Gm Recovery: a Bumpy Ride

By: Anthony Fontanelle

General Motors Corp.'s already shaky recovery plan paved the way to one long bumpy ride. Experts in the industry said slow sales were boosted by a collapsing housing market, high gasoline prices and across-the-board uncertainty. The enduring sales doldrums are expected to significantly affect GM's workers.

The Detroit-based automaker said that it would take a $38.6 billion hit for a tax-related accounting charge that was not the biggest problem in the company's third-quarter earnings report Thursday.

GM lost $1.6 billion in the three months ending Sept. 30, excluding special items and one-time charges. As a result, a sudden end to a series of profitable quarters occurred. To stress, it has wiped away gains made in the first half of this year.

Analysts said more tough years are likely ahead. The American auto industry's sales slump of this year is expected to carry on if not worsen, well into next year, they noted. Commodity prices persist to hike beyond expectations. Unstable gasoline prices are again making American shoppers jittery. And the U.S. housing market crisis, which cost GM $757 million in the third quarter through its partial ownership of the GMAC financial unit, is showing no signs of letting up, The Detroit News Reported.

"We do have concerns over near-term economic conditions," said GM Chief Financial Officer Fritz Henderson. "The overall pace of economic activity is certainly below our expectations."

Altogether, the automaker posted a record $39 billion third quarter net loss, which included the $38.6 billion charge related to future tax benefits. According to Bloomberg News, the loss is the worst in GM's history and ranks fourth on the list of worst quarterly performances since 1990 for members of the Standard & Poor's 500 Index.

The tax credit could have been used to offset taxes on future earnings and will be restored if the automaker posts three consecutive years of profitable quarters. GM's Henderson said that the charge is an accounting adjustment and does not affect the automaker's cash flow or long-term prospects for profitability.

"We simply aren't inclined to look through the root cause as just 'noncash, nonrecurring' items," Bear Sterns analyst Peter Nesvold said in a research note. "As we noted last week, fundamental pressures appear to be coming on even faster and stronger than we thought when we downgraded GM shares," three weeks ago.

Overall, GM's quarterly results were far worse than Wall Street predicted. The news cast doubt over the automaker's recovery plan which, in 2006, has delivered three consecutive profitable quarters, a landmark cost-cutting labor deal with the United Auto Workers, stable U.S. market share and a string of product successes.

Henderson acknowledged that economic conditions had worsened beyond the automaker's expectations going into the year. "We certainly didn't foresee a 16-million market," Henderson said. "We certainly didn't foresee the housing problems. We have to base the business on the reality of today."

To battle auto industry's crisis, GM should be as efficient and flexible as . And the company has to find a way out of the bumpy track.

"We continue to implement the key elements of our North America turnaround strategy, and these initiatives are driving steady improvement in our financial results, despite challenging North America market conditions," concluded GM Chairman Rick Wagoner.

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