At GM, the Endgame Begins

All year, General Motors CEO Rick Wagoner has been insisting his company will never declare bankruptcy. "We're well positioned," he said in August. Company spokespeople reiterated that in October, despite the big stock market plunge. Even the company website states that "bankruptcy protection is not an option GM is considering."

Well, guess what. While announcing a $2.5 billion third-quarter loss, GM also said that its "estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business." That means the company is spending way more than it's earning and, unless something changes, will run out of cash sometime early next year. The company itself hasn't raised the possibility of a Chapter 11 filing. But at this dire juncture, Wagoner and his lieutenants ought to be fired if they're not doing contingency planning for bankruptcy—since that's where companies end up when they run out of money and can't pay their bills.

There's one alternative, of course. No, it's not a desperate merger with Chrysler, which GM has now disavowed, since Chrysler is in even worse shape than GM. Salvation lies in—you guessed it—a government bailout. With the feds in full giveaway mode, GM is poised to be a major beneficiary, since it's still one of America's biggest companies, with about 140,000 employees (though shrinking quickly).

The mistake that brought GM to its knees is well known by now: It relied for too long on big trucks and SUVs that customers fled when gas prices spiked. As a result, sales have plunged 20 percent so far this year, with a dramatic 45 percent drop in October. "This type of decline is unheard of," says Tom Libby, a J. D. Power and Associates analyst.

GM is also a hit-and-run victim of the credit crunch and other factors beyond its control. GMAC, which provides financing for the majority of GM's buyers, recently tightened credit standards so much that thousands of customers couldn't get a loan, one reason GM's October sales were much worse than anybody else's, including Ford's and Chrysler's. Even GM itself can't get loans anymore, which is why its cash-flow problem is effectively a bankruptcy alert.

Wagoner & Co. have already tried a number of maneuvers to get the company back on track. GM has closed more than a dozen aging factories over the past 5 years and announced dozens of other cost-cutting measures. In fact, GM is like one of those highways that's always under construction: The company has announced reforms and taken charges for restructuring in virtually every quarter for the past four years.

Still, the damage never seems to get fixed. "What is taking so long?" wonders David Silver, an analyst at the research firm Wall Street Strategies. Last October, for instance, GM said that some of its truck and SUV production would be converted to smaller vehicles and that cars sold in Europe and Asia would be brought to the United States. "But I still see the same models in showrooms," Silver says. "Nothing Wagoner has done can be considered a strategic readjustment."

He and others have long argued that GM must take much more drastic steps—which may now be on the way. Some possibilities:

Consolidate brands. GM has eight divisions (quick, can anybody name them all?) with significant overlap. Chevrolet, Buick, Pontiac, and Saturn, for instance, share many vehicles that are nearly identical, except for the badging. Consolidation would cost some money up front to buy out dealers and close out certain brands, but it would make GM leaner and more competitive.

Pump out high-quality, smaller vehicles faster. One nice way to do this would be to shut down an old plant, retool it completely, retrain the workers, and then reopen as a Toyota-quality, made-in-the-USA operation. But that might be too expensive for a company bleeding cash.

Continue work on the electric-powered Chevy Volt. And make sure it meets the very high expectations GM has set, like being able to run 40 miles on a single charge, at an overnight recharging cost of less than $1 per day—with no quality problems!

Some help is already on the way. GM stands to get a boost of at least $5 billion from the $25 billion aid package Congress approved for the automakers in September. And all three Detroit automakers have been lobbying Washington for more help. One selling point is the devastation that a bankruptcy filing would cause. With plenty of quality cars in a crowded market, a Chapter 11 filing would be "so punishing it would virtually cripple the company," says Libby. "GM will sell other things or beg for money before they do that." The company might even admit how desperate it is.