our industry Swedish government is likely to provide significant financial will become even more marked. Many assistance to keep the company trading. factories will become redundant. That The future of Chevrolet in Europe is less clear. It is likely that means we will hear more screaming GM will dispose of either part or its entire 51 per cent stake in and we will probably see strikes. It will GM Daewoo as part of the global restructuring. Potential be ‘ugly’ and ‘painful’ but until someone candidates include the Korean government. Future sales of comes up with a better way to cope with Chevrolet in GM Europe dealerships is unclear, as are the prospects for Chevrolet assembly plants in Eastern Europe. dramatically falling demand, ” this is the only way for the It is unclear whether GM Europe will enter the European automotive industry to survive. equivalent of bankruptcy as a result of a Chapter 11 of GM in the US. The German government have suggested a plan that Sergio Marchionne Opel assets could be handed over to a trustee who would CEO Fiat, at Fiat's annual meeting in March ensure the interests of creditors, with a consortium of banks providing bridging finance until the situation is resolved. Inevitably, plants will be reduced across the European Union if this (Fiat) takeover goes ahead. This move sends shivers down my spine. Tony Woodley General Secretary of British industrial union Unite
  4. 4. 3 BDO Stoy Hayward The end of the road for General Motors? Implications for other OEMs volumes as economic recovery commences (likely in late 2010) – this could trigger a fresh wave of failures. Although Fiat see acquiring GM Europe as an opportunity to achieve the scale to survive in the With so much change amongst suppliers a risk for Opel in ’new automotive economy’, their level of achieving future success could be a reduction in product quality restructuring is likely to be much deeper than other and higher warranty claims as components are transitioned to potential acquirers – making them a less popular new tier 1 and 2 suppliers. choice with Berlin. Other automakers, like Ford, see the removal of competitor Implications for Financial vehicles from the market place as a chance to increase sales. Stakeholders However, if falling demand from GM plants puts parts suppliers Financial stakeholders face a period of uncertainly. out of business the consequences could be disastrous. OEMs The ability to back ‘winners’ and cut back on ‘losers’ may therefore have to make significant price concessions or will be vital for lending teams in the next two years. provide one-off cash injections to keep crucial suppliers afloat. As UK component companies close, and supply moves away OEMs will need to carefully assess the strength of supplier from the UK, lending institutions are likely to experience a networks. While many have already done so and have started reduction in business over the medium-term. to rationalise the supplier base, those that have not are likely to face severe financial penalties in 2009. Business plans will need reviewing and sensitising to lower GM Europe volumes as well as lower volumes in the sector generally. Expectations for the sector are that 2009 volumes Implications for European Suppliers will be 40per cent down, and 2010 25per cent down on 2008. Falling car sales are already having a severe impact Cash flow forecasts need to be updated and assessed against on tier 1 and tier 2 suppliers. Many have already funding levels and banking covenants. Lending institutions in commenced operational restructuring, leading to particular need to understand what companies and which plant closures, short term working, and consolidation. OEM/vehicle models their borrowers are supplying, to ensure The sale and/or restructuring of GM Europe will add they assess their risk levels correctly. significant further pressure. Pressure needs to be placed on companies to accelerate Initially, there is likely to be little change for Opel / Vauxhall restructuring plans and to be clear at what stage they need to suppliers as payments can be met in full from existing funding be implemented. (although this may not to apply to Chevrolet and Saab Just as the OEM’s are rating tier 1 suppliers and transitioning suppliers). supply away from the weaker suppliers, tier 1 suppliers should However, in the medium to long term, significant supplier assess their tier 2 suppliers for financial health and failure risk. consolidation is likely. If Fiat acquires Opel, consolidation is Financial stakeholders should conduct a similar exercise in likely to centre on Fiat’s existing Italian supplier base, whereas if respect of their tier 1 and tier 2 borrowers – whose futures Magna and the Russian consortium acquire Opel, component may be intertwined. supply is likely to move to Eastern Europe more quickly. Another driver for consolidation is that many US owned “ ” groups with European operations are likely to dispose of their Suppliers are going to be overseas companies to focus on the home market. working as furiously as Suppliers will be divided into winners and losers. The winners possible to try to cut costs and are likely to be those with high plant efficiencies, low cost survive through this until we can see bases, and a history of investing in technology. Being on the some sort of stability in the right model programmes with a low, or manageable, exposure to GM Europe is also important. The losers are likely to be market. those that are: having to divert significant funds away from R&D Mike Wall to fund current restructuring actions; have a high exposure to auto analyst at CSM Worldwide GM vehicles; and who produce products of low technical quality. Suppliers are also likely to struggle to fund the higher levels of working capital required to build inventories and supply higher
  5. 5. 4 BDO Stoy Hayward The end of the road for General Motors? “ ” The process will undoubtedly be painful for employees. Suppliers must cut their costs now to survive. It's going to spread throughout the entire [supply] chain. Craig Fitzgerald automotive consultant at Plante Moran Conclusion Although GM’s decision to enter Chapter 11 proceedings is a major event in itself, it is ultimately just one step on the world-wide automotive industry’s journey towards a ‘new model’. With production down 50 per cent in the US and expected by some commentators not to fully recover until 2015, there is clearly the need for a major realignment. Those that survive will, like the ‘new’ GM we envisage, have undergone major changes in operational efficiency and will emerge stronger and better placed to profit from new opportunities However, they will first have to endure a long and painful period of uncertainty and adjustment. For more information or advice on this topic please contact Sid Hopper on 0121 352 6400, a member of the automotive team, or your usual BDO Stoy Hayward contact.
  6. 6. About BDO Stoy Hayward BDO Stoy Hayward is the award-winning UK Member Firm of BDO International, the world's fifth largest accountancy network, with more than 1,000 offices in over 100 countries.* We operate from 14 offices in the UK with more than 3000 partners and staff. We believe that clients want an adviser they can trust, one who understands them and their objectives. One way we do this is by continually building our sector related expertise, and applying this to the way we do business. To talk about any issues your business may be facing please contact Sid Hopper, Automotive Partner at BDO Stoy Hayward, on 0121 352 6400 or at How we can help you If you would like to discuss or require any further information about this publication or our wide range of automotive services please contact the BDO Stoy Hayward Automotive team: Birmingham London 020 7893 2215 0121 352 6400 020 7893 3246 020 7893 2288 020 7893 3297 BDO Stoy Hayward offices in the UK: Belfast Chelmsford London Southern region: Epsom, Gatwick 028 9043 9009 01707 255880 0207 893 2209 01483 401426 Birmingham Glasgow Manchester 0121 352 6200 0141 249 5246 0161 817 7534 Bristol Hatfield Reading 0117 930 1528 01707 255880 0118 925 4439 Cambridge Leeds Southampton 01707 255880 0113 204 1304 023 8088 1786 The document was produced by Sid Hopper and Stephen Cooney. ‘Audit Team of the Year’ 2008 ‘Tax Team of the Year’ 2008 ‘Corporate Finance Deal of the Year’ 2008 *Including exclusive alliances of BDO Member Firms. BDO Stoy Hayward LLP operates across the UK with over 3,000 partners and staff. BDO Stoy Hayward LLP is a UK limited liability partnership and the UK Member Firm of BDO International. BDO international is a world-wide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an independent legal entity in its own country. The network is coordinated by BDO Global Coordination B.V., incorporated in The Netherlands, with its statutory seat in Eindhoven (trade register registration number 33205251) and with an office at Boulevard de la Woluwe 60, 1200 Brussels, Belgium, where the International Executive Office is located. In the UK the Belfast Firm is operated by a separate Partnership known as BDO Stoy Hayward - Belfast. BDO Stoy Hayward LLP and BDO Stoy Hayward – Belfast are both authorised and regulated by the Financial Services Authority to conduct investment business. BDO Stoy Hayward LLP is the Data Controller for any personal data that it holds about you. We may disclose your information, under a confidentiality agreement, to a Data Processor (Shamrock Marketing Ltd). To correct your personal details or if you do not wish us to provide you with information that we believe may be of interest to you, please contact Amanda Elson on 020 7893 3705 or email Whilst every care and attention has been taken to ensure the accuracy of this information, it is intended for general guidance only. Please call us if you would like specific advice on any matter. Copyright © May 2009 BDO Stoy Hayward LLP. All rights reserved.