DETROIT (AP) — General Motors Corp. drew closer to bankruptcy, acknowledging that its revenue fell by nearly half as car buyers worldwide steered away from showrooms for fear that the auto giant would not be around to honor its warranties.
The company lost $6 billion in the first three months of the year. The results are bad enough to bring a warning from Chief Financial Officer Ray Young, who acknowledged the difficulty of climbing out of a steep decline even if the company cuts costs.
“Once you start losing revenue, you get yourself into a vicious circle in which you cannot recover,” he told reporters on a conference call.
GM is living on $15.4 billion in federal loans and faces a June 1 government deadline to finish a restructuring plan or join Chrysler in Chapter 11 bankruptcy reorganization. The company would prefer to restructure out of court, but even its own executives say the obstacles are formidable.
“I think bankruptcy is highly likely, not because the losses are so bad, but because everyone has realized that this company needs fundamental restructuring,” said Douglas Baird, a University of Chicago law professor who specializes in bankruptcy cases.
Chapter 11 “seems the best way to clean up the balance sheet, clean up the problems, get a fresh start.”
Young conceded the second quarter also will be tough for GM because it is shutting many of its U.S. factories for up to 11 weeks to slash dealer inventories. But he expects revenue to bounce back once the automaker gets through inventory cuts.
GM is making more money on new products than it did on their predecessors, including the Chevrolet Malibu and Cadillac CTS, Young said.
GM spent $10.2 billion more cash than it took in from January through March, mainly because revenue fell by $20 billion from the first quarter of last year, to $22.4 billion.
Young expects GM to need another $2.6 billion in federal loans this month and $9 billion more during the rest of the year.
All the talk about bankruptcy, he said, is scaring some car buyers away. Detroit rival Chrysler LLC filed for bankruptcy protection last week.
“People are concerned about bankruptcy, and that’s the reason why we want to avoid it if at all possible,” Young said.
Government guarantees of GM and Chrysler warranties were not revealed by President Obama until March 30, so consumers did not know about them for virtually the entire first quarter, Young said.
Car buyers, he said, should be reassured by the government’s warranty guarantee, but it might take time for word to spread.
GM’s quarterly loss amounted to $9.78 per share, compared with a loss of $3.3 billion, or $5.80 per share a year ago.
Although huge, the $6 billion loss was nowhere near GM’s worst. The auto giant lost $39 billion in the third quarter of 2007 due mainly to a write-down for unused tax credits.
Revenue tumbled a stunning 47 percent because of declining sales worldwide, as well as huge production cuts and a strengthening U.S. dollar that made income earned in other currencies worth $3.5 billion less to GM.
GM cut structural costs by $3 billion in the quarter mainly with staff reductions, but Young said that was not enough. “We cannot cut costs fast enough to offset that revenue loss.”
Young said GM continues to prepare for bankruptcy while simultaneously pursuing its preferred option of restructuring out of court, Young said.
Chapter 11 does not necessarily mean a company goes out of business and liquidates its property. It also allows businesses to keep running and rehabilitate finances without the threat of creditors’ lawsuits.
The “revenue implosion,” Young said, was due largely to GM’s effort to cut inventories, reducing production by 900,000 vehicles globally, or about 40 percent.
Automakers count revenue on their books when cars leave factories for showrooms. If they are not making vehicles, they do not make money.
GM ended the quarter with $11.6 billion in cash, down from $14.2 billion on Dec. 31.
GM reported an operating loss of $3.2 billion from its North American operations alone. In Europe, the operating loss totaled $2 billion. Italy’s Fiat SpA is in talks to take over GM’s operations in Europe — Germany’s Opel, Britain’s Vauxhall and Sweden’s Saab.
Fiat confirmed Thursday that it is also interested in GM’s operations in Latin America, where the U.S. company squeezed out a small profit in the latest quarter.
GM faces an almost impossible list of restructuring tasks before the June 1 deadline. It must get new cost-cutting agreements with unions, close factories, cut jobs and complete a debt-for-stock swap with 90 percent of its bondholders to prove to the government it can repay loans.
The government could wind up with 50 percent of GM’s stock, while a United Auto Workers’ retiree health care trust fund could get around 39 percent. Of the remainder, 10 percent has been offered to bondholders and 1 percent would go to existing shareholders.
GM shares fell 6 cents, or 3.7 percent, to $1.60 in afternoon trading Thursday.
