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Prateek Gupta, Pujan Kumar Verma, Pulkit Khurana,

Sambit Roy, Sanchit Taneja, Shreyans Sharma

IMT Ghaziabad (DCP)

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Table of Contents

Abstract................................................................................................................................3

About General Motors.........................................................................................................4

GM in 2009: The Bankruptcy..............................................................................................4

Causes..............................................................................................................................4

Area of Focus.......................................................................................................................5

Leverage Analysis................................................................................................................6

Operational Leverage.......................................................................................................6

Financial Leverage...........................................................................................................7

Combined Leverage.........................................................................................................8

Competition Analysis...........................................................................................................9

Tesla Motors....................................................................................................................9

Tata Motors....................................................................................................................11

Summary............................................................................................................................12

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Abstract

This report concentrates on studying the operational and financial performance of

General Motors. This report is regarding the financials of the General Motors during and after

the bankruptcy filing. This was a trying moment for the company.

Through the financial instruments we come to know how the company was able to utilize

the government funding before they start making profit.

With the help of Operating and Financial Leverage we try to understand how and when

General Motors started taking risks and making high profits.

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About General Motors

General Motors is an American multinational company. They are commonly known as GM. Their headquartered in Detroit and Michigan. They design, manufacture, market and distribute vehicle and vehicle parts. They also sell financial services. The current GM was founded in 2009 after bankruptcy of the old GM.

The company was founded on September 16, 98 in flint, Michigan as a holding company for McLaughlin Car Company of Canada limited and Buick. It was then controlled by William C. Durant. GM’s co-founder Charles Stewart Mott was the largest single stockholder in GM. GM later acquired Oldsmobile. In the year 1909, Durant brought in Cadillac, Elmore, Oakland and several others. Also in 1909, GM acquired Reliance Motor Truck Company and Rapid Motor Vehicle Company. In the year 1911 Durant started Chevrolet Motor Car Company. In 1916 GM was reorganized into GM Corporation. Post-war global dominance of GM was led by Alfred P. Sloan when seven manufacturing facilities operated by Chevrolet before GM acquired and began operations. These were added to individual factories exclusive to Cadillac, Buick, Oldsmoblie, Oakland and other GM acquired companies. The major growth GM saw was in the 1980’s when it employed 349,000 workers and operated 150 assembly plants.

They led the global vehicle sales for 77 years from 1931-2007and is currently world’s largest automakers by vehicle unit sales. GM produces vehicles in 37 countries under thirteen brands: Alpheon, Chevrolet, Buick, GMC, Cadillac, Holden, Hsv, Opel, Vauxhall, Wuling, Baojun, Jie Fang, UzDaewoo. GM holds a 20% stake in IMM and a 77% stake in GM Korea. It also has joint ventures in countries like China, Russia, Pakistan, Uzbekistan, India, Egypt and South Africa. GM employs 212,000 people and does business in more than 120 countries across the globe.

But in the year 2009, GM had to close several brands like Saturn, Pontiac, and Hummer due to financial problems. GM is now divided into five business segments: GM North America, Opel Group, GM International Operations, GM South America and GM Financial.

GM in 2009: The Bankruptcy

Causes

There were various mistakes that lead to General Motors file for bankruptcy. The company which once sold half the cars in US now is operating on $20 billion in government aid and would need more billions to reorganize. Few of the major reasons are:

1. Not filling for bankruptcy sooner: The filing for bankruptcy in the year 2005 would have better for everyone as in the year 2005 the company was stronger and the economy was going along well enough to absorb job losses rather than waiting for the filling to accelerate due to market collapse. This would have also saved them from a lot more of debts that they took.

2. Incentives: After 2001 terrorist attacks GM started giving consumers 0% financing on loans up to five years. As newness of the deal wore off they started taking $3000 as rebate. After a few years the deals kept coming but GM stuck with their model of low

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rates as they were praised a lot for it. But this was starting a downfall for them as prices kept increasing and the effect had to be incurred by the company instead. They kept low rates and increased rebates to $6000 and later to $8000. This caused the market to go away from them as the sticker price was getting higher than the competition.

3. Killing EV2 electric program: They tried to compete with Toyota in the field of electric car and launched a test fleet. Due to PR problems the test cars were reclaimed. The real loss for the company was shutting down of the program and losing all the R&D done behind it. They should have benched it for use in future which would have helped them later as the consumers were looking for something greener and as their market was going away they would have used it for earning more profit.

4. Selling control of GMAC: GMAC was the financial arm behind every car pushed out of GM factories. They were considered equal to a bank for the GM group. But in 2006 due to cash crunch GM sold off 51% of GMAC to Cerberus for 7.4 billion in cash and 6.6 billion in staggered payments. This crippled GM from starting any new project or even taking risk in any existing project.

5. Mishandling FIAT- When GM bought 20% of the Italian company for 2.4 billion in GM shares; the deal looked as a genius move. This would have given them dominance in European market. The second clause was that FIAT could force GM to buy the remaining shares. But in 2005 GM paid FIAT $2 billion to get out of the deal.

6. Overreaction to the truck boom: After seeing the booming market for trucks, GM overcommitted themselves towards truck manufacturing especially from Hummer brand. But when in 2008 the fuel prices hiked and as trucks were not fuel efficient, the market tilted away from the trucks and the over commitment towards truck backfired.

Area of Focus

We are focusing on General Motors during and after they filed for bankruptcy. What measures where taken which were either beneficial to the resurgence of the company. What all measures and financial instruments actually help us evaluating if they are improving or they are still during the same phase.

We also compare General Motors with other competitors like Tesla Motors from the United States perspective and Tata Motors from the Indian perspective. This will help us analyze if General Motors have actually improved and utilized its bankruptcy filings. We have chosen this two companies because Tesla Motors and Tata Motors were in a very poor state after recession hit the market.

With the help of the operating leverage we would like two show how the company went into a shell and started consolidating before they thrust back and gave all in when they were financially strong so that they could earn extraordinary profits.

Through financial leverage we would like to show how General Motors have used the money provided by the US government to bail it out of bankruptcy. On whether they used the money usefully or did they waste the money.

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Leverage Analysis

Operational Leverage

Operational Leverage is a measure how growth in revenue translates in to growth or reduction operating income. If the company has a high positive degree of operating leverage, then the company is making unprecedented operating profits. But if the company is making high negative degree of operating leverage, then the company is making unprecedented operating loses. Operating leverage is a double edged sword for a company with respect to the fact that if the company is making profits, the higher the degree of operating leverage the higher will be its profit but if the company is making loses then it will make huge amount of profits.

The main reason for this the dependency of companies on fixed cost. If the company is incurring high amount of fixed costs, then the operating leverage will be higher. But if the company incurs high level of variable costs then the company’s operating leverage will be lower.

Below is the detailed data of General Motor’s Operating Leverage

  2014 2013 2012 2011 2010 2009Sales 155,427 155,929 152,256 148,866 135,311 57,474EBIT 1,530 5,131 -30,363 5,656 5,108 -4,863

The sales and EBIT value is in thousands.

Percentage change in Sales and EBIT and Degree of Operating Leverage (year on year):

 2014-2013

2013-2012

2012-2011

2011-2010

2010-2009

Percentage change in Sales      -0.0032 0.0241 0.0228 0.1002 1.3543Percentage change in EBIT -0.7018 -1.1690 -6.3683 0.1073 -2.0504DOL 217.9939 -48.4578 -279.6521 1.0709 -1.5140

The DOL or the degree of operating leverage is calculated by dividing the Percentage change in Sales by Percentage change in EBIT. This gives us year on year change in DOL.From the below data we can see that immediately after the year of bankruptcy the operating leverage of the company was at -1.5. This could be due to less dependence on the fixed costs. This could mean that they were trying to consolidate the company with the latest influx of money from the US government. Even the following the year the the company had an operating leverage of positive 1.07. This was again under the consolidation phase where the company was trying to make profits but slowly.

It can be observed that in the year 2012, the company tried to go for profits but failed miserably because it earned an operating loss of $ 30,363,000. It could be forgiven because the company had to try and start earning profits as the entire world was coming out of recession. But as the company incurred losses the DOL was down -279. In the year 2013, we can see that the

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company learned from the mistakes of 2012 and actually made profits of around $5 million. But still this could not reduce the DOL to be on the positive side.

But in the year 2014, we can see that the there was a negative change in EBIT but also there was negative change in Sales. This lead to a huge positive margin on degree of operating leverage. The initial years of low degree of operating leverage was due to the fact that they started selling or phasing out brands that were making losses. For example, GM sold its brand Saab to a Swedish auto maker Spyker Cars. Also the brands, Saturn and Hummer was declared defunct in the year 2010.

These factors combined with the high operating leverage was one of the reasons that it has paid of the bankruptcy loan and is valued as one of the top performing companies in the US.

Financial Leverage

Financial Leverage of a company is the practice of using the borrowed money from either debt or equity to invest in an asset. This can have completely opposite impacts depending on the investments. It may multiply gains if the right investment is carried out but it can also lead to heavy losses if the investment goes bad i.e. if the asset prices become bearish. Below is the detailed financial leverage of General Motors:

2014 2013 2012 2011 2010 2009

EPS 1.75 2.71 3.1 4.94 3.11 -3.58EBIT 1,530 5,131 -30,363 5,656 5,108 -4,863

The value of EBIT is in thousands.

Percentage change in Sales and EBIT and Degree of Financial Leverage (year on year):2014-2013 2013-2012 2012-2011 2011-2010 2010-2009

Percentage change in Sales -0.354 -0.126 -0.372 0.588 -1.869Percentage change in EBIT -0.702 -1.169 -6.368 0.107 -2.050DFL 0.505 0.108 0.058 5.485 0.911

The DFL or Degree of Financial Leverage is calculated by dividing the Percentage change in EBIT by Percentage change in Sales. Higher the value of DFL higher is the return from assets on which a company has invested in.

It is a common fact that General Motors had borrowed $ 20 Billion Dollars from the US government in July of 2009 after its claim of bankruptcy was approved. We can observe that the DFL value is almost one which shows that the assets invested by General Motors were relatively safe in terms of profit. Also in its corresponding year the company had a healthy DFL of almost 5.5. This showed that the company was on the right track after borrowing from the US government.It is to be noted that that in the following year there was a drastic drop in the DFL. This was due to the losses incurred by the company. This meant that the assets had back fired and had incurred losses for the company.

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But the next two years after that the company has generally been having a healthy DFL rate. These were the main reasons that the company was able to pay off the loan that it had taken from the government during the bankruptcy by the year 2014. It had taken the company only 5 years to repay a loan of $ 20 Billion Dollar plus the interests.

Combined Leverage

Combined leverage summarizes the effect of the degree of financial leverage and the degree of operating leverage. It is given as the percentage change of EPS with respect to percentage change in sales.

It provides the investors the idea of the earning a company has per share with respect to change in sales. If it has a higher and a positive degree it can be a good investment option.For General Motors the Sales and EPS from 2009 to 2014 is provided as below

  2014 2013 2012 2011 2010 2009Sales 155,427 155,929 152,256 148,866 135,311 57,474EPS 1.75 2.71 3.1 4.94 3.11 -3.58

The Degree of Total Leverage for these years are below:

 2014-2013

2013-2012 2012-2011 2011-2010 2010-2009

Percentage change in sales -0.003 0.024 0.023 0.100 1.354Percentage change in EPS -0.354 -0.126 -0.372 0.588 -1.869DTL 110.034 -5.215 -16.356 5.874 -1.380

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Competition Analysis

Tesla Motors

Tesla Motors is a company which manufactures electric cars. It gained major traction during their production of Roadster which was the first fully electric sports car. We have chosen this company because in 2009, it was noted that the company was out of cash. It was only when Elon Musk the CEO of the company had to invest his own cash to get the company out of the financial mess.Below is the Companies DOL, DFL and DTL.

Operating Leverage:

  2014 2013 2012 2011 2010 2009Sales 3,198,356 2,013,496 413,256 204,242 116,744 111,943EBIT -186,689 -61,283 -394,283 -251,488 -146,838 -51,897

Financial Leverage:

  2014 2013 2012 2011 2010 2009Sales 1.75 2.71 3.1 4.94 3.11 -3.58EBIT -186,689 -61,283 -394,283 -251,488 -146,838 -51,897

2014-2013 2013-2012 2012-2011 2011-2010 2010-2009

Percentage change in Sales 0.14 2.81 -0.83 0.46 -0.40Percentage change in EBIT 2.05 -0.84 0.57 0.71 1.83DFL 0.07 -3.32 -1.47 0.64 -0.22

Total Leverage:

 2014-2013 2013-2012 2012-2011 2011-2010

2010-2009

Percentage change in sales 0.59 3.87 1.02 0.75 0.04Percentage change in EBIT 2.05 -0.84 0.57 0.71 1.83DOL 3.48 -0.2181 0.554 0.95 42.65

  2014 2013 2012 2011 2010 2009Sales 3,198,356 2,013,496 413,256 204,242 116,744 111,943EPS -2.68 -2.36 -0.62 -3.69 -2.53 -4.22

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 2014-2013

2013-2012 2012-2011 2011-2010 2010-2009

Percentage change in sales 0.59 3.87 1.02 0.75 0.04Percentage change in EPS 0.14 2.81 -0.83 0.46 -0.40

DTL0.23

0.724 -0.812 0.611 -9.33

We can see that for Tesla Motors, Except for the year 2010-09, it has had a very low operating leverage and financial leverage. This is due to the fact that the the environmental cars are not yet very common. So they are still going very slowly instead of going with full blown risk. Tesla Motors did understand that as time passes they will have their time by increasing the risks and hence start earning more profits.

Tata Motors

It is a subsidiary of the large conglomerate Tata Group. The Tata Motors was set up in 1945. It started building trucks initially, but in 1991 created the its first passenger vehicle Taat Seirra followed by Tata Indica in1998 and Tata Nano in 2008. Also in 2008, it bought over the famous British car manufacturer, Jaguar Land Rover(JLR).

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Due to the launch of Nano and takeover of JLR there were some issues with its financials. We are trying to depict should it first try to reduce its risk and concentrate on consolidation or should it keep on continuing it riskiness.

Operating Leverage

  2015 2014 2013 2012 2011 2010 2009Sales 38,651.22 37,209.56 46,581.32 54,919.24 47,718.51 38,173.39 28,538.20EBIT -3,974.72 -1,025.80 174.93 1,341.03 2,196.52 2,829.54 1,013.76

Financial Leverage

  2014 2013 2012 2011 2010 2009Sales 1.75 2.71 3.1 4.94 3.11 -3.58EBIT -186,689 -61,283 -394,283 -251,488 -146,838 -51,897

2014-2013 2013-2012 2012-2011 2011-2010 2010-2009

Percentage change in Sales -15.15 0.09 -0.76 -0.86 -0.27Percentage change in EBIT 2.87 -6.86 -0.87 -0.39 -0.22DFL -5.27 -0.01 0.87 2.22 1.22

Total Leverage

 2014-2013 2013-2012 2012-2011 2011-2010

2010-2009

Percentage change in sales 0.04 -0.20 -0.15 0.15 0.25Percentage change in EBIT 2.87 -6.86 -0.87 -0.39 -0.22

DOL 74.20 34.12 5.73 -2.58 -0.89

  2014 2013 2012 2011 2010 2009Sales 38,651.22 37,209.56 46,581.32 54,919.24 47,718.51 38,173.39

EPS -14.72 1.04 0.95 3.91 28.55 39.26

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 2014-2013

2013-2012 2012-2011 2011-2010 2010-2009

Percentage change in sales 0.04 -0.20 -0.15 0.15 0.25Percentage change in EPS -15.15 0.09 -0.76 -0.86 -0.27

DTL -391.12 -0.47 4.99 -5.72 -1.09

We can observe that the DOL of Tata Motors is pretty strong but the financial leverage of the company is pretty weak. It leads to the fact that Tata motors has still not been able to invest in the correct assets. It has faced issues regarding land acquisition in India which is one of the main reasons for this.

Summary

We can see that the General Motors has actually performed exceptionally after it filled for bankruptcy. It has been taken less risks in the initial years. It did not look to make huge profits as they understood that it was the tax payer’s money and it had just one shot to success.

This lead to the slow but steady growth of General Motors to the initial glory days. By 2014 it was able to repay the entire $ 20 Billion plus the interest back to the government.

This shows that how a company can concentrate on reducing risks while consolidating and later on once the financials and other strategies in place it can pick up drastically.

Currently the GMC is listed under Nasdaq and is trading around $35 per share. Also the company is listed as one of the top 40 performing companies in Dow Jones ahead of some major companies like American Express etc.