General Motors Files for Chapter 11 Bankruptcy

The Obama administration is estimating it will take 60–90 days for the "New GM" to emerge from bankruptcy. IHS Global Insight believes there is a high probability that this timing is achievable, since a prolonged GM bankruptcy could significantly harm the U.S. economy—just as it is starting to show some signs of recovery. Thus, the administration will likely do everything possible to minimize the time the New GM stays in bankruptcy.

While we believe that GM will emerge quickly from bankruptcy and that it has a high probability of eventually becoming a sustainable and successful business, we have some concerns with the speed and robustness of GM's forecasted recovery. In particular, its forecasts for market volume, market share, and the resulting factory unit sales (FUS) are somewhat higher than our own forecasts. GM is estimating an outbound market share of 18.4–18.9% in its documents. IHS Global Insight has a GM market share stabilizing at 17.2–17.4% during 2009–14. This share difference, coupled with GM's more optimistic forecast for total market volume, results in GM's forecast for its factory unit sales being higher than ours by 5.4–20.4%.

Like all domestic auto companies, GM faces a perception issue. Many American consumers are not yet willing to accept that GM, Ford, and Chrysler can build vehicles with the same appeal and quality as their Asian counterparts. Taking GM and Chrysler through bankruptcy will only worsen the situation. One of the risks to the forecast is that in order for GM to stabilize market share, we have to assume that GM can attract enough younger (Gen Y) buyers to replace the domestic-loyal buyers of older generations (Depression Gen, Quiet Gen) that are ageing out of the market. This allows GM to halt its market share decline at around 17.2–17.4%. If GM cannot accomplish this, its market share will continue to slide, further weakening its recovery plan. The automaker is banking on exciting upcoming products like the Chevy Volt, the Chevy Cruze, and the newly available Chevy Camaro to help with general perception issues.

On the production side, we have factored in some of the announcements that were made today and those are outlined below. GM is reporting that with the plant closures and realignments announced today, it will be at "full capacity utilization of its assembly operations in 2011" (Operational Changes, taken from GM S-4 filing of April 27, 2009). But based on our lower forecast for GM market share, we see a capacity utilization rate of 74% in 2011, based on a U.S. capacity of 2.56 million units and a production level of 1.7 million units.

Adjustments in this month's North American Light Vehicle Forecast Report include GM's decision to eliminate its Saturn, Hummer, and Saab brands by the end of 2009, and its Pontiac brand after the 2010 model year. The forecast does not include possible contract production by GM for Saturn or other brands beyond their termination dates, since this information is highly speculative.

The forecast includes adjustments at the plant level from the details released at the June 1 declaration of bankruptcy, including Wilmington (Kappa platform), slated to close in July 2009.

Other adjustments include closing Spring Hill (Lambda) by November 2009 and putting it on standby pending future demand. Production of the Chevrolet Traverse shifts to the Lansing Delta plant beginning October 2009. IHS Global Insight currently believes the plant will reopen in 2012, when GM begins production of the next-generation Chevrolet Traverse (Lambda2), as well as begins replacing some GMT900 products with Lambda-based vehicles. Lambda-based volume will require two assembly plants.

Orion (Epsilon) closes September 2009 and is on standby, pending future market demand. The closure of the Pontiac Assembly plant (GMT900) was confirmed, but because the closure was already figured into the forecast, there is no change to the end production date for the Pontiac plant, which is October 2009.

We have not added a subcompact car to a U.S. plant, which GM pegged at 160,000 units annually, but gave no timeframe. If GM goes ahead with it, we believe it is likely to be a Gamma product built at the Orion plant, beginning in 2011 or 2012. All North American-produced Gamma products are currently sourced in the forecast at the San Luis Potosi plant.

Overall, we are confident that GM will be able to emerge from bankruptcy in a relatively short amount of time and become a viable company again. But concerns remain about its ability to stabilize market share and the time line of its recovery, especially in the short term. We have a much more conservative forecast for GM's volumes, which of course directly impacts the automaker's performance, particularly related to capacity utilization and potential operational profitability.

In summary, we are cautiously optimistic about GM, but some red flags remain.