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Stalled GM needs a restart

www.breakingviews.com

As General Motors boss Rick Waggoner takes charge of the company's US factories, he should ask himself a basic question: Why bother? There's no doubt that GM needs a tune-up. And Waggoner might be the mechanic for the job. But GM faces a bigger problem, one that tinkering with the engine is unlikely to fix – long-term solvency.

The threat to solvency comes from the company's huge liabilities for pensions and healthcare. The big number is the

$61 billion of unfunded healthcare liabilities, of which $28 billion are on the balance sheet. These are likely to get much bigger as the ratio of retired to active workers – already an astonishing 2.4 to 1 – increases. As for pensions, the company reports a mere $8 billion underfunding for the end of 2004, but more realistic return assumptions would bring the total up.

Those off-balance-sheet liabilities are not exactly debt; nevertheless they already dwarf the company's $28 billion of equity. As the workforce ages and these obligations have to be paid out, GM will struggle to find the cash.

To solve these problems for good, GM needs to start afresh.

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