|Why GM can't repay the money|
General Motors (NYSE: GM) presented a 117-page plan for "viability" last night. But after looking at it, I concluded that it was "crafted" to increase the odds of getting the $30 billion loan it now claims it needs to survive. As Mark Twain said, "There are three kinds of lies: lies, damn lies, and statistics." And GM's viability plan is the third kind. Why? Its sales forecasts are way too optimistic.
Yesterday, I spoke with a class I'm teaching about Net Present Value (NPV), which is supposed to be the basis of GM's plan for viability. In simple terms, an investment has a positive NPV if it pays back the up-front money plus interest and some profit within a reasonable period of time. I pointed out that since the NPV calculation is based on projecting the future, it is almost always wrong. Therefore, the forecaster has an obligation to state his or her assumptions explicitly and to re-calculate the NPV with different ones -- I recommend a sensitivity analysis with a 10% cut in base case assumptions.
GM's assumptions are wildly optimistic. It thinks it can get back to profitability in 24 months based on sales projections that seem way to high. More realistically, Chrysler's plan forecasts 10.1 million units for the industry in 2009, and flat sales of 10.8 million units between 2010 and 2012. But GM thinks industry sales will be much higher, ranging between 11.5 million vehicles and 14.3 million vehicles in 2010 and from 14.5 million to 17.5 million in 2012. So why are GM's numbers too high?
They ignore how fast sales are falling. 2008 industry sales were an estimated 13.2 million -- down 19% from 2007's 16.2 million. And in January 2009, industry sales were down 37% -- with GM's tumbling 49% and Chrysler's down 55%. If you annualize the January figures, 2009 sales should total 9.6 million -- which is 11% below Chrysler's estimate and 17% below GM's. When GM starts off with an overly optimistic estimate of 2009 sales and goes up from there, you know you're in trouble.
And when you start to think about why sales are down so much, you realize just how self-serving those optimistic sales forecasts are. As I posted, GM wants to fire 47,000 people and there are millions of homeowners in foreclosure and 3.6 million people who have lost their jobs in the last year. These are not the kind of people who can afford a new car or get a loan to help them buy it.
When you're in the kind of deflationary spiral we're in now, companies are racing to fire people faster than demand is dropping. And those fired people are the very ones that would need to be buying cars for GM's overly optimistic sales forecasts to make any sense. In short, GM can't pay back the money because its sales forecasts are unrealistically high. Its management has presided over a 95% drop in GM stock and $73 billion in losses since 2004.
To me, it's pretty clear that if GM wants its $30 billion, the U.S. should demand new management that can at least tell the truth with its numbers.
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