Form 10-K

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549-1004

Form 10-K

 

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2008

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 1-43

GENERAL MOTORS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

STATE OF DELAWARE   38-0572515

(State or other jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

300 Renaissance Center, Detroit, Michigan   48265-3000
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code

(313) 556-5000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

  

Name of Each Exchange on

which Registered

Common Stock, $1 2/3 par value    New York Stock Exchange
1.50% Series D Convertible Senior Debentures    New York Stock Exchange
4.50% Series A Convertible Senior Debentures    New York Stock Exchange
5.25% Series B Convertible Senior Debentures    New York Stock Exchange
6.25% Series C Convertible Senior Debentures    New York Stock Exchange
7.375% Senior Notes due October 1, 2051    New York Stock Exchange
7.25% Senior Notes due July 15, 2041    New York Stock Exchange
7.375% Senior Notes due May 23, 2048    New York Stock Exchange
7.25% Senior Notes due February 15, 2052    New York Stock Exchange
7.25% Quarterly Interest Bonds due April 15, 2041    New York Stock Exchange
7.375% Senior Notes due May 2048    New York Stock Exchange
7.50% Senior Notes due July 1, 2044    New York Stock Exchange

Note: The $1 2/3 par value common stock of the Registrant is also listed for trading on the following exchanges:

 

Bourse de Bruxelles

  

Brussels, Belgium

Euronext Paris

  

Paris, France

Securities registered pursuant to Section 12 (g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  þ  No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ¨  No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ  No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Yes  þ  No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  þ  Accelerated filer  ¨  Non-accelerated filer  ¨  Smaller reporting company  ¨  

Do not check if smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  þ

As of June 30, 2008, the aggregate market value of GM $1 2/3 par value common stock held by nonaffiliates of GM was approximately $6.5 billion. The closing price on June 30, 2008 as reported on the New York Stock Exchange was $11.50 per share.

As of March 2, 2009, the number of shares outstanding of GM $1 2/3 par value common stock was 610,501,969 shares.

 

 

 


INDEX

 

         Page
 

PART I

  

Item 1.

 

Business

   1

Item 1A.

 

Risk Factors

   19

Item 1B.

 

Unresolved Staff Comments

   45

Item 2.

 

Properties

   46

Item 3.

 

Legal Proceedings

   46

Item 4.

 

Submission of Matters to a Vote of Security Holders

   53
 

PART II

  

Item 5.

 

Market for the Registrant’s Common Equity and Related Stockholder Matters

   54

Item 6.

 

Selected Financial Data

   55

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   57

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

   134

Item 8.

 

Financial Statements and Supplementary Data

   139
 

Consolidated Statements of Operations

   139
 

Consolidated Balance Sheets

   140
 

Consolidated Statements of Cash Flows

   141
 

Consolidated Statements of Stockholders’ Equity (Deficit)

   143
 

Notes to Consolidated Financial Statements

   144
 

Note 1.

 

Nature of Operations

   144
 

Note 2.

 

Basis of Presentation

   144
 

Note 3.

 

Significant Accounting Policies

   148
 

Note 4.

 

Acquisition and Disposal of Businesses

   157
 

Note 5.

 

Marketable Securities

   158
 

Note 6.

 

Finance Receivables and Securitizations

   160
 

Note 7.

 

Inventories

   163
 

Note 8.

 

Equipment on Operating Leases, net

   164
 

Note 9.

 

Investment in Nonconsolidated Affiliates

   164
 

Note 10.

 

Property, net

   170
 

Note 11.

 

Goodwill and Intangible Assets

   171
 

Note 12.

 

Other Assets

   172
 

Note 13.

 

Variable Interest Entities

   173
 

Note 14.

 

Accrued Expenses, Other Liabilities and Deferred Income Taxes

   174
 

Note 15.

 

Short-Term Borrowings and Long-Term Debt

   175
 

Note 16.

 

Pensions and Other Postretirement Benefits

   183
 

Note 17.

 

Derivative Financial Instruments and Risk Management

   200
 

Note 18.

 

Commitments and Contingencies

   203
 

Note 19.

 

Income Taxes

   212
 

Note 20.

 

Fair Value of Financial Instruments

   219
 

Note 21.

 

Restructuring and Other Initiatives

   225
 

Note 22.

 

Impairments

   229
 

Note 23.

 

Other Expenses

   232
 

Note 24.

 

Stockholders’ Equity

   232
 

Note 25.

 

Loss Per Share

   234
 

Note 26.

 

Stock Incentive Plans

   234
 

Note 27.

 

Transactions with GMAC

   239
 

Note 28.

 

Supplementary Quarterly Financial Information (Unaudited)

   245
 

Note 29.

 

Segment Reporting

   247
 

Note 30.

 

Supplemental Information for Consolidated Statements of Cash Flows

   252
 

Note 31.

 

Subsequent Events

   252

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   253

Item 9A.

 

Controls and Procedures

   253

Item 9B.

 

Other Information

   256


         Page
 

PART III

  

Item 10.

 

Directors, Executive Officers and Corporate Governance

   257

Item 11.

 

Executive Compensation

   261

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   300

Item 13.

 

Certain Relationships and Related Transactions and Director Independence

   302

Item 14.

 

Principal Accountant Fees and Services

   303
 

PART IV

  

Item 15.

 

Exhibits and Financial Statement Schedule

   305

Signatures

     401


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

PART I

General Motors Corporation, incorporated in 1916 under the laws of the State of Delaware, is sometimes referred to in this Annual Report on Form 10-K as “we,” “our,” “us,” “ourselves,” the “Registrant,” the “Corporation,” “General Motors,” or “GM.”

Item 1. Business

General

We are engaged primarily in the worldwide development, production and marketing of cars, trucks and parts. We develop, manufacture and market vehicles worldwide through our four automotive segments: GM North America (GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM) and GM Asia Pacific (GMAP).

Our total worldwide car and truck deliveries were 8.4 million, 9.4 million and 9.1 million, in 2008, 2007 and 2006, respectively. Substantially all of our cars, trucks and parts are marketed through retail dealers in North America, and through distributors and dealers outside of North America, the substantial majority of which are independently owned. GMNA primarily meets the demands of customers in North America with vehicles developed, manufactured and/or marketed under the following brands:

 

•      Chevrolet

 

•      Buick

 

•      Saab

 

•      GMC

•      Pontiac

 

•      Cadillac

 

•      HUMMER

 

•      Saturn

The demands of customers outside North America are primarily met with vehicles developed, manufactured and/or marketed under the following brands:

 

•      Opel

 

•      Saab

 

•      GMC

 

•      HUMMER

•      Vauxhall

 

•      Buick

 

•      Cadillac

 

•      Isuzu

•      Holden

 

•      Chevrolet

 

•      Daewoo

 

•      Suzuki

At December 31, 2008, we also had equity ownership stakes directly or indirectly through various regional subsidiaries, including GM Daewoo, New United Motor Manufacturing, Inc. (NUMMI), Shanghai GM, SAIC-GM-Wuling Automobile Co., Ltd. (SGMW) and CAMI Automotive Inc. These companies design, manufacture and market vehicles under the following brands:

 

•      Pontiac

 

•      Wuling

 

•      Chevrolet

 

•      Buick

•      Daewoo

 

•      Cadillac

 

•      Holden

 

As previously announced, we are undertaking a strategic review of the HUMMER brand, which includes the possible sale of the brand. As a result of our strategic review of the global Saab Automobile AB (Saab) business, Saab announced, in February of 2009, that it has filed for reorganization under a self-managed Swedish court process. Pending court approval the reorganization will be executed over a three month period and will require independent funding to succeed. During the reorganization process, Saab will continue to operate as usual in accordance with the formal reorganization process. With respect to the Saturn brand, which has a unique franchise agreement and operating structure, our plan is to accelerate discussions with Saturn retailers and explore alternatives for the Saturn brand. In addition, in connection with our plan to achieve and sustain long-term viability, international competitiveness and energy efficiency, we may review other brands to determine their fit within our portfolio. Refer to “MD&A — Recent Developments” for a further discussion of our strategic approach.

On December 31, 2008, we entered into a Loan and Security Agreement (UST Loan Agreement) with the United States Department of the Treasury (UST) pursuant to which the UST agreed to provide us with a $13.4 billion secured term loan facility (UST Loan Facility). We borrowed $4.0 billion under the UST Loan Facility on December 31, 2008, an additional $5.4 billion on January 21, 2009 and $4.0 billion on February 17, 2009. Refer to “MD&A — Recent Developments” for more information about the UST Loan Agreement.

 

1


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

In addition to the products we sell to our dealers for consumer retail sales, we also sell cars and trucks to fleet customers, including daily rental car companies, commercial fleet customers, leasing companies and governments. Sales to fleet customers are completed through our network of dealers and in some cases directly by us. Our retail and fleet customers can obtain a wide range of aftersale vehicle services and products through our dealer network, such as maintenance, light repairs, collision repairs, vehicle accessories and extended service warranties.

In addition to our automotive operations, our finance and insurance operations are primarily conducted through GMAC LLC (GMAC), the successor to General Motors Acceptance Corporation. GMAC was a wholly-owned subsidiary until November 30, 2006, when we sold a 51% controlling ownership interest in GMAC to a consortium of investors (FIM Holdings) in the GMAC Transaction. Since the GMAC Transaction, we have accounted for our ownership interest in GMAC under the equity method. GMAC provides a broad range of financial services, including consumer vehicle financing, automotive dealership and other commercial financing, residential mortgage services, automobile service contracts, personal automobile insurance coverage and selected commercial insurance coverage.

As a result of the financial market turmoil and depressed economy, GMAC had been facing significant income and liquidity challenges that adversely affected both the value of our investment in GMAC and the extent to which GMAC was able to provide financing to our customers and our dealers. Consequently, GMAC had reduced its financing of vehicle sales and leases, including completely exiting the retail vehicle financing business in certain international markets. These developments in turn made it harder for our customers to find financing and resulted in lost sales for us. On December 24, 2008, GMAC’s application to become a bank holding company (BHC) was approved by the Board of Governors of the Federal Reserve System (Federal Reserve). As a BHC, GMAC has indicated that it is positioned to increase its lending to auto and mortgage consumers and businesses such as automotive dealers; however, BHC status alone will not allow GMAC to meet all of our consumer and wholesale funding needs. Refer to “Significant Transactions” below for a further discussion of GMAC’s BHC status.

In December 2008 we and FIM Holdings entered into a subscription agreement with GMAC under which we agreed to purchase additional Common Membership Interests in GMAC. The UST had committed to provide us with additional funding in order to purchase the additional Common Membership Interests in GMAC. In January 2009, we borrowed $884 million from the UST (UST GMAC Loan) and utilized those funds to purchase 190,921 Class B Common Membership Interests of GMAC. The representations, covenants and events of default of the UST GMAC Loan are substantially the same as the UST Loan agreements. These borrowings are secured by our Common and Preferred Membership Interests in GMAC. As part of this loan agreement, the UST has the option to convert outstanding amounts under this loan agreement into Class B Common Membership Interests on a pro-rata basis. As a result of this purchase, our interest in GMAC’s Common Membership Interests increased from 49% to 60%. As part of the conversion of GMAC to a BHC, we have agreed to transfer all, but 10%, of our economic interest in GMAC, including the shares purchased in 2009, into a series of trusts. We will be the beneficial owner of these trusts, but the trusts assets will be controlled by the trustee. The trusts must dispose of the shares within three years. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Factors Affecting Future and Current Results — GMAC — Conversion to Bank Holding Company and Related Transactions.”

The following information is incorporated herein by reference to the indicated pages:

 

Item

   Page(s)

Employment

   17

Production Volumes

   59

Segment Reporting (Refer to Note 29 to the consolidated financial statements)

   222

 

2


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Vehicle Sales

The following table summarizes total industry sales of new motor vehicles of domestic and foreign makes and our competitive position:

 

     Vehicle Sales(a)(b)
Years Ended December 31,
     2008    2007    2006
     Industry    GM    GM as a
% of
Industry
   Industry    GM    GM as a
% of
Industry
   Industry    GM    GM as a
% of
Industry
     (Vehicles in thousands)

United States

                          

Cars

                          

Small

   2,601    328    12.6%    2,647    381    14.4%    2,617    426    16.3%

Midsize

   2,920    760    26.0%    3,410    884    25.9%    3,595    946    26.3%

Sport

   272    48    17.7%    372    68    18.2%    452    83    18.4%

Luxury

   963    122    12.6%    1,142    157    13.7%    1,190    170    14.3%
                                      

Total cars

   6,757    1,257    18.6%    7,571    1,489    19.7%    7,854    1,625    20.7%

Trucks

                          

Pick-ups

   1,993    738    37.0%    2,710    979    36.1%    2,874    1,022    35.6%

Vans

   841    151    17.9%    1,119    219    19.6%    1,326    245    18.5%

Utilities

   3,653    809    22.1%    4,752    1,136    23.9%    4,505    1,173    26.0%

Medium Duty

   257    26    10.1%    321    44    13.7%    501    59    11.8%
                                      

Total trucks

   6,744    1,723    25.6%    8,902    2,377    26.7%    9,206    2,499    27.1%

Total United States

   13,501    2,981    22.1%    16,473    3,867    23.5%    17,060    4,125    24.2%

Canada, Mexico, and Other

   3,057    583    19.1%    3,116    649    20.8%    3,141    682    21.7%
                                      

Total GMNA

   16,557    3,564    21.5%    19,588    4,516    23.1%    20,201    4,807    23.8%

GME

   21,981    2,041    9.3%    23,136    2,183    9.4%    21,895    2,005    9.2%

GMLAAM

   7,477    1,276    17.1%    7,267    1,236    17.0%    6,269    1,036    16.5%

GMAP

   21,105    1,475    7.0%    20,717    1,436    6.9%    19,230    1,248    6.5%
                                      

Total Worldwide

   67,120    8,356    12.4%    70,708    9,370    13.3%    67,595    9,095    13.5%
                                      

 

3


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

     Vehicle Sales(a)(b)
Years Ended December 31,
     2008    2007    2006
     Industry    GM    GM as a
% of

Industry
   Industry    GM    GM as a
% of

Industry
   Industry    GM    GM as a
% of

Industry
     (Vehicles in thousands)

United States

   13,501    2,981    22.1%    16,473    3,867    23.5%    17,060    4,125    24.2%

Canada

   1,674    359    21.4%    1,691    404    23.9%    1,666    421    25.3%

Mexico

   1,071    212    19.8%    1,146    230    20.1%    1,179    245    20.8%

Other

   312    12    3.9%    279    15    5.4%    295    16    5.4%
                                      

Total GMNA

   16,557    3,564    21.5%    19,588    4,516    23.1%    20,201    4,807    23.8%

United Kingdom

   2,486    384    15.4%    2,800    427    15.2%    2,734    391    14.3%

Russia

   3,050    338    11.1%    2,707    260    9.6%    2,033    133    6.5%

Germany

   3,425    300    8.8%    3,482    331    9.5%    3,772    380    10.1%

Spain

   1,362    107    7.8%    1,939    171    8.8%    1,953    183    9.4%

France

   2,574    114    4.4%    2,584    125    4.8%    2,499    123    4.9%

Other

   9,086    800    8.8%    9,622    868    9.0%    8,903    795    8.9%
                                      

Total GME

   21,981    2,041    9.3%    23,136    2,183    9.4%    21,895    2,005    9.2%

China

   9,132    1,095    12.0%    8,457    1,032    12.2%    7,076    871    12.3%

Australia

   1,012    133    13.1%    1,050    149    14.2%    963    148    15.4%

South Korea

   1,215    117    9.7%    1,271    131    10.3%    1,202    129    10.7%

India

   1,975    66    3.3%    1,989    60    3.0%    1,750    35    2.0%

Other

   7,771    64    0.8%    7,949    63    0.8%    8,239    65    0.8%
                                      

Total GMAP

   21,105    1,475    7.0%    20,717    1,436    6.9%    19,230    1,248    6.5%

Brazil

   2,820    549    19.5%    2,463    499    20.3%    1,928    410    21.3%

Mid-East (excluding Israel)

   1,620    144    8.9%    1,606    136    8.5%    1,627    141    8.7%

Argentina

   616    95    15.5%    573    92    16.1%    454    75    16.5%

Venezuela

   272    91    33.3%    492    151    30.7%    343    92    26.7%

Colombia

   219    80    36.3%    252    93    36.8%    192    74    38.6%

Other

   1,931    317    16.4%    1,881    264    14.0%    1,725    244    14.1%
                                      

Total GMLAAM

   7,477    1,276    17.1%    7,267    1,236    17.0%    6,269    1,036    16.5%
                                      

Total Worldwide

   67,120    8,356    12.4%    70,708    9,370    13.3%    67,595    9,095    13.5%
                                      

 

(a) Our vehicle sales primarily represent vehicles we manufacture, sell under a GM brand or through a GM-owned distribution network. Under a contractual agreement with SGMW we also report Wuling China vehicle sales as part of our global market share. Wuling China vehicle sales included in our global vehicle sales and market share data was 606,000 vehicles, 516,000 vehicles and 417,000 vehicles in 2008, 2007 and 2006, respectively. Consistent with industry practice, vehicle sales information includes estimates of industry sales in certain countries where public reporting is not legally required or otherwise available on a consistent basis.

 

(b) Totals may include rounding differences.

 

4


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Fleet Sales and Deliveries

The sales and market share data provided above includes both retail and fleet vehicle sales. Our fleet sales are comprised of vehicle sales to daily rental car companies, as well as leasing companies and commercial fleet and government customers. Certain fleet transactions, particularly daily rental, are generally less profitable than average retail sales. As part of our pricing strategy, particularly in the U.S., we have reduced sales to daily rental car companies.

The following table summarizes our estimated fleet sales and the amount of those sales as a percentage of our total vehicle sales:

 

     Years Ended December 31,
         2008            2007            2006    
     (Vehicles in thousands)

GMNA

   953    1,152    1,270

GME

   769    833    792

GMLAAM

   361    362    289

GMAP

   226    232    227
              

Total fleet sales (a)

   2,309    2,579    2,578
              

Fleet sales as a percentage of total vehicle sales

   27.6%    27.5%    28.3%

 

(a) Fleet sale transactions vary by region and some amounts are estimated.

The following table summarizes our U.S. fleet sales and the amount of those sales as a percentage of our total U.S. vehicle sales:

 

     Years Ended December 31,
         2008            2007            2006    
     (Vehicles in thousands)

Daily rental sales

   480    596    704

Other fleet sales

   343    412    407
              

Total fleet sales

   823    1,008    1,111
              

Fleet sales as a percentage of total vehicle sales

        

Cars

   34.8%    34.9%    36.5%

Trucks

   22.4%    20.5%    20.7%

Total cars and trucks

   27.6%    26.1%    26.9%

Competitive Position

In 2008, the global automotive industry continued to be highly competitive and was severely affected by the tightening of the credit markets, a recession in the United States and Western Europe and volatile oil prices and decreases in the employment rate. These economic factors had a negative effect on the automotive industry and the principal factors that determine consumers’ vehicle buying decisions. As a result of these economic factors, consumers delayed purchasing or leasing new vehicles causing a decline in global vehicle sales. The principal factors that determine consumer vehicle preferences in the markets in which we operate include price, quality, style, safety, reliability, fuel economy and functionality. Our estimated worldwide market share was 12.4%, 13.3% and 13.5% in 2008, 2007 and 2006. Market leadership in individual countries in which we compete varies widely and we do not lead in every country.

The negative economic factors mentioned above had a significant effect on North America and our largest market, the United States. In addition to the economic factors described above, turmoil in the mortgage markets, resulting in reductions in housing values, and declining consumer confidence as a result of the declining household incomes and the United States recession contributed to significantly lower vehicle sales in the United States. Despite the adverse economic conditions affecting the United States in 2008, we have maintained the largest market share in our largest market, the United States, for 78 consecutive years.

 

5


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

The following table summarizes the respective U.S. market shares for us and our principal competitors in passenger cars and trucks in the U.S.:

 

     Years Ended December 31,
         2008            2007    

GM

   22.1%    23.5%

Toyota

   16.5%    15.9%

Ford

   14.7%    15.2%

Chrysler

   10.8%    12.6%

Honda

   10.6%    9.4%

Nissan

   7.0%    6.5%

Product Pricing

In 2008, we continued to use a number of methods to promote our products, including the use of dealer, retail and fleet incentives such as customer rebates, finance rate support and special lease programs. The level of incentives is dependent in large part upon the level of competition in the markets in which we operate and the level of demand for our products. During the latter half of 2008, we shifted our incentive offerings primarily to cash offers to consumers due to the deterioration in the credit markets, specifically GMAC’s inability to find funding to support finance rate incentives and lease programs.

Seasonal and Cyclical Nature of Business

In the automotive business, retail sales are seasonal and production varies from month to month. Changeovers occur throughout the year for reasons such as new market entries and vehicle model changeovers. Production is typically lower in the third quarter due to annual product changeovers and the fact that annual facility shutdowns are planned during this time to facilitate other facility and product changes. These lower production rates in the third quarter cause operating results to be, in general, less favorable than those in the other three quarters of the year. Production rates in 2008 did not follow this usual pattern, instead decreasing throughout the year in response to the increasing economic crisis.

The market for vehicles is cyclical and depends on general economic conditions and consumer spending. Since mid-2008, the global automotive industry has been severely affected by the tightening of the credit markets, a recession in the U.S. and Western Europe and volatile oil prices. These factors have resulted in consumers deferring purchasing or leasing new vehicles, which led to decreases in the total number of new cars and trucks sold.

Relationship with Dealers

Worldwide we market our vehicles through a network of independent retail dealers and distributors. At December 31, 2008 there were 6,375 GM vehicle dealers in the United States, 715 in Canada and 270 in Mexico. Additionally, there were a total of 14,242 distribution outlets throughout the rest of the world for vehicles manufactured by us and our affiliates. These outlets include distributors, dealers and authorized sales, service and parts outlets.

The following table summarizes the number of authorized GM dealerships:

 

     December 31,
     2008    2007    2006

GMNA

   7,360    7,835    8,096

GME

   8,732    8,902    8,802

GMLAAM

   1,684    1,763    1,681

GMAP

   3,826    3,387    3,649
              

Total Worldwide

   21,602    21,887    22,228
              

 

6


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

In 2008, GMNA’s authorized dealerships decreased by 475 outlets, 401 of which were in the U.S. The decrease in authorized GM dealerships at GMNA was caused primarily by the decline in the U.S. automotive industry’s vehicle sales brought about by the U.S. recession. The tightening of the credit markets, turmoil in the mortgage markets and volatile oil prices caused a decline in consumer confidence resulting in consumers delaying purchasing or leasing new vehicles forcing some dealerships to cease operations. In addition to the U.S. recession’s effect on our dealers, decreases in GMNA’s dealerships were a result of our channel realignment strategy. Channel realignment is the strategic combining of certain brands in a single dealership. We believe channel realignment helps us differentiate products and brands more clearly, enhance dealer profitability and provide greater flexibility in product portfolio and technology planning. As discussed in “Recent Developments,” we intend to continue reducing the number of our dealers.

We enter into a contract with each authorized dealer agreeing to sell the dealer one or more specified product lines at wholesale prices and granting the dealer the right to sell those vehicles to retail customers from a GM approved location. Our dealers often offer more than one GM brand of vehicle at a single dealership. In fact, we actively promote this for several of our brands in a number of our markets in order to enhance dealer profitability. In some instances an authorized GM dealer may also be an authorized dealer for another manufacturer’s vehicles. Authorized GM dealers offer parts, accessories, service and repairs for GM vehicles in the product lines that they sell, primarily using genuine GM vehicle accessories and service parts. Our dealers are authorized to service GM vehicles under our limited warranty program, and those repairs are to be made only with genuine GM parts. In addition, our dealers generally provide their customers access to credit or lease financing, vehicle insurance and extended service contracts provided by GMAC or its subsidiaries and other financial institutions.

Because dealers maintain the primary sales and service interface with the ultimate consumer of our products, the quality of GM dealerships and our relationship with our dealers and distributors are significant to our success. In addition to the terms of our contracts with our dealers, we are regulated by various country and state franchise laws that supersede those contractual terms and impose specific regulatory requirements and standards for initiating dealer network changes, pursuing terminations for cause and other contractual matters.

Research, Development and Intellectual Property

In 2008, we incurred costs of $8.0 billion for research, manufacturing engineering, product engineering, design and development activities related primarily to developing new products or services or improving existing products or services, including activities related to vehicle emissions control, improved fuel economy and the safety of drivers and passengers in our vehicles. We incurred costs of $8.1 billion and $6.6 billion for similar company-sponsored research and other product development activities in 2007 and 2006, respectively. We expect to incur lower costs for these purposes in 2009.

Research

Overview

Our top priority for research is to continue to develop and advance our alternative propulsion strategy, as energy diversity and environmental leadership are critical elements of our overall business strategy. Our objective is to be the recognized industry leader in fuel efficiency through the development of a wide variety of technologies to reduce petroleum consumption. To meet this objective we will focus on five specific areas:

 

   

Continue to increase the fuel efficiency of our cars and trucks;

 

   

Development of alternative fuel vehicles;

 

   

Invest significantly in expanding our hybrid vehicle offerings;

 

   

Invest significantly in plug-in electric vehicle technology; and

 

   

Continued development of hydrogen fuel cell technology.

 

7


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

We are among the industry leaders in fuel efficiency and we are committed to lead in the development of technologies to increase the fuel efficiency of internal combustion engines such as cylinder deactivation, direct injection, turbo-charging with engine downsizing, six speed transmissions and variable valve timing. Given our long history as a full-line manufacturer that produces a wide variety of cars, trucks and sport utility vehicles our contributions to significantly improving fuel economy are frequently not well recognized. We currently offer 20 models obtaining 30 mpg or more in highway driving, more than any other manufacturer.

We have also been in the forefront in the development of alternative fuel vehicles, leveraging experience and capability developed around these technologies in our operations in Brazil. Alternative fuels offer the greatest near-term potential to reduce petroleum consumption in the transportation sector, especially as cellulosic sources of ethanol become more affordable and readily available in the United States. An increasing percentage of our sales will be alternative fuel capable vehicles, estimated to increase from 17% in 2008 to approximately 65% in 2014.

We are also investing significantly in hybrid and plug-in vehicles, for both cars and trucks, and by mid-2009 we expect to offer up to nine hybrid models, more than any other manufacturer. We plan to increase our hybrid and plug-in offerings to 14 models by 2012 and 26 models by 2014. Included is the Chevrolet Volt, as are two additional models sharing the Volt’s extended-range electric vehicle (E-REV) technology. We plan to invest heavily between 2009 and 2012 timeframe to support the expansion in hybrid offerings and for the Chevrolet Volt’s E-REV technology.

As part of our long-term strategy to reduce petroleum consumption and greenhouse gas emissions we are committed to continuing the development of our hydrogen fuel cell technology. We are the leader in fuel cell technology as evidenced by our Chevrolet Equinox Fuel Cell prototype vehicles powered by our fourth-generation hydrogen fuel cell propulsion system and Project Driveway, the first large-scale market test of fuel cell vehicles in the United States. In 2008, the participants in Project Driveway have increased from our initial test market of customers to include the United States Department of Agriculture, the Environmental Protection Agency (EPA), the United States Department of Energy (DOE) and the United States Postal Service in Irvine, California, all of which have added a Chevrolet Equinox fuel cell vehicle to their fleet. In addition, the University of California — Irvine, the California Air Resources Board (CARB), the California Fuel Cell Partnership, and the Air Quality Management District in Southern California have joined Project Driveway in 2008. These organizations will be evaluating our Chevrolet Equinox fuel cell vehicles to understand the current state of technology, to get first-hand experience with infrastructure needs and challenges and to have a better understanding of what is needed for larger scale fleet applications. These organizations will also utilize the vehicles for public education and awareness to help communicate the energy and environmental benefits of fuel cells and hydrogen.

We have complied with federal fuel economy requirements since their inception in 1978, and we are fully committed to meeting the requirements in the Energy Independence and Security Act of 2007 (EISA) and compliance with other regulatory schemes, including the California CO2 program. We anticipate steadily improving fuel economy for both our car and truck fleets. We are committed to meeting or exceeding all federal fuel economy standards in the 2010-2015 model years. We plan to achieve compliance through a combination of strategies, including: extensive technology improvements to conventional powertrains, increased use of smaller displacement engines and six speed automatic transmissions; vehicle improvements, including increased use of lighter, front-wheel drive architectures; increased hybrid offerings and the launch of our first E-REV, the Chevrolet Volt in 2010; portfolio changes, including the increasing car/crossover mix and dropping select larger vehicles in favor of smaller, more fuel efficient offerings.

Alternative fuels

As part of an overall energy diversity strategy, we remain committed to making at least 50% of the vehicles we produce for the United States capable of operating on biofuels, specifically E85 ethanol, by 2012. For 2009, we offer 20 FlexFuel models capable of operating on gasoline, E85 ethanol or any combination of the two. In July 2008, we formed a partnership with the National Governors Association under which we will help 10 states expand their E85 infrastructure. The partnership with the National Governors Association will leverage relationships we have with governmental agencies, non-governmental organizations, fuel providers and fuel retailers.

We are focused on promoting sustainable biofuels derived from non-food sources, such as agricultural, forestry and municipal waste. Following the January 2008 announcement of our strategic alliance with and investment in Coskata, Inc., a Warrenville, Ill.

 

8


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

cellulosic ethanol startup that uses a biothermal process to make ethanol, we formed a second strategic alliance in May 2008 with Mascoma Corporation, a Boston-based cellulosic startup that uses a biochemical process to make ethanol. Current-generation ethanol, made primarily from corn, is produced as an E10 additive to gasoline and E85 fuel blended with 15% gasoline.

Our research into alternative fuels is demonstrated in vehicles produced around the world. In Brazil, more than 95% of the vehicles sold domestically by GM do Brasil in 2008 were flexible-fuel capable and can run on either E100 or gasoline containing E22 ethanol. In Sweden, Saab’s “BioPower” flexible-fuel engine can run on E85 ethanol, petroleum or a mixture of the two. Saab offers BioPower variants throughout its core product lineup and Saab’s 9-5 BioPower, the best selling flexible-fuel vehicle in Europe, is exported to Australia.

We are also supporting the development of biodiesel, a clean-burning alternative diesel fuel that is produced from renewable sources. We currently approve the use of B5, which are certified biodiesel blends of up to 5%, in our 2008 Duramax engine that we sell in the United States, available on Chevrolet Silverado and GMC Sierra heavy-duty pick-up trucks, Chevrolet Express and GMC Savanna fullsize vans and the Chevrolet Kodiak and GMC Top Kick commercial vehicles. B5 is also approved for all GM diesels in Europe and Asia. We offer a special equipment option on the 6.6-liter Duramax for B20, a 20% biodiesel blend. The special equipment option is available on certain configurations of the GMC Savanna and Chevrolet Express Vans and the Chevrolet Silverado and GMC Sierra Heavy-Duty One-Ton Pick-ups.

Hybrid and Plug-in Electric Vehicle Technologies

We currently market six hybrid models in the United States: the Saturn Vue and Aura Hybrids, Chevrolet Malibu and Tahoe Hybrids, GMC Yukon Hybrid and Cadillac Escalade Hybrid. We will have up to nine hybrids available in the U.S. by mid-2009 following the launch of the Chevrolet Silverado Hybrid and GMC Sierra Hybrid. These vehicles will be equipped with two different hybrid systems designed to meet the different driving patterns and needs of our customers. These hybrid systems are the GM Hybrid system and the GM Two-Mode Hybrid system. The systems vary in fuel economy savings and cost, providing an opportunity for more consumers to own a hybrid vehicle and to benefit from increased fuel economy savings.

We are significantly expanding and accelerating our commitment to electrically driven vehicles, including those powered by fuel cells, which convert hydrogen into electricity and emit only water. We have placed more than 100 Chevrolet Equinox Fuel Cell prototype vehicles with U.S. customers as part of Project Driveway, the first large-scale market test of fuel cell vehicles. The Equinox Fuel Cell vehicle is equipped with our fourth-generation fuel cell propulsion system. Since the inception of Project Driveway in 2007, our Chevrolet Equinox Fuel Cell prototype vehicles have driven more than 500,000 emission free miles. The benefits of Project Driveway have come primarily from the feedback from our participating customers. To date, their feedback has led to technology improvements such as extending fuel cell stack life and improvements in the regenerative braking system, which has also benefited our Two-Mode Hybrid vehicles, and improvements in the infrastructure of fueling stations for hydrogen fuel cell electric vehicles. In addition, the knowledge gained during Project Driveway on the fuel cell itself has affected the development of the Chevrolet Volt battery as we are applying fuel cell thermal design knowledge to the Chevrolet Volt battery design.

We have also announced that we plan to bring the Chevrolet Volt E-REV to market in 2010. As an E-REV, the Chevrolet Volt uses electricity to power the wheels at all times and at all speeds. The Chevrolet Volt is designed to operate on battery power alone for up to 40 miles, after which an engine generator will provide the electricity to power the electric drive unit. Advanced lithium-ion battery technology is the key enabling technology for the Chevrolet Volt. In January of 2009, we announced that we will assemble the battery packs for the Chevrolet Volt in the United States using cells and components supplied by LG Chem Ltd.

Other examples of our technology leadership include telematics through our OnStar product. Our OnStar in-vehicle safety, security and convenience service is the automotive industry’s leading telematics provider, available on more than 50 of our vehicles and currently serving nearly 6 million subscribers. OnStar has applied the lessons from over 200 million cumulative subscriber interactions to continually evolve and improve its services. OnStar’s key services include: Automatic Crash Response, Stolen Vehicle Assistance, Turn-by-Turn Navigation, OnStar Vehicle Diagnostics and Hands-Free Calling. In 2008, we launched OnStar Stolen Vehicle Slowdown, an enhancement to the Stolen Vehicle Assistance service. This new technology can allow OnStar advisors working with law enforcement to send a signal to a subscriber’s stolen vehicle to reduce engine power slowing the vehicle down

 

9


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

gradually. In November 2008, we announced that OnStar’s Automatic Crash Response technology has aided subscribers and others on the nation’s roadways in over 100,000 crash incidents over the past 12 years. The ability of OnStar to pinpoint the GPS location of the crash and convey to emergency responders the seriousness of the incident has assisted in the dispatch of the appropriate level of response from emergency service personnel. Improving the response time of emergency responders has contributed to saving lives.

Other safety systems include the third generation of our StabiliTrak electronic stability control system, which debuted on the 2008 Cadillac STS. In addition to controlling brakes and reducing engine power, this latest iteration of the system combines active front steering to turn the front wheels into the skid when the rear wheels lose traction. Our Lane Departure Warning System and Side Blind Zone Alert System, which extend and enhance driver awareness and vision, also debuted on the 2008 Cadillac STS, DTS and 2008 Buick Lucerne.

We generate and hold a significant number of patents in a number of countries in connection with the operation of our business. While none of these patents by itself is material to our business as a whole, these patents are very important to our operations and continued technological development. In addition, we hold a number of trademarks and service marks that are very important to our identity and recognition in the marketplace.

Refer to “Environmental and Regulatory Matters” for a discussion of vehicle emissions requirements, vehicle noise requirements, fuel economy requirements and safety requirements, which also affect our research and development.

Product Development

Over the past few years, we have integrated our vehicle development activities into a single global organization. This strategy built on earlier efforts to consolidate and standardize our approach to vehicle development.

For example, in the 1990s we merged 11 different engineering centers in the United States into a single organization. In 2005, GM Europe Engineering was created, following a similar consolidation from three separate engineering organizations. At the same time, we have grown our engineering operations in emerging markets in the Asia Pacific and Latin America/Africa/Mid-East (LAAM) regions.

As a result of this process, product development activities are fully integrated on a global basis under one budget and one decision-making group. Similar approaches have been in place for a number of years in other key functions, such as powertrain, purchasing and manufacturing, to take full advantage of our global footprint and resources.

Under our global vehicle architecture strategy and for each of our eight global architectures, we generally define a specific range of performance characteristics and dimensions supporting a common set of major underbody components and subsystems with common interfaces.

Global architecture development teams are responsible for most of the non-visible parts of the vehicle such as steering, suspension, brake system, heating, ventilation and air conditioning system and electrical system. These global teams work very closely with vehicle development teams around the world, who are responsible for components that are unique to each brand, such as exterior and interior design, tuning of the vehicle to meet the brand character requirements and final validation to meet applicable government requirements.

We currently have eight different global architectures that are assigned to global engineering teams and centers in North America, Europe, Asia Pacific and Latin America. The allocation of the architectures to specific development centers is based on where the expertise for the vehicle segment resides, e.g., mini and small vehicles in Asia, compact and midsize vehicles in Europe and fullsize pick-up trucks, sport utility vehicles and crossover vehicles in North America.

The eight global architectures are:

 

•       Mini Vehicles

  

•       Rear-wheel drive Vehicles

•       Small Vehicles

  

•       Luxury Rear-wheel drive Vehicles

•       Compact Vehicles

  

•       Compact Crossover Vehicles

•       Midsize Vehicles

  

•       Midsize Trucks

 

10


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

We believe that this integrated global product development process, based on our global architectures, creates faster product development, at lower cost, while ensuring a consistently high level of quality resulting in better cars and trucks across all of our markets and brands.

Raw Materials, Services and Supplies

We purchase a wide variety of raw materials, parts, supplies, energy, freight, transportation and other services from numerous suppliers for use in the manufacture of our products. The raw materials primarily consist of steel, aluminum, resins, copper, lead and platinum group metals. We have not experienced any significant shortages of raw materials and normally do not carry substantial inventories of such raw materials in excess of levels reasonably required to meet our production requirements. Over most of the past three years the global automotive industry has experienced increases in commodity costs, most notably for raw materials such as steel, aluminum, copper, lead and platinum group metals. These price increases have been driven by increased global demand largely reflecting strong demand in emerging markets, higher energy prices and a weaker U.S. Dollar. During the second half of 2008, the prices of these commodities decreased significantly reflecting the drop in global demand brought about by the tightening of the credit markets, recession in the U.S. and Western Europe and volatile oil prices. We manage our commodity price risk by using derivatives to economically hedge a portion of raw material purchases.

In some instances, we purchase systems, components, parts and supplies from a single source, and may be at an increased risk for supply disruptions. Furthermore, the inability or unwillingness of our largest supplier, Delphi, to supply us with parts and supplies could adversely affect us because our production capacity would be affected without those parts and supplies. From 2005 to 2008, our annual purchases from Delphi have ranged from approximately $6.5 billion to approximately $10.2 billion. Since 2005 Delphi has been in bankruptcy proceedings under Chapter 11 of the Bankruptcy Code.

Based on our standard payment terms with our systems, components and parts suppliers, we are generally required to pay most of these suppliers on the second day of the second month following delivery.

Environmental and Regulatory Matters

Automotive Emissions Control

We are subject to similar laws and regulations, including vehicle exhaust emission standards, vehicle evaporative emission standards and onboard diagnostic system (OBD) requirements, in the regions throughout the world in which we sell cars and trucks.

North America

The U.S. federal government imposes stringent emission control requirements on vehicles sold in the United States, and additional requirements are imposed by various state governments, most notably California. These requirements include pre-production testing of vehicles, testing of vehicles after assembly, the imposition of emission defect and performance warranties and the obligation to recall and repair customer owned vehicles that do not comply with emissions requirements. We must obtain certification that the vehicles will meet emission requirements from the EPA before we can sell vehicles in the United States and Canada and from the CARB before we can sell vehicles in California and other states that have adopted the California emissions requirements.

The EPA and the CARB continue to emphasize testing customer owned vehicles for compliance. We believe that our vehicles meet currently applicable EPA and CARB requirements. If our vehicles do not comply with the emission standards or if defective emission control systems or components are discovered in such testing, or as part of government required defect reporting, we could incur substantial costs related to emissions recalls. New CARB and federal requirements will increase the time and mileage periods over which manufacturers are responsible for a vehicle’s emission performance.

The EPA and the CARB emission requirements will become even more stringent in the future. In addition, California has passed legislation regulating the emissions of greenhouse gases. Since we believe this regulation is effectively a form of fuel economy requirement, it is discussed under “Automotive Fuel Economy.” A new tier of exhaust emission standards for cars and light-duty

 

11


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

trucks, the Low-Emission Vehicles II standards, began phasing in for vehicles in states that have California requirements in the 2004 model year. In 2004, similar federal Tier 2 standards began phasing in. In addition, both the CARB and the EPA have adopted more stringent standards applicable to heavy-duty trucks.

California law requires that a specified percentage of cars and certain light-duty trucks sold in the state must be zero emission vehicles (ZEV), such as electric vehicles or hydrogen fuel cell vehicles. This requirement started at 10% in model year 2005 and increased in subsequent years. Manufacturers have the option of meeting a portion of this requirement with partial ZEV credit for vehicles that meet very stringent exhaust and evaporative emission standards and have extended emission system warranties. An additional portion of the ZEV requirement can be met with vehicles that meet these partial ZEV requirements and incorporate advanced technology, such as a hybrid electric propulsion system meeting specified criteria. We are complying with the ZEV requirements using a variety of means, including introducing products certified to the partial ZEV requirements beginning in the 2007 model year and placing Chevrolet Equinox Fuel Cell Vehicles powered by hydrogen into service. California recently adopted changes applicable to the 2012 and later model years that allow an additional portion of the ZEV requirements to be met with plug-in hybrid electric vehicles, including E-REV’s such as the Chevrolet Volt, that meet certain criteria.

The Clean Air Act permits states that have areas with air quality compliance issues to adopt the California car and truck emission standards in lieu of the federal requirements. Ten states, New York, Massachusetts, Maine, Vermont, Connecticut, Pennsylvania, Rhode Island, New Jersey, Oregon and Washington have these standards in effect now. Maryland and New Mexico have adopted the California standards effective beginning in the 2011 model year and Arizona’s are effective beginning in the 2012 model year. Additional states could also adopt the California standards in the future.

In addition to the exhaust emission programs described above, advanced OBD systems, used to identify and diagnose problems with emission control systems, have been required under federal and California law since the 1996 model year. This system has the potential of increasing warranty costs and the chance for recall. OBD requirements become more challenging each year as vehicles must meet lower emission standards, and new diagnostics are required. Beginning with the 2004 model year, California adopted more stringent OBD requirements, including new design requirements and corresponding enforcement procedures, and we have implemented hardware and software changes to comply with these more stringent requirements. In addition, California has recently adopted technically challenging new OBD requirements that take effect from the 2008 through the 2013 model years.

Vehicle evaporative emission control systems were modified to accommodate onboard refueling vapor recovery control standards. Onboard refueling vapor recovery was phased in on passenger cars in the 1998 through 2000 model years, and phased in on light-duty trucks in the 2001 through 2006 model years. Beginning with the 2004 model year, federal and California evaporative emission standards became more stringent, and we have implemented changes to comply with these more stringent requirements.

Europe

In Europe emissions are regulated by two different entities: the European Union (EU) and the United Nations Economic Commission for Europe (UN ECE). The EU imposes stringent emission control requirements on vehicles sold in all 27 EU Member States, and other countries apply regulations under the framework of the UN ECE. A minority of countries in Eastern Europe, which currently do not require compliance with the latest limited standards, are considering convergence to those standards by the end of the decade. In addition, EU Member States can give incentives to qualifying low emission vehicles through tax benefits. This could result in specific market requirements rewarding different technical equipment in various markets, despite the fact there is only one European wide emission requirement. The current EU requirements include type approval of preproduction testing of vehicles, testing of vehicles after assembly and the obligation to recall and repair customer owned vehicles that do not comply with emissions requirements. EU requirements and UN ECE requirements are equivalent in terms of stringency and implementation. We must demonstrate that vehicles will meet emission requirements in witness tests and obtain type approval from an approval authority before we can sell vehicles in the EU.

Emission requirements in Europe will become even more stringent in the future. A new level of exhaust emission standards for cars and light-duty trucks, Euro 5 standards, will apply from September 2009, while stricter Euro 6 standards are expected to apply from 2014. The OBD requirements associated with these new standards will become more challenging as well. The new European emission

 

12


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

standards focus particularly on reducing emissions from diesel vehicles. Diesel vehicles have become important in the European marketplace and surpassed 50% market share in 2007. The new requirements will require additional technologies and further increase the cost of diesel engines, which currently cost more than gasoline engines. To comply with Euro 6, we expect that technologies need to be implemented which are similar to those being developed to meet U.S. emission standards. The technologies available today are not cost effective and would therefore not be suitable for the European market for small and midsize diesel vehicles, which typically are under high cost pressure. Further, measures to reduce exhaust pollutant emissions have detrimental effects on vehicle fuel economy which drives additional technology cost to maintain fuel economy.

In the long-term, notwithstanding the already low vehicle emissions in Europe, regulatory discussions in Europe are expected to continue. Regulators will continue to refine the testing requirements addressing issues such as test cycle, durability, OBD, in-service conformity and alternative fuels.

Asia Pacific

Within the Asia Pacific region, our vehicles are subject to a broad range of vehicle emission laws and regulations. Japan sets specific exhaust emission and durability standards, test methods and driving cycles. In Japan, OBD is required with both EU and U.S. OBD systems accepted. South Korea is transitioning to California style exhaust emission standards and considering adopting other aspects of the California emission program. South Korea is scheduled to introduce Euro 5 emission standards for diesel powered vehicles in September 2009. In South Korea, OBD is required and evaporative emissions follow the EPA standard. China is implementing European standards, with Euro 4 first applied in Beijing on March 1, 2008, with Shanghai scheduled by late 2009, and then rolling out nationwide. All other countries in which we conduct operations within the Asia Pacific region either require or allow some form of EPA, EU or UN ECE style emission requirements with or without OBD.

Latin America/Africa/Mid-East

Within the LAAM region, some countries follow the U.S. test procedures, standards and OBD requirements and some follow the EU test procedures, standards and OBD requirements with different levels of stringency. In terms of standards, Brazil implemented National Low Emission Vehicle standards, which preceded Tier 2 standards in the U.S., for passenger cars and light commercial vehicles in January 2009. Argentina implemented Euro 4 standards starting with new registrations in January 2009. Chile currently requires Euro 3 standards for gasoline vehicles and Euro 4 standards for diesel vehicles and has proposed Euro 5 standards for diesel vehicles beginning September 2011. Other countries in the LAAM region either have some level of U.S. or EU standards or no standards at all.

Industrial Environmental Control

Our operations are subject to a wide range of environmental protection laws including those laws regulating air emissions, water discharges, waste management and environmental cleanup. We are in various stages of investigation for sites where contamination has been alleged. We are involved in a number of remediation actions to clean up hazardous wastes as required by federal and state laws. Certain environmental statutes require that responsible parties fund remediation actions regardless of fault, legality of original disposal or ownership of a disposal site. Under certain circumstances these laws impose joint and several liability, as well as liability for related damages to natural resources.

The future effect of environmental matters, including potential liabilities, is often difficult to estimate. We record an environmental reserve when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. This practice is followed whether the claims are asserted or unasserted. We expect that the amounts reserved will be paid out over the periods of remediation for the applicable sites, which typically range from five to 30 years. Expenditures for site remediation actions, including ongoing operations and maintenance, were $94 million, $104 million and $107 million in 2008, 2007 and 2006, respectively. It is possible that such remediation actions could require average annual expenditures in the range of $65 million to $85 million over the next five years.

For many sites, the remediation costs and other damages for which we ultimately may be responsible are not reasonably estimable because of uncertainties with respect to factors such as our connection to the site or to materials located at the site, the involvement of other potentially responsible parties, the application of laws and other standards or regulations, site conditions and the nature and

 

13


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

scope of investigations, studies and remediation to be undertaken (including the technologies to be required and the extent, duration and success of remediation). As a result, we are unable to determine or reasonably estimate the amount of costs or other damages for which we are potentially responsible in connection with these sites, although that total could be substantial.

In 2008, as part of our commitment to reduce the effect our worldwide facilities have on the environment, we announced a commitment to convert half of our major global manufacturing operations to landfill-free facilities by 2010. This landfill-free strategy translates, on an individual facility basis, to more than 80 of our manufacturing operations worldwide. We currently have 43 landfill-free manufacturing facilities worldwide. At our landfill-free facilities, over 98% of waste materials are recycled or reused and approximately 2% is converted to energy at waste-to-energy facilities. In 2008, we estimate over 2.5 million tons of waste materials was recycled or reused, an estimated 43,000 tons of waste materials was converted to energy at waste-to-energy facilities and over 3 million metric tons of carbon dioxide emissions were prevented from entering the atmosphere from our land-fill free facilities and other facilities worldwide. These numbers will increase as additional manufacturing sites reach landfill-free status.

We are implementing and publicly reporting on various voluntary initiatives to reduce energy consumption and greenhouse gas emissions from our worldwide operations. We set a 2010 target of an 8% reduction in CO2 emissions from our worldwide facilities compared to 2005 emission levels. By 2007, we had exceeded this target by reducing CO2 emissions from our worldwide facilities by 13% compared to 2005 levels. We currently have not set any future targets to reduce CO2 emission levels from our worldwide facilities; however, we are constantly researching ways to further reduce CO2 emission levels at our worldwide facilities. Several of our facilities are included in and comply with the European emissions trading regime, which is being implemented to meet the European Community’s greenhouse gas reduction commitments under the Kyoto Protocol. We have reported in accordance with the Global Reporting Initiative, the Carbon Disclosure Project, the EPA Climate Leaders Program and the DOE 1605(b) program since their inception. Global Environment and Energy goals and progress made on all voluntary programs are available in our Corporate Responsibility Report at www.gmresponsibility.com.

Vehicular Noise Control

Vehicles we manufacture and sell may be subject to noise emission regulations.

In the United States, passenger cars and light-duty trucks are subject to state and local motor vehicle noise regulations. We are committed to designing and developing our products to meet these noise requirements. Since addressing different vehicle noise regulations established in numerous state and local jurisdictions is not practical, we attempt to identify the most stringent requirements and validate to those requirements. In the rare instances where a state or local noise regulation is not covered by the composite requirement, a waiver of the requirement is requested and to date no significant cost has resulted from such a request. Medium to heavy-duty trucks are regulated at the federal level. Federal truck regulations preempt all United States state or local noise regulations for trucks over 10,000 lbs. gross vehicle weight rating.

Outside the United States, noise regulations have been established by authorities at the national and supranational level (e.g., EU or UN ECE for Europe). We believe that our vehicles meet all applicable noise regulations in the markets where they are sold.

While current noise emission regulations serve to regulate maximum allowable noise levels, proposals have been made to regulate minimum noise levels. These proposals stem from concern that vehicles that are relatively quiet, specifically hybrids, may not be heard by the sight-impaired. We are committed to design and manufacture vehicles to comply with potential noise emission regulations that may come from these proposals.

Automotive Fuel Economy

The 1975 Energy Policy and Conservation Act provided for average fuel economy requirements for passenger cars built for the 1978 model year and thereafter, weighted by production volumes under a complex formula. Based on the EPA combined city-highway test data, our 2008 model year domestic passenger car fleet achieved a Corporate Average Fuel Economy (CAFE) of 29.6 mpg, which exceeded the requirement of 27.5 mpg. The estimated CAFE for our 2009 model year domestic passenger cars is projected to be 31.1 mpg, which would also exceed the applicable requirement.

 

14


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

For our imported passenger cars, the 2008 model year CAFE was 31.5 mpg, which exceeded the requirement of 27.5 mpg. The CAFE estimate for our 2009 model year imported passenger cars is 31.8 mpg, which would also exceed the applicable requirement.

Fuel economy standards for light-duty trucks became effective in 1979. Starting with the 2008 model year, the National Highway Traffic Safety Administration (NHTSA) implemented substantial changes to the structure of the truck CAFE program, including reformed standards based upon truck size. Under the existing truck rules, reformed standards are optional for the 2008-2010 model years. We have chosen to comply with these optional reform-based standards for the 2008 model year. Our light-duty truck CAFE for the 2008 model year was 23.2 mpg, which exceeds our requirement of 22.0 mpg. Our projected reform standard for light-duty trucks for the 2009 model year is 22.4 mpg and our projected performance under this standard is 23.2 mpg.

The CAFE provisions in EISA include instructions to the NHTSA to set rateable fuel economy standards separately for cars and trucks beginning in the 2011 model year that would increase to at least 35 mpg by 2020 on a combined car and truck fleet basis. Based upon the NHTSA’s proposed rule, it is likely that the 2011-2015 model year standards will be more stringent than those required by Congress. Complying with these proposed new standards is likely to require us to sell a significant national volume of hybrids or electrically powered vehicles across our portfolio as well as introduce new technologies for our conventional internal combustion engines. To the extent that we are successful, we expect to be able to meet these new standards. President Obama directed the NHTSA, by March 31, 2009, to prescribe new fuel efficiency standards for the 2011 model year.

In addition, California has passed legislation known as AB 1493 requiring the CARB to regulate greenhouse gas emissions from new motor vehicles sold in the state beginning in the 2009 model year. The Standards apply during the first seven years only to large volume manufacturers defined as having annual California sales over 60,000 vehicles. Since CO2 emissions are directly proportional to the amount of fuel consumed by motor vehicles, CO2 emissions per mile are directly related to fuel consumption per mile. In this regard, California’s attempt to regulate CO2 emissions per mile is tantamount to establishing state level fuel economy standards, which is prohibited by the U.S. federal fuel economy law. Nonetheless, the CARB promulgated the AB 1493 Rules establishing standards that effectively require approximately a 40% increase in new vehicle fuel economy for passenger cars by 2016. The Alliance of Automobile Manufacturers, of which we are members along with Ford, Chrysler, Toyota and other foreign manufacturers, have challenged these standards in court; so have several automobile dealers. Rulings adverse to the industry’s position were handed down in U.S. District Courts in Burlington, Vermont and Fresno, California. Appeals of the Vermont and California federal court decisions have been filed.

The AB 1493 Rules cannot be enforced in any state unless the EPA grants a waiver of federal preemption. In December 2007, the EPA denied California’s request for a waiver of the AB 1493 Rules. California and others brought a legal challenge to the EPA’s waiver decision. In January 2009, President Obama ordered the EPA to reconsider denial of the waiver.

Since the CARB has characterized the AB 1493 Rules as an emission regulation, other states have adopted the California CO2 requirements pursuant to the authority granted under the U.S. Clean Air Act. The following states have adopted the AB 1493 Rules imposing CO2 requirements on new motor vehicles: Arizona, Connecticut, Maine, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, Maryland and New Mexico. Other states are also considering adopting the AB 1493 Rules.

If the EPA grants a waiver of federal preemption of the AB 1493 Rules, and the lawsuits or new federal action does not modify the requirements, we could be forced to cease selling select vehicles in those states where the AB 1493 Rules are in effect. Going forward, we will work closely with the federal government to set future requirements and to meet them in the most cost effective way. We believe a single, national set of fuel economy/greenhouse gas requirements is the best approach to reduce U.S. gasoline consumption and CO2 emissions, while preserving consumer choice, safety, jobs, and the economy.

In Europe, the EU passed legislation in December, 2008 to regulate CO2 emissions beginning in 2012. A target function of CO2 to weight with a slope of 60% is established. Each manufacturer must meet a specific target based on the CO2 target value on this curve for each vehicle it sells, but with the ability to average across its fleet in each year. This requirement will be phased in with 65% of vehicles sold in 2012 required to meet this target, 75% in 2013, 80% in 2014 and 100% in 2015 and beyond. The law provides super-credits that count vehicles under 40 grams CO2 3.5 times for compliance purposes in 2012 and 2013, 2.5 times in 2014 and 1.5 times

 

15


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

in 2015. This is intended to encourage the early introduction of ultra-low CO2 vehicles such as the Chevrolet Volt and Opel/Vauxhall Ampera. Automakers may gain credit of up to 7 grams for eco-innovations — those technologies which improve real-world fuel economy but may not show in the test cycle (such as highly efficient lighting). There is also a 5% credit for E85 flexible-fuel vehicles if more than 30% of refueling stations in an EU Member State sell E85. Further regulatory detail will be developed in the Comitology, a committee system which oversees the delegated acts implemented by the executive branch of the EU, process in 2009. The legislation sets a target of 95 grams for 2020 with an impact assessment required to further assess and develop this requirement. We have developed a compliance plan by adopting operational CO2 targets for each market entry in Europe.

A regulatory proposal is now in the European Parliament to require low-rolling resistance tires and tire pressure monitoring systems. A proposal is also under discussion that would require labeling of tires for noise, fuel efficiency and rolling resistance which may affect vehicles at sale as well as the sale of tires in the aftermarket. It is anticipated that a proposal to regulate CO2 emissions from light commercial vehicles will be introduced in 2009.

Fourteen EU Member States have introduced CO2 based vehicle taxation schemes. Tax measures are within the sovereignty of the EU Member States. We are faced with significant challenges relative to the predictability of future tax laws and differences in the tax schemes and thresholds.

Potential Effect of Regulations

We continue to improve the fuel efficiency of our vehicles, even as we enhance utility and performance, address environmental aspects of our products and add more safety features and customer convenience options, which add mass to a vehicle and therefore tend to lower its fuel economy. Our product lineup of 2009 models in the United States includes 20 models that achieve an EPA estimated 30 mpg or better on the highway. Overall fuel economy and CO2 emissions from cars and light-duty trucks on the road are determined by a number of factors, including what products customers select and how they use them, traffic congestion, transit alternatives, fuel quality and availability and land use patterns.

As referred to in “Research, Development and Intellectual Property,” our top priority is the development of our alternative propulsion strategy as energy diversity and environmental leadership are critical to our overall business strategy. This is illustrated by our commitment to marketing more hybrid vehicles, our accelerated commitment to electrically powered vehicles using fuel cell and lithium-ion battery technology and the use of biofuels in our expanded portfolio of flexible-fuel vehicles.

Currently, we market six hybrid models in the U.S. with up to nine hybrid models expected to be available by mid-2009. Our hybrid vehicles are equipped with one of two different hybrid systems, which vary in fuel economy and cost, providing an opportunity for more consumers to own a hybrid vehicle.

We are also developing plug-in hybrid electric vehicles, which combine our two-mode hybrid technology with advanced lithium-ion battery technology to potentially double the fuel economy of any current sport utility vehicle.

We are accelerating our commitment to electrically powered vehicles, including those powered by fuel cells, which convert hydrogen into electricity and emit only water. This commitment to fuel cell technology was demonstrated by placing 100 Chevrolet Equinox Fuel Cell prototype vehicles with U.S. customers as part of Project Driveway the first large-scale market test of fuel cell vehicles. In addition, we plan to bring the Chevrolet Volt E-REV to market in 2010. Advanced lithium-ion battery technology is required for the Chevrolet Volt and we will assemble the battery packs in the U.S. using cells and components supplied by LG Chem Ltd.

Biofuels, specifically E85 ethanol, are also an important part of our overall energy diversity strategy as we are committed to producing at least 50% of our vehicles in the U.S. market capable of operating on biofuels by 2012. This commitment to biofuels is further illustrated by our partnership with the National Governors Association, as well as our strategic alliances with Coskata, Inc. and Mascoma Corporation. We also offer 20 flexible-fuel models capable of operating on gasoline, E85 ethanol or any combination of the two fuels. In Brazil, more than 95% of our vehicles sold are flexible-fuel capable, while SAAB’s 9-5 BioPower is the best selling flexible-fuel vehicle in Europe. We are also committed to biodiesel, through our 2008 Duramax engine sold in the U.S., which can run on B5 and a special equipment option available on our 6.6-liter Duramax engine, which can run on B20.

 

16


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

We have established aggressive short-term and long-term plans to develop and bring to market technologies designed to further improve fuel efficiency, reduce emissions, and provide additional value and benefits to our customers. These include enhancements to conventional internal combustion engine technology such as active fuel management, variable valve timing systems, six-speed automatic transmissions and advanced diesel engines. We believe that the development and global implementation of new, cost-effective energy technologies in all sectors is the most effective way to improve energy efficiency and reduce greenhouse gas emissions.

Despite these advanced technology efforts, our ability to satisfy fuel economy and CO2 requirements in the four regions in which we operate is contingent on various future economic, consumer, legislative and regulatory factors that we cannot control and cannot predict with certainty. If we are not able to comply with specific new fuel economy requirements, which include higher CAFE standards and state CO2 requirements such as those imposed by the AB 1493 Rules, then we could be subject to sizeable civil penalties or have to restrict product offerings drastically to remain in compliance. In turn, any such actions could have substantial adverse effects on our operations, including facility closings, reduced employment and loss of revenue.

Safety

New vehicles and equipment sold in the United States are required to meet certain safety standards promulgated by the NHTSA. The National Traffic and Motor Vehicle Safety Act of 1966 authorizes the NHTSA to determine these standards and the schedule for implementing them. In addition, in the case of a vehicle defect that creates an unreasonable risk to motor vehicle safety or does not comply with a safety standard, the National Traffic and Motor Vehicle Safety Act of 1966 generally requires that the manufacturer notify owners and provide a remedy. The Transportation Recall Enhancement, Accountability and Documentation Act requires us to report certain information relating to certain customer complaints, warranty claims, field reports and lawsuits in the United States and fatalities and recalls outside the United States.

We are subject to certain safety standards and recall regulations in the markets outside the United States in which we operate. These standards often have the same purpose as the U.S. standards, but may differ in their requirements and test procedures. From time to time, other countries pass regulations which are more stringent than U.S. standards. Most countries require type approval while the U.S. and Canada require self-certification.

Pension Legislation

We are subject to a variety of federal rules and regulations, including the Employee Retirement Income Security Act of 1974, as amended and the Pension Protection Act of 2006, which govern the manner in which we fund and administer our pensions for our retired employees and their spouses. The Pension Protection Act of 2006 is designed, among other things, to more appropriately reflect the value of pension assets and liabilities to determine funding requirements. Under the Pension Protection Act of 2006 we expect there will be no cash funding requirement for our U.S. hourly and salaried pension plans in 2009. However, assuming that interest rates remain at December 31, 2008 levels and pension fund assets earn 8.5% annually going forward, we may need to make significant contributions to the U.S. pension plans in 2013 and beyond. We are currently analyzing our pension funding strategies. We also maintain pension plans for employees in a number of countries outside the United States, which are subject to local laws and regulations.

Export Control

We are subject to a number of domestic and international export control requirements. Our Office of Export Compliance is responsible for addressing export compliance issues that are specified in regulations issued by the U.S. Department of State, the U.S. Department of Commerce, and the U.S. Department of Treasury, as well as issues relating to export control laws of other countries. Export control laws of countries other than the United States are likely to be increasingly significant to our business as we develop our research and development operations on a global basis. The Office of Export Compliance works with export compliance officers in our business units who address export compliance issues on behalf of the units. If we fail to comply with applicable export compliance regulations, we and our employees could be subject to criminal and civil penalties and, under certain circumstances, suspension and debarment from doing business with the government.

 

17


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Significant Transactions

In August 2007, we completed the sale of the commercial and military operations of Allison, formerly a division of our Powertrain Operations. The negotiated purchase price of $5.6 billion in cash plus assumed liabilities was paid at closing. The purchase price was subject to adjustment based on the amount of Allison’s net working capital and debt on the closing date, which resulted in an adjusted purchase price of $5.4 billion. A gain on the sale of Allison in the amount of $5.3 billion ($4.3 billion after-tax), inclusive of the final purchase price adjustments, was recognized in 2007. Allison is a global leader in the design and manufacture of commercial and military automatic transmissions and a premier global provider of commercial vehicle automatic transmissions for on-highway vehicles, including trucks, specialty vehicles, buses and recreational vehicles, off-highway and military vehicles, as well as hybrid propulsion systems for transit buses. We retained our Powertrain Operations’ facility near Baltimore, Maryland which manufactures automatic transmissions primarily for our trucks and hybrid propulsion systems. The results of operations and cash flows of Allison have been reported in the consolidated financial statements as discontinued operations for all periods presented. Historically, Allison had been reported in the North America automotive business. Refer to Note 4 to the consolidated financial statements for more information on this transaction.

In April 2006, we, along with our wholly-owned subsidiaries GMAC and GM Finance Co. Holdings Inc., entered into a definitive agreement pursuant to which we agreed to sell a 51% controlling interest in GMAC for a purchase price of $7.4 billion to FIM Holdings. FIM Holdings is a consortium of investors, including Cerberus FIM Investors, LLC, Citigroup Inc., Aozora Bank Limited and a subsidiary of the PNC Financial Services Group, Inc. The GMAC Transaction was completed on November 30, 2006. We have retained a 49% interest in GMAC’s Common Membership Interests.

As part of the GMAC Transaction, we entered into the GMAC Services Agreement, which is comprised of a number of agreements with GMAC governing aspects of our relationship including agreements related to consumer and dealer financing by GMAC for the purchase and lease of our products in the United States. Under the GMAC Services Agreement, GMAC financed a broad spectrum of consumer credits, consistent with historical practice, and received a negotiated return based on its funding costs. GMAC also provided full consideration to consumer credit applications received from GM-franchised dealers and purchased consumer financing contracts from GM dealers in accordance with GMAC’s usual standards for creditworthiness, consistent with historical practice.

The GMAC Services Agreement also provided that, subject to certain conditions and limitations, we would offer vehicle financing and leasing incentives to U.S. customers, except for Saturn-brand products, exclusively through GMAC. We had the right to set the terms and conditions and eligibility of all such incentive programs. In consideration of GMAC’s exclusive relationship with us for vehicle financing and leasing incentives for consumers, GMAC had agreed to certain targets, and if it did not meet those targets, we could have imposed certain fees and other monetary consequences or even revoke GMAC’s exclusivity in whole or in part unless certain credit market disruptions occurred and we and GMAC mutually agreed to suspend the targets, fees, and termination rights. As long as GMAC’s exclusivity remained in effect, GMAC would pay us $105 million annually.

Effective December 29, 2008 and in connection with the approval of GMAC’s application to become a BHC, we and GMAC agreed to modify certain terms and conditions of the GMAC Services Agreement. Certain of these amendments include the following: (1) for a two-year period, we can offer retail financing incentive programs through a third party financing source under certain specified circumstances, and in some cases subject to the limitation that pricing offered by such third party meets certain restrictions, and after such two-year period we can offer any such incentive programs on a graduated basis through third parties on a non-exclusive, side-by-side basis with GMAC provided that pricing such third parties financing sources meets certain requirements; (2) GMAC will have no obligation to provide operating lease financing products; and (3) GMAC will have no targets against which it could be assessed penalties. After December 24, 2013, we will have the right to offer retail financing incentive programs through any third party financing source, including GMAC, without any restrictions or limitations. The exclusivity fee will be pro-rated downward for any period when we work with a third-party provider. A primary objective of the GMAC Services Agreement continues to be supporting distribution and marketing of our products. We and GMAC have agreed to work in good faith to execute definitive documentation with respect to an amendment of the GMAC Services Agreement on or before March 29, 2009.

In connection with GMAC’s conversion to a BHC, we have committed to the Federal Reserve that we will reduce our ownership interest in GMAC to less than 10% of the voting and total equity interest of GMAC by December 24, 2011. Pursuant to our understanding with the UST, all but 7.4% of our common equity interest in GMAC will be placed in a trust by March 24, 2009.

 

18


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

For further information about the business relationship between us and GMAC, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Factors Affecting Future and Current Results — GMAC — Conversion to Bank Holding Company and Related Transactions — GMAC — Sale of 51% Controlling Interest” and Note 1, Note 4, Note 9 and Note 27 to the consolidated financial statements.

Employees

At December 31, 2008 we employed 243,000 employees, of whom, 170,000 (70%) were hourly employees and 73,000 (30%) were salaried employees. The following table summarizes our employment by region:

 

     December 31,
         2008            2007            2006    
     (In thousands)

GMNA

   116    139    152

GME

   55    57    60

GMLAAM

   35    34    32

GMAP

   35    34    34

Other

   2    2    2
              

Total

   243    266    280
              

Salaried

   73    76    75

Hourly

   170    190    205

At December 31, 2008, 62,000 of our U.S. employees (or 68%) were represented by unions, of which 61,000 employees were represented by the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW). In addition, many of our employees outside the United States are represented by various unions. At December 31, 2008, we had 377,000 U.S. hourly retirees and 116,000 U.S. salaried retirees.

Segment Reporting Data

Operating segment and principal geographic area data for 2008, 2007 and 2006 are summarized in Note 29 to the consolidated financial statements.

Website Access to GM’s Reports

Our internet website address is www.gm.com.

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (Exchange Act) are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC).

In addition to the information about us and our subsidiaries contained in this 2008 Form 10-K, extensive information about us can be found on our website, including information about our management team, our brands and products and our corporate governance principles.

Item 1A. Risk Factors

We face a number of significant risks and uncertainties in connection with our operations. Our business, results of operations and financial condition could be materially adversely affected by the factors described below.

 

19


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

While we describe each risk separately, some of these risks are interrelated and certain risks could trigger the applicability of other risks described below. Also, the risks and uncertainties described below are not the only ones that we may face. Additional risks and uncertainties not presently known to us, or that we currently do not consider significant, could also potentially impair, and have a material adverse effect on, our business, results of operations and financial condition.

Risks Related to us and our Automotive Business

There is substantial doubt about our ability to continue as a going concern.

Our independent public accounting firm has issued an opinion on our consolidated financial statements that states that the consolidated financial statements were prepared assuming we will continue as a going concern and further states that our recurring losses from operations, stockholders’ deficit and inability to generate sufficient cash flow to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern. Our plans concerning these matters, including our Viability Plan, are discussed in Note 2 to the accompanying audited consolidated financial statements. Our future is dependent on our ability to execute our Viability Plan successfully or otherwise address these matters. If we fail to do so for any reason, we would not be able to continue as a going concern and could potentially be forced to seek relief through a filing under the U.S. Bankruptcy Code.

Our business, the success of our Viability Plan and our ability to continue as a going concern are highly dependent on sales volume. In 2008, global vehicle sales declined rapidly and there is no assurance that the global automobile market will recover or that it will not suffer a significant further downturn.

Our business and financial results are highly sensitive to sales volume, as demonstrated by the effect of sharp declines in vehicle sales in the United States since 2007 and globally during 2008. Vehicle sales in the United States have fallen 40% since their peak in 2007, and sales globally have declined 23.5% since their peak in January 2008. The deteriorating economic and market conditions that have driven the drop in vehicle sales, including declines in real estate values and household incomes, rising unemployment, tightened credit markets, weakened consumer confidence and volatility in oil prices, are not likely to improve during 2009 and may continue past that year. Our Viability Plan is based on assumptions that vehicle sales will decline further in 2009 but that they will begin to recover in 2010. Sales volumes may decline more severely or take longer to recover than we expect, however, and if they do, our results of operations and financial condition and the success of the Viability Plan will be materially adversely affected.

The success of our Viability Plan and our ability to continue as a going concern depends on our compliance with the terms of the UST Loan Agreement, and on the availability of additional financing from the United States and certain foreign governments.

The terms of the UST Loan Agreement require us to submit a written certification and report detailing our progress in implementing our Viability Plan on or before March 31, 2009. This report must identify and explain any deviations from the restructuring targets contained within the UST Loan Agreement and explain why such deviations do not jeopardize our long-term viability. The report must also include evidence that: (1) the labor modifications described in “MD&A — Recent Developments” have been approved by the unions and ratified by their membership, (2) all necessary approvals for the voluntary employe beneficiary association (VEBA) modifications (other than regulatory and judicial approvals) described in “MD&A — Recent Developments” have been received; and (3) the exchange offer described below in “MD&A — Recent Developments” has commenced. Under the terms of the UST Loan Agreement, unless we receive certification under the UST Loan Agreement that we have complied with the requirements of the agreements, the maturity of the UST Loan, which totals $13.4 billion at February 28, 2009, will accelerate and become due and payable.

If the maturity of the loans under the UST Loan Facility is accelerated, we do not currently have means to repay or refinance the amounts that would be due and payable. If we failed to repay the amounts due under the agreement, an event of default would occur, which would permit the UST to exercise its remedies under the agreement, including foreclosing on the collateral pledged to secure our obligations under the agreement. These circumstances would trigger events of defaults in certain of our other significant agreements, potentially requiring us to seek relief through a filing under the U.S. Bankruptcy Code.

 

20


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

We have also proposed the authorization of additional loans from the U.S. government, and we hope to receive loans of up to $7.7 billion or more under Section 136 of EISA, which, combined with our indebtedness under the UST Loan Facility, would represent an aggregate of approximately $30.0 billion in borrowings from the U.S. government by 2011. We are also in the process of requesting temporary loan support from certain foreign governments, including Canada, Germany, the United Kingdom, Sweden and Thailand, and have assumed for purposes of our Viability Plan that we will receive up to approximately $6.0 billion in financing from foreign governments to fund operating requirements, plus amounts to satisfy certain legal obligations. We believe that obtaining funding from these governmental sources will be necessary to continue to operate our business in its current scope. We have not received any commitment with regard to the additional proposed borrowings from either the U.S. government or any foreign governments, and there is no assurance that we will be successful in obtaining the additional governmental funding we will need to continue to operate our business. The failure to obtain sufficient funding from the US government or governments outside the United States may require us to shrink or terminate operations or seek reorganization for certain subsidiaries outside the United States. If we fail to obtain sufficient funding for any reason, we would not be able to continue as a going concern and could potentially be forced to seek relief under the U.S. Bankruptcy Code.

Our Viability Plan relies in large part upon assumptions and analyses developed by us. If these assumptions and analyses prove to be incorrect, our Viability Plan may be unsuccessful and we may be unable to continue as a going concern.

Our Viability Plan relies in large part upon assumptions and analyses that we developed based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we consider appropriate under the circumstances. Whether actual future results and developments will be consistent with our expectations and predictions as reflected in our Viability Plan depends on a number of factors, including but not limited to:

 

   

Our ability to obtain adequate liquidity and financing sources and establish an appropriate level of debt, including our ability to negotiate the required debt conversions with our bondholders, commercial lenders and other creditors and changes in the contributions to the New VEBA with representatives of the VEBA;

 

   

Our ability to realize production efficiencies and to achieve reductions in costs as a result of the turnaround restructuring and the modifications in compensation and work rules negotiated with the UAW and other unions that represent our hourly employees;

 

   

Consumers’ confidence in our viability as a continuing entity and our ability to continue to attract customers, particularly for our new products, including cars and crossover vehicles;

 

   

The availability of adequate financing on acceptable terms to our customers, dealers, distributors and suppliers to enable them to continue their business relationships with us;

 

   

The continued financial viability and ability to borrow of our key suppliers, including Delphi’s ability to address its underfunded pension plans and to emerge from bankruptcy proceedings;

 

   

Our ability to sell, spin off or phase out some of our brands as planned, to manage the distribution channels for our products and to complete other planned asset sales;

 

   

Our ability to qualify for federal funding for our advanced technology vehicle programs under Section 136 of EISA;

 

   

The ability of our foreign operations to restructure or to qualify for support from host governments;

 

   

GMAC’s ability to obtain funding to provide both wholesale and retail financing in the United States and Canada and to support our ability to sell vehicles in those markets; and

 

   

The overall strength and stability of general economic conditions and of the automotive industry, both in the United States and in global markets.

 

21


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

In addition, our Viability Plan relies upon financial projections, including with respect to (1) revenue growth and improvements in earnings before interest, taxes, depreciation and amortization margins, (2) growth in earnings and cash flow, (3) the amounts of future pension contributions, (4) the value of unconsolidated subsidiaries, (5) the value of expected asset sales and (6) the amounts of other restructuring costs, including those related to Delphi. Financial projections are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial projections will not be accurate. Accordingly, we expect that our actual financial condition and results of operations will differ, perhaps materially, from what we describe in our Viability Plan. Consequently, there can be no assurance that the results or developments predicted by our Viability Plan will occur or, even if they do occur, that they will have the anticipated effects on us and our subsidiaries or our businesses or operations. The failure of any such results or developments to materialize as anticipated could materially adversely affect the successful execution of our Viability Plan and our ability to continue as a going concern.

If we are not able to obtain adequate financing from the U.S. government or other sources or to execute our Viability Plan or if our Viability Plan does not result in an entity capable of sustaining itself over the long-term, or if we are unable to restructure our Series D convertible debentures prior to June 1, 2009, we could potentially be required to seek relief through a filing under the U.S. Bankruptcy Code, either through a prepackaged plan of reorganization or under an alternative plan, which could include liquidation.

If we were not able to secure adequate funding to continue our operations or to execute our Viability Plan, for example because we could not execute the debt reduction or achieve other restructuring targets mandated by the UST Loan Agreement, we could potentially be required to seek relief through a filing under the U.S. Bankruptcy Code. We currently have approximately $1.0 billion of outstanding Series D convertible debentures that mature on June 1, 2009. If we are unable to restructure the Series D convertible debentures prior to June 1, 2009, or otherwise satisfactorily address the payment due on June 1, 2009, a default would arise with respect to payment of these obligations, which could also trigger cross defaults in other outstanding debt and potentially require us to seek relief through a filing under the U.S. Bankruptcy Code. Such a restructuring would preferably be conducted through a prepackaged reorganization. We believe that the announcement of a prepackaged reorganization plan and its execution in Bankruptcy Court, however, could materially adversely affect the relationships between us and our customers, employees, suppliers, dealers, partners and others. Further, if we were unable to develop a prepackaged plan or to obtain confirmation of the prepackaged plan on a timely basis, because of a legal challenge to it or inability to obtain sufficient financing or another cause, or for other reasons, we could be forced to operate in bankruptcy for an extended period while we tried to develop a reorganization plan that could be confirmed.

Moreover, there is no assurance that we would be able to obtain debtor-in-possession financing to sustain us during bankruptcy proceedings, particularly if we do not have U.S. government support.

Substantial risks would result from any such bankruptcy filing. For example:

 

   

It is likely that the filing would substantially erode consumers’ confidence in our ability to provide parts and service over the long-term, ensure the availability of warranty coverage or maintain acceptable resale values and that as a result there would be significant and precipitous decline in our revenues;

 

   

A significant decline in revenue would endanger the viability of our dealers and suppliers, threaten the ability of GMAC to fund itself and impair its capacity to provide essential wholesale and retail financing to our dealers and customers;

 

   

If we were not able to develop a successful plan for reorganization or if debtor-in-possession financing were not available, we would be forced to liquidate under Chapter 7 of the U.S. Bankruptcy Code;

 

   

Holders of our debt obligations would have their claims significantly reduced, converted into equity or eliminated, depending upon the terms of the restructuring; and

 

   

The equity interests of our current stockholders would be completely eliminated.

 

22


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Even if our progress under the Viability Plan is certified under the UST Loan Agreement and our debt restructuring is successful, our indebtedness and other obligations will continue to be significant. If the current economic environment does not improve we are not likely to generate sufficient cash flow from operations to satisfy our obligations as they come due, and as a result we would need additional funding, which may be difficult to obtain.

Even if we complete the debt restructuring and other steps of the Viability Plan, we will continue to have a significant amount of indebtedness and other obligations. As of December 31, 2008, after giving effect to the $13.4 billion of advances outstanding under the UST Loan Agreement and the execution of the Viability Plan, including a reduction by two-thirds of our outstanding public debt, we would still have a very significant amount of debt outstanding. In addition, as described above, we estimate under our Viability Plan that we will be required to seek additional borrowings from the U.S. government and certain foreign governments, and as a result of which even after giving effect to our public debt restructuring, our total debt outstanding would increase.

Our significant current and future indebtedness and other obligations are likely to have several important consequences. For example, it could:

 

   

Require us to dedicate an even more significant portion of our cash flow from operations than we currently do to the payment of principal and interest on our indebtedness and other obligations, which will reduce the funds available for other purposes such as product development;

 

   

Make it more difficult for us to satisfy our obligations, including our obligations under our indebtedness;

 

   

Make us more vulnerable to adverse economic and industry conditions;

 

   

Limit our ability to withstand competitive pressures;

 

   

Limit our ability to fund working capital, capital expenditures and other general corporate purposes;

 

   

Make us more vulnerable to any continuing downturn in general economic conditions and adverse developments in our business; and

 

   

Reduce our flexibility in responding to changing business and economic conditions.

There is no assurance that we will be able to generate sufficient cash flow from operations in the future to allow us to service our debt, pay our other obligations as required and make necessary capital expenditures, in which case we might be forced to seek additional financing, dispose of certain assets, minimize capital expenditures or seek to refinance some or all of our debt. There is no assurance that any of these alternatives would be available to us, if at all, on satisfactory terms or on terms that would not require us to breach the terms and conditions of our existing or future debt agreements. In addition, we and our subsidiaries may incur substantial additional indebtedness in the future, subject to the restrictions contained in the agreements governing our indebtedness. If we incur additional indebtedness, the related risks that we now face would intensify.

Negative developments in the availability or terms of consumer credit through GMAC or other sources materially adversely affected our sales in 2008 and may have a similar effect in 2009 if credit markets deteriorate.

Based on our historical relationship, GMAC finances a significant percentage of our global vehicle sales and virtually all of our U.S. sales involving subsidized financing such as below-market interest rates. Due to conditions in credit markets particularly later in 2008, GMAC experienced severe difficulty accessing new funding, and other sources of financing other than through governmental programs such as the Troubled Asset Relief Program, were not readily available to fully meet GMAC’s role in supporting our dealers and their retail customers. As a result, the number of vehicles sold with a subsidized financing rate or under a lease contract declined rapidly in the second half of the year, with lease contract volume dropping to zero by the end of 2008. This had a significant effect on our vehicles sales overall, since many of our competitors have captive finance subsidiaries that were better capitalized than GMAC and thus were able to offer consumers subsidized financing and leasing offers.

 

23


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Similarly, many of the dealers that sell our products rely on GMAC financing to purchase our vehicles on a wholesale basis. The reduced availability of GMAC wholesale dealer financing (particularly in the second half of 2008), the increased cost of such financing and a continuation in the decline in the availability of other sources of dealer financing due to the general weakness of the credit market, has caused and will likely continue to cause dealers to modify their plans to purchase vehicles from us.

While GMAC’s ability to provide consumer financing at subsidized rates has improved, lease financing remains largely unavailable. Because of recent modifications to our commercial agreements with GMAC, GMAC no longer is subject to contractual wholesale funding commitments or retail underwriting targets. Therefore, there can be no assurance that GMAC will continue to have adequate funding available at competitive rates to ensure that financing for purchases of our vehicles by our dealers and customers will be consistent with the funding levels and competitive rates that have historically been available from GMAC. In addition, availability of funding for both wholesale and retail sales from other sources, while improved, remains limited and would decrease if credit markets deteriorate.

Because of our dependence on GMAC, we are subject to risks associated with other developments in the business and financial condition of GMAC.

Because of our dependence on GMAC for the financing of a significant percentage of our global vehicle sales and virtually all of our U.S. sales involving subsidized financing such as sales incentives, as well as dealer financing for wholesale purchases, we are subject generally to risks associated with business and financial developments at GMAC. See the discussion under “Risks related to our ownership interest in GMAC.”

Inadequate liquidity could materially adversely affect our business operations in the future.

We require substantial liquidity to implement long-term cost savings and restructuring plans, continue capital spending to support product programs and development of advanced technologies, meet scheduled term debt and lease maturities, make scheduled cash contributions to the New VEBA for postretirement health care and run our normal business operations. If we continue to operate at or close to the minimum cash levels necessary to support our normal business operations, we may be forced to further curtail capital spending, research and development and other programs that are important to the future success of our business. Our suppliers might respond to an apparent weakening of our liquidity position by requesting quicker payment of invoices or other assurances. If this were to happen, our need for cash would be intensified, and we might be unable to make payments to our suppliers as they become due.

In the fourth quarter of 2008, our available liquidity dropped below the level necessary to operate our businesses. While we received significant liquidity through our borrowings pursuant to the UST Loan Facility, our efforts to continue to maintain adequate liquidity will be very challenging given the current business environment and the immediate working capital requirements of the Viability Plan required by the UST Loan Agreement. We anticipate that the effect on working capital of reductions in production volume and other restructuring initiatives we undertook in 2008 will result in significant liquidity needs during the first quarter of 2009. Moreover, even if our liquidity enhancing actions are successfully implemented, their full effect will not be realized until later in 2009. Our ability to maintain adequate liquidity through the first half of 2009 will depend significantly on the volume and quality of vehicle sales, the continuing curtailment of operating expenses and capital spending, the availability of funding under one or more current or future federal government programs and the completion of some of our planned asset sales. We currently have approximately $1 billion of outstanding Series D convertible debentures that mature on June 1, 2009. If we are unable to restructure the Series D convertible debentures prior to June 1, 2009, or otherwise satisfactorily address the payment due on June 1, 2009, a default would arise with respect to payment of these obligations, which could also trigger cross defaults in other outstanding debt and potentially require us to seek relief through a filing under the U.S. Bankruptcy Code.

We are committed to exploring all of these liquidity enhancement options because there is no assurance that industry or capital markets conditions will improve before the second half of 2009, if then. Even if we implement the Viability Plan and other planned operating actions that are substantially within our control, our estimated liquidity during the remainder of 2009 will be inadequate to operate our business unless economic and automotive industry conditions significantly improve, we receive additional government funding under one or more current or future programs, we receive substantial proceeds from asset sales, we take more aggressive

 

24


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

working capital initiatives, or we gain access to capital markets and other private sources of funding, or some combination of these actions occurs. If we fail to obtain sufficient funding for any reason, we would not be able to continue as a going concern and could potentially be forced to seek relief through a filing under the U.S. Bankruptcy Code.

We may not be able to reach agreement on the UAW VEBA Modification to fund and discharge retiree health care obligations or enter into the Labor Modifications required by the UST Agreements or with the UAW to modify our compensation structure and work rules.

We may not be able to reach agreement on the VEBA Modifications and have reached a tentative agreement on the Labor Modifications. To implement the Labor Modifications successfully, we will require the ratification by the employees affected and the approval of each major union that represents our employees. Once we have reached an agreement on the VEBA Modifications, their successful implementation will require regulatory and judicial approvals, including the approval of the United States District Court for the Eastern District of Michigan. There is no assurance that we will receive any or all of these approvals on a timely basis, if at all. If we do not receive the necessary approvals to authorize these actions, or if we otherwise fail to implement them, our ability to execute our Viability Plan, our compliance with the UST Loan Agreement and our ability to obtain additional U.S. government financing may be materially adversely affected.

Even if the VEBA Modifications described in the UST Loan Agreement are implemented, we have agreed to contribute a significant amount of cash to fund the New VEBA in the relatively near future.

If the VEBA Modifications are implemented, we will still be required to contribute a significant amount of cash to the New VEBA over a period of years, in addition to our equity. There is no assurance that we will be able to obtain all of the necessary funding that has not been set aside in existing VEBAs on terms that will be acceptable to us. If we are unable to obtain funding on terms that are consistent with our business plans, we would have to delay or reduce or cancel other planned expenditures.

We may not be able to reach an agreement with the unofficial committee of holders of our public debt regarding the terms of a potential exchange offer or successfully execute a reduction in our unsecured debt as envisioned by UST Loan Agreement.

Under the UST Loan Agreement, we are required to commence an exchange offer by March 31, 2009 to reduce our public unsecured debt by at least two-thirds (Debt Reduction), and to use our best efforts to achieve the Debt Reduction as a goal of the Viability Plan, which we believe is critical to our viability. Although we have been in discussions with advisors to an unofficial committee of holders of our public debt, we may not be able to reach agreement regarding the terms of an exchange offer that the committee would recommend to holders of our public debt. The failure to reach an agreement may make it more difficult to consummate an exchange offer. Further, even if we reach agreement with the committee, holders of our public debt will not be obligated to participate in any exchange offer, and as a result any exchange offer we commence may fail. We anticipate that if we fail to restructure our public debt through the exchange offer, we could potentially be required to seek relief through a filing under the U.S. Bankruptcy Code.

Our pension and OPEB expenses and funding obligations are expected to increase significantly as a result of the weak performance of financial markets and its effect on plan assets.

Our future funding obligations for our U.S. defined benefit pension plans qualified with the Internal Revenue Service (IRS) and our estimated liability related to other postretirement benefit (OPEB) plans depend upon the future performance of assets set aside in trusts for these plans, the level of interest rates used to determine funding levels, the level of benefits provided for by the plans, actuarial data in healthcare inflation trend rates, and experience and any changes in government laws and regulations. Our employee benefit plans currently hold a significant amount of equity and fixed income securities. Due to our contributions to the plans and to the strong performance of these assets during prior periods, our U.S. hourly and salaried pension plans were consistently overfunded from 2005 through 2007, which allowed us to maintain a surplus without making additional contributions to the plans. However, due to significant declines in financial markets and a deterioration in the value of our plan assets, as well as the coverage of additional retirees, including Delphi employees, we may need to make significant contributions to our U.S. pension plans in 2013 and beyond, assuming that interest rates remain at December 31, 2008 levels and pension fund assets earn 8.5%, annually, going forward. There is

 

25


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

no assurance that interest rates will remain constant or that our pension fund assets can earn 8.5% annually, and our actual experience may be significantly more negative. In addition, our Canadian pension plans are currently significantly underfunded, which we expect will also require us to make significant additional annual contributions in the future. Our pension and OPEB expenses and funding may also be greater than we currently anticipate if our assumptions regarding plan earnings and expenses turn out to be incorrect.

If the market values of the securities held by our pension plans continue to decline, our pension and OPEB expenses would further increase and, as a result, could materially adversely affect our business. Decreases in interest rates that are not offset by contributions and asset returns could also increase our obligations under such plans. In addition, if local legal authorities increase the minimum funding requirements for our pension plans outside the United States, we could be required to contribute more funds, which would negatively affect our cash flow.

The UST Loan Agreement contains significant representations and affirmative and negative covenants that may restrict our ability to take actions management believes are important to our long-term strategy, including our ability to enter into certain material transactions outside of the ordinary course of business.

The UST Loan Agreement and the similar provisions of the UST GMAC Loan contains representations and warranties, affirmative covenants requiring us to take certain actions and negative covenants restricting our ability to take certain actions. The affirmative covenants impose obligations on us with respect to, among other things, financial and other reporting to the UST (including periodic confirmation of compliance with certain expense policies and executive privilege and compensation requirements), beginning March 31, 2009 any financial covenants that may be required, use of proceeds of asset sales, maintenance of facility collateral and other property, payment of obligations, compliance with various restrictions on executive privileges and compensation, a corporate expense policy, progress on the Viability Plan, and a cash management plan.

Under the UST Loan Agreement, we may be prohibited from entering into any proposed transaction outside the ordinary course of business that is valued at more than $100 million if it is determined that the transaction would be inconsistent with, or detrimental to, our long-term viability. In addition, the UST Loan Agreement restricts our ability to manage our liquidity on a global basis by placing stringent limitations on our ability to make intercompany loans to or equity investments in our foreign subsidiaries.

The negative covenants in the UST Loan Agreement generally apply to us and our U.S. subsidiaries that provided guarantees of our obligations under that agreement and restrict us with respect to, among other things, transactions with affiliates, granting liens, distributions on capital stock, amendments or waivers of certain documents, prepayments of senior loans, entering into new indebtedness, making investments, ERISA and other pension fund matters, maintenance of facility collateral, sales of assets and entering into or amending joint venture agreements.

Compliance with the representations, warranties and affirmative and negative covenants contained in the UST Loan Agreement could restrict our ability to take actions that management believes are important to our long-term strategy. If strategic transactions we wish to undertake are prohibited or inconsistent with, or detrimental to, our long-term viability, our ability to execute our long-term strategy could be materially adversely affected. In addition, monitoring and certifying our compliance with the UST Loan Agreement will require a high level of expense and management attention on a continuing basis.

Failure of our suppliers due to current economic conditions to provide us with the systems, components and parts that we need to manufacture our automotive products and operate our business could result in a disruption in our operations and have a material adverse effect on our business.

We rely on many suppliers to provide us with the systems, components and parts that we need to manufacture our automotive products and operate our business. In recent years, a number of these suppliers, including but not limited to Delphi, have experienced severe financial difficulties and solvency problems, and some have reorganized under the U.S. Bankruptcy Code or similar reorganization laws. This trend has intensified in recent months due to the combination of general economic weakness, sharply declining vehicle sales and tightened credit availability that has affected the automobile industry generally. The substantial reduction in production volumes that we plan is likely to intensify this trend, particularly if, as we anticipate, similar volume reductions are

 

26


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

executed by our competitors, who frequently purchase from the same suppliers that we do. Suppliers that are substantially dependent on our purchases may encounter difficulties in obtaining credit or may receive an opinion from their independent public accountants regarding their financial statements that includes a statement expressing substantial doubt about their ability to continue as a going-concern, which could trigger defaults under their financing or other agreements or impede their ability to raise new funds. Our suppliers might respond to an apparent weakening of our liquidity position and address their own liquidity needs by requesting faster payment of invoices or other assurances. If this were to happen, our need for cash would be intensified, and we might be unable to make payments to our suppliers as they become due.

When comparable situations have occurred in the past, our suppliers have attempted to increase their prices to us, pass through increased costs, alter payment terms or seek other relief. In instances where our suppliers have not been able to generate sufficient additional revenues or obtain the additional financing they need to continue their operations, either through private sources or government funding, some have been forced to reduce their output, shut down their operations or file for bankruptcy protection. Such actions are likely to increase our costs, create challenges to meeting our quality objectives and in some cases make it difficult for us to continue production of certain vehicles. To the extent we take steps in such cases to help key suppliers remain in business that would adversely affect our liquidity. It may also be difficult to find a replacement for certain suppliers without significant delay.

As part of our Viability Plan, we have reduced compensation and headcount for our management and non-management salaried employees, which may materially adversely affect our ability to hire and retain salaried employees.

As part of the cost reduction initiatives in the Viability Plan, we have discontinued salary increases, imposed reduction in salaries for at least six months ranging from 30% or more for the most highly paid executives to 3% for salaried employees who earn more than a specified minimum and reduced benefits to a level that we believe is significantly lower than offered by other major corporations. The UST Loan Agreement restricts the compensation that we can provide to our top executives as well as prohibits certain types of compensation or benefits for any employees. At the same time, we have substantially decreased the number of salaried employees and expect to reduce the number further, so that the workload is shared among fewer employees and in general the demands on each salaried employee are increased. Companies in similar situations have experienced significant difficulties in hiring and retaining highly skilled employees, particularly in competitive specialties. Given our compensation structure and increasing job demands, there is no assurance that we will be able to hire and retain the employees whose expertise is required to execute the restructuring plan while at the same time developing and producing vehicles that will stimulate demand for our products.

Our plan to reduce the number of our retail channels and core brands and to consolidate our dealer network is likely to reduce our total sales volume, may not create the structural cost savings we anticipate and is likely to result in restructuring costs that may materially adversely affect our result of operations.

As part of our Viability Plan, we intend to phase out our Saturn, Saab and HUMMER retail channels and brands in order to reduce the number of our retail channels and the number of our core brands; Pontiac is expected to become a highly focused niche brand. We also intend to consolidate our dealer network by reducing the total number of our dealers by over 30% from present levels. We anticipate that this reduction in retail outlets, core brands and dealers will result in structural costs savings over time, but there is no assurance that we will realize the savings we expect. Based on our experience and the experiences of other companies that have eliminated brands, models and/or dealers, we believe that our total sales volume is likely to decline because of these reductions, possibly significantly. In addition, executing the phase-out of retail channels and brands and the reduction in the number of our dealers will require us to terminate established business relationships. There is no assurance that we will be able to terminate all such relationships, and if we are not able to terminate substantially all of such relationships we would not be able to achieve all of the benefits we have targeted in the Viability Plan. We anticipate that negotiating these terminations on an individual basis will require considerable time and expense. In addition, we will be required to comply with a variety of national and state franchise laws, which will limit our flexibility and increase our costs. There is no assurance that such negotiations will be successful or that our dealers or other affected parties, such as retail outlets, will not pursue remedies through litigation and, if so, that we would prevail in such litigation or would not be required to pay judgments in excess of negotiated settlements.

 

27


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Part of our Viability Plan involves the sale of some of our businesses, which will be difficult to execute both because of the weakness of the industry and the lack of available credit to finance an acquisition.

We are pursuing a combination of operating and related initiatives as part of our Viability Plan, including asset sales, to generate incremental cash flows as discussed under “MD&A — Liquidity and Capital Resources.” The businesses that we are contemplating selling are involved in the automotive industry by supplying either components to us and other OEMs or services to our retail customers. In light of the current weak demand for our products and deterioration of the automotive industry in general, the number of potentially interested buyers is limited, and the price we might receive for such assets would be significantly lower than it might have been in previous years. In addition, to the extent that buyers would require credit to finance their purchases of our assets, the contraction in the credit market would significantly restrict their ability to pay us in cash, which we require for liquidity under the Viability Plan. Accordingly, even if we are able to consummate the asset sales that we have included in the Viability Plan, we may be forced to accept lower prices than we have anticipated or other payment terms that are less favorable than assumed in our Viability Plan.

In addition, we expect to dispose of a large portion of our equity interest in GMAC. In connection with GMAC’s conversion to a BHC, we have committed to the Board of Governors of the Federal Reserve that we will reduce our ownership interest in GMAC to less than 10% of the voting and total equity interest of GMAC by December 24, 2011. Pursuant to our understanding with the UST, all but 7.4% of our common equity interest in GMAC will be placed in one or more trusts by March 24, 2009. Given the current economic environment, there is no assurance that the trustee will be able to dispose of the remaining portion of common equity interest in GMAC on terms that are favorable to us.

Delphi is unlikely to emerge from bankruptcy in the near-term without government support and possibly may not emerge at all.

In January 2008, the U.S. Bankruptcy Court entered an order confirming Delphi’s Plan of Reorganization (POR) and related agreements including certain agreements with us. On April 4, 2008 Delphi announced that, although it had met the conditions required to substantially consummate its POR, including obtaining exit financing, Delphi’s plan investors refused to participate in a closing that was commenced but not completed on that date. The current credit markets, the lack of plan investors and the challenges facing the automotive industry make it difficult for Delphi to emerge from bankruptcy. As a result, it is unlikely that Delphi will emerge from bankruptcy in the near-term, without government support, and it is possible that it may not emerge successfully or at all. We believe that Delphi will continue to seek alternative arrangements to emerge from bankruptcy, but there can be no assurance that Delphi will be successful in obtaining any alternative arrangements. In October 2008, and as amended in December 2008, we agreed subject to certain conditions to extend our outstanding $300 million advance agreement to June 30, 2009 and to accelerate our North American payables to Delphi in the first and second quarters of 2009, so that Delphi would have additional liquidity. In January 2009, we agreed to immediately accelerate $50 million in advances towards the temporary acceleration of our North American payables. In February 2009, we agreed to increase the advance agreement commitment from $300 million to $350 million, to become effective on March 24, 2009, subject to approval by the Presidential Designee under the terms of our UST Loan Agreement. In March 2009, we agreed to the increase in the advance agreement commitment from $350 million to $450 million, to become effective on March 24, 2009, subject to our Board approval, UST approval and certain other conditions. Our ability to assist Delphi further by providing additional financial support or assuming some of Delphi’s obligations to its workforce and retirees is restricted by the terms of the UST Loan Agreement. If Delphi is unable to successfully emerge from bankruptcy in the near-term, it may be forced to sell all of its assets. As a result, we may be required to pay additional amounts to secure the parts we need until alternative suppliers are secured or new contracts are executed with the buyers of Delphi’s assets. We may also have to consider acquiring some of Delphi’s manufacturing operations in order to ensure supply of parts. In addition, in conjunction with the spin-off of Delphi from us in 1999 we entered into certain agreements with the UAW; the International Union of Electronic, Electrical, Salaried, Machine and Furniture Workers — Communication Workers of America (IUE-CWA) and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (USW) that provide contingent benefit guarantees covering certain former U.S. hourly employees who became employees of Delphi (Benefit Guarantee Agreements) These agreements were triggered on the basis set forth in the September 2008 individual Implementation Agreements executed between us and Delphi and the UAW, IUE-CWA and USW, respectively (Implementation Agreements). Under these Implementation Agreements, we could have additional liabilities for certain pension obligations to employees formerly covered by the Benefit Guarantee Agreements in the event of a termination of the Delphi hourly pension plan.

 

28


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

We may not have adequate liquidity to fund our planned significant investment in new technology, and, even if funded, a significant investment in new technology may not result in successful vehicle applications.

We intend to invest approximately $5.1 billion in 2009 to support our products and to develop new technology, and after 2009 we anticipate our investments will stabilize in the range of $5.5 billion to $6.5 billion per year. In addition, in the Viability Plan as required by the UST Loan Agreement, we committed to invest heavily in alternative fuel and advanced propulsion technologies between 2009 and 2012, largely to support our planned expansion of hybrid and electric vehicles, consistent with our announced objective of being recognized as the industry leader in fuel efficiency. We have submitted two applications for Section 136 Loans under EISA aggregating $8.4 billion to support our advanced technology vehicle programs, but there is no assurance that we will receive any funds under this program or that we will be able to comply with the requirements of the program. Moreover, if we are not able to execute the Viability Plan or if the Viability Plan does not provide us with adequate liquidity, we may be forced to reduce, delay or cancel our planned investments in new technology in order to maintain adequate liquidity to fund our business operations and meet our obligations as they come due.

In some cases, the technologies that we plan to employ, such as hydrogen fuel cells, are not yet commercially practical and depend on significant future technological advances by us and by suppliers, especially in the area of advanced battery technology. For example, we have announced that we intend to produce by November 2010 the Chevrolet Volt, an electric car, which requires battery technology that has not yet proven to be commercially viable. There can be no assurance that these advances will occur in a timely or feasible way, that the funds that we have budgeted for these purposes will be adequate or that we will be able to establish our right to these technologies. Moreover, our competitors and others are pursuing the same technologies and other competing technologies, in some cases with more money available, and there can be no assurance that they will not acquire similar or superior technologies sooner than we do or on an exclusive basis or at a significant price advantage.

Shortages of and volatility in the price of oil could cause diminished profitability due to shifts in consumer vehicle demand.

Continued volatile oil prices throughout 2008 contributed to weaker demand for some of our higher margin vehicles, especially our full-size sport utility vehicles, as consumer demand shifted to smaller, more fuel-efficient vehicles, which provide us with lower profit margins and in recent years have represented a smaller proportion of our sales volume in North America. Fullsize pick-up trucks, which are generally less fuel efficient than smaller vehicles, provided more than 21.7% of our North American sales in 2008, compared to a total industry average of 12.1% of sales. Demand for traditional sport utility vehicles and vans also declined in 2008. Any future increases in the price of gasoline in the United States or in our other markets or any sustained shortage of oil could further weaken the demand for such vehicles, which could reduce our market share in affected markets, decrease profitability and have a material adverse effect on our business.

Our continued ability to achieve structural and materials cost reductions and to realize production efficiencies for our automotive operations is critical to our ability to achieve our Viability Plan and return to profitability.

We are continuing to implement a number of structural and materials cost reduction and productivity improvement initiatives in our automotive operations, including substantial restructuring initiatives for our North American operations, as more fully discussed in “MD&A.” Our future competitiveness depends upon our continued success in implementing these restructuring initiatives throughout our automotive operations, especially in North America. In addition, while some of the elements of structural cost reduction are within our control, others such as interest rates or return on investments, which influence our expense for pension and OPEB, depend more on external factors, and there can be no assurance that such external factors will not materially adversely affect our ability to reduce our structural costs.

A significant amount of our operations are conducted by joint ventures that we cannot operate solely for our benefit.

Many of our operations, particularly in emerging markets, are carried on by jointly owned companies such as GM Daewoo or Shanghai GM. In joint ventures we share ownership and management of a company with one or more parties who may not have the same goals, strategies, priorities or resources as we do. In general, joint ventures are intended to be operated for the equal benefit of

 

29


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

all co-owners, rather than for our exclusive benefit. Operating a business as a joint venture often requires additional organizational formalities as well as time-consuming procedures for sharing information and making decisions. In joint ventures, we are required to pay more attention to our relationship with our co-owners as well as with the joint venture, and if a co-owner changes, our relationship may be materially adversely affected. In addition, the benefits from a successful joint venture are shared among the co-owners, so that we do not receive all the benefits from our successful joint ventures.

Increase in cost, disruption of supply or shortage of raw materials could materially harm our business.

We use various raw materials in our business including steel, non-ferrous metals such as aluminum and copper and precious metals such as platinum and palladium. The prices for these raw materials fluctuate depending on market conditions. In recent years, we have experienced significant increases in freight charges and raw material costs. Substantial increases in the prices for our raw materials increase our operating costs and could reduce our profitability if we cannot recoup the increased costs through vehicle prices. In addition, some of these raw materials, such as corrosion-resistant steel, are available from a limited number of suppliers. We cannot guarantee that we will be able to maintain favorable arrangements and relationships with these suppliers. An increase in the cost or a sustained interruption in the supply or shortage of some of these raw materials, which may be caused by a deterioration of our relationships with suppliers or by events such as natural disasters, power outages or labor strikes, could negatively affect our net revenues and profits to a material extent.

We could be materially adversely affected by changes or imbalances in foreign currency exchange and other rates.

Because we sell products and buy materials globally over a significant period of time, we are exposed to risks related to the effects of changes in foreign currency exchange rates, commodity prices and interest rates, which can have material adverse effects on our business. In recent years, the relative weakness of certain currencies has provided competitive advantages to certain of our competitors. While in recent months the Japanese Yen has strengthened significantly, its weakness in recent years has provided pricing advantages for vehicles and parts imported from Japan to markets with more robust currencies like the United States and Western Europe. Moreover, the relative strength of other currencies has negatively affected our business. For example, before the current financial crisis, the relative weakness of the British Pound compared to the Euro, has had an adverse effect on our results of operations in Europe. In addition, in preparing our consolidated financial statements we translate our revenue and expenses outside the United States into U.S. Dollars using the average exchange rate for the period and the assets and liabilities using the foreign currency exchange rate at the balance sheet date. As a result, foreign currency fluctuations and the associated currency translations could have a material adverse effect on our results of operation.

We operate in a highly competitive industry in which many manufacturers have relatively high fixed costs and are faced with sharply decreasing demand.

The automotive industry is highly competitive, and has historically had manufacturing capacity that exceeds demand. Due to current economic conditions, demand for automobiles has fallen sharply, both in North America and in other parts of the world. Many manufacturers, including us, have relatively high fixed labor costs as well as significant limitations on their ability to close facilities and reduce fixed costs. To offset these high fixed costs, some of our competitors have responded to recent deteriorations in economic conditions and vehicle sales by attempting to sell more vehicles by adding vehicle enhancements, providing subsidized financing or leasing programs, offering option package discounts or other marketing incentives or reducing vehicle prices in certain markets. These actions have had, and are expected to continue to have, a significant negative effect on our vehicle pricing, market share and operating results particularly on the low end of the market, and present a significant risk to our ability to enhance our revenue per vehicle and maintain our market share during difficult economic times.

New laws, regulations or policies of governmental organizations regarding increased fuel economy requirements and reduced greenhouse gas emissions, or changes in existing ones, may have a significant negative effect on how we do business.

We are affected significantly by a substantial amount of governmental regulations that increase costs related to the production of our vehicles and affect our product portfolio. We anticipate that the number and extent of these regulations, and the costs and changes

 

30


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

to our product lineup to comply with them, will increase significantly in the future. In the United States and Europe, for example, governmental regulation is primarily driven by concerns about the environment (including CO2 emissions), vehicle safety, fuel economy and energy security. These government regulatory requirements significantly affect our plans for global product development and may result in substantial costs, which can be difficult to pass through to our customers, and may result in limits on the types of vehicles we sell and where we sell them, which can affect revenue.

The CAFE requirements mandated by the U.S. government pose special concerns. The EISA, enacted in December 2007, will require significant increases in CAFE requirements applicable to cars and light trucks beginning in the 2011 model year in order to increase the combined U.S. fleet average for cars and light trucks to at least 35 mpg by 2020, a 40% increase. The estimated cost to the automotive industry of complying with this new standard will likely exceed $100 billion, and our compliance cost could require us to alter our capital spending and research and development plans, curtail sales of our higher margin vehicles, cease production of certain models or even exit certain segments of the vehicle market. We anticipate that to comply with these higher standards we will be required to sell a significant volume of hybrid or electrically powered vehicles throughout the United States, as well as develop new technologies for conventional internal combustion engines. There is no assurance that we will be able to produce and sell vehicles that use such technologies at a competitive price, or that our customers will purchase such vehicles in the quantities necessary for us to comply with these higher CAFE standards.

In April 2008 the NHTSA issued a proposed rule to set the car and truck standards for the 2011 through 2015 model years, but no final rule has been issued. The standards that NHTSA finally adopts may be stricter than the proposed rule provided, which would exacerbate the challenges in and costs of compliance.

In addition, California and 13 other states have adopted the AB 1493 Rules, establishing CO2 emission standards that effectively impose increased fuel economy standards for new vehicles sold in those states, and other states are considering adopting similar standards. We do not believe that it is technically possible for us to comply with the requirements of the AB 1493 Rules based on our current product portfolio, and the extent of technical improvements that we believe are possible in the near future. If stringent CO2 emission standards are imposed on us on a state-by-state basis, the result could be even more disruptive to our business than the higher CAFE standards discussed above. The AB 1493 Rules have been challenged in litigation in several states and have been upheld in certain cases. In January 2009, President Obama ordered the EPA to reconsider whether the automobile emission standards of California or other states, such as the AB 1493 Rules, should be allowed to differ from the federal rules and to implement new fuel efficiency guidelines for the automotive industry in time to cover 2011 model year cars. There is no assurance that states will not be permitted to adopt a variety of emission standards that are stricter than the federal requirements, or that the federal rules will not be changed to require lower emissions and higher fuel economy, possibly to an extent that is not technically feasible.

In addition, a number of countries in Europe are adopting or amending regulations that establish CO2 emission standards or other frameworks that effectively impose similarly increased fuel economy standards for vehicles sold in those countries, or establish vehicle-related tax structures based on them. Like the U.S. regulations, these government regulatory requirements could significantly affect our plans for global product development and result in substantial costs, which would be difficult to pass through to our customers, and could result in limits on the types of vehicles we sell and where we sell them, which could affect revenue.

Pursuant to the transactions proposed in the Viability Plan to issue additional common stock to unsecured debt holders and to the UAW VEBA, substantially all of our common stock would be newly issued and distributed to exchanging bond holders and the UAW VEBA, and the voting power and share of future dividends of our currently outstanding common stock would be significantly and materially diluted.

If the Bond Exchange and the VEBA Modifications are executed as we have planned, we expect to issue significant amounts of additional common stock. Under potential scenarios currently contemplated, new equity issued in the Bond Exchange and to the VEBA would represent substantially all of our pro forma common stock outstanding. As a result, upon consummation of the Bond Exchange and the VEBA Modifications, and without regard to any additional dilution relating to the UST warrant, our current stockholders’ interest would be almost entirely diluted, so that their effect on voting and their share of any future dividends on the common stock would be significantly and materially diluted.

 

31


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Our common stock may be delisted from the New York Stock Exchange.

Our common stock is currently listed on the New York Stock Exchange (NYSE). We may fail to comply with the continued listing requirements of the NYSE, which may result in the delisting of our common stock. NYSE rules require, among other things, that the minimum listing price of our common stock be at least $1.00 for more than 30 consecutive trading days. If we failed to comply with the minimum listing price requirement and were unable to cure such defect within the six months following the receipt of any notice from the NYSE regarding our failure to achieve the minimum listing price of our common stock, the NYSE might delist our common stock. Delisting would have an adverse effect on the liquidity of our common stock and, as a result, the market price for our common stock might become more volatile. Delisting could also make it more difficult for us to raise additional capital.

If our common stock is deemed a penny stock, its liquidity may be materially adversely affected.

If the market price for our common stock remains below $5.00 per share, our common stock may be deemed to be a penny stock, and therefore subject to rules that impose additional sales practices on broker-dealers who sell our securities. For example, broker-dealers must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. Also, a disclosure schedule must be delivered to each purchaser of a penny stock, disclosing sales commissions and current quotations for the securities. Monthly statements are also required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Because of these additional conditions, some brokers may choose to not effect transactions in penny stocks. This could have an adverse effect on the liquidity of our common stock.

Our business may be materially adversely affected by decreases in the residual value of off-lease vehicles.

In addition to the effect on GMAC of the residual value of off-lease vehicles discussed in “MD&A — FIO Results of Operations,” we are also negatively affected more directly by decreases in the residual value of off-lease vehicles through our residual support programs, our ownership of lease-related assets and the effect of leasing activity on our retail sales. We record an estimate of marketing incentive accruals for residual support and risk sharing programs when vehicles are sold to dealers. To the extent the residual value of off-lease vehicles decreases, we are required to increase our estimate of the residual support required to be provided to GMAC to subsidize leases or increase risk sharing payments to GMAC. We also own certain lease-related assets that GMAC paid to us as a dividend prior to the consummation of the GMAC Transaction, the value of which would be impaired by decreases in the residual value of off-lease vehicles. In addition, because of the severe decline in expected lease residual values, leasing transactions currently are infrequently available to our end-use customers, and when they are available are markedly more expensive than other types of financing. Because customers who prefer leasing may not be able to obtain or afford to lease our vehicles, they may defer a purchase or buy a vehicle from a manufacturer that offers leasing on more attractive terms. Any one or more of these consequences could have a material adverse effect on our business.

The pace of introduction and market acceptance of new vehicles is important to our success and the frequency of new vehicles introductions may be materially adversely affected by our reductions in capital expenditures.

Our competitors have introduced, new and improved vehicle models designed to meet consumer expectations, and will likely continue to do so. Our profit margins, sales volumes and market shares may decrease if we are unable to produce models that compare favorably to these competing models. Because of the downturn in vehicle sales that we have experienced, we have reduced the levels of capital expenditures that we expect to incur in the near future and as a result, we expect in the next few years to introduce new models less frequently than we have recently. If we are unable to produce new and improved vehicle models on a basis consistent with the models introduced by our competitors, demand for our vehicles may be materially adversely affected. Further, the pace of our development and introduction of new and improved vehicles depends on our ability to successfully implement improved technological innovations in design, engineering and manufacturing. If our cost reductions pursuant to the Viability Plan reduce our ability to develop and implement improved technological innovations, demand for our vehicles may be materially adversely affected.

 

32


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

We have determined that our internal controls over financial reporting are currently not effective. The lack of effective internal controls could materially adversely affect our financial condition and ability to carry out our strategic business plan.

As discussed in Item 9A, “Controls and Procedures,” our management team for financial reporting, under the supervision and with the participation of our chief executive officer and our chief financial officer, conducted an evaluation of the effectiveness of the design and operation of our internal controls. As of December 31, 2008, they concluded that our disclosure controls and procedures and our internal control over financial reporting were not effective. Until we are successful in our effort to remediate the material weakness in our internal control over financial reporting, it may materially adversely affect our ability to report accurately our financial condition and results of operations in the future in a timely and reliable manner. In addition, although we continually review and evaluate our internal control systems to allow management to report on the sufficiency of our internal controls, we cannot assure you that we will not discover additional weaknesses in our internal controls over financial reporting. Any such additional weakness or failure to remediate existing weakness could adversely affect our financial condition or ability to comply with applicable legal requirements of our Viability Plan.

Our businesses outside the United States expose us to additional risks that may materially adversely affect our business.

Approximately 64% of our vehicle unit sales in 2008 were generated outside the United States, and we intend to continue to pursue growth opportunities for our business in a variety of business environments outside the United States. Operating in a large number of different regions and countries exposes us to political, economic and other risks as well as multiple foreign regulatory requirements that are subject to change, including:

 

   

Multiple foreign regulatory requirements that are subject to change, including foreign regulations restricting our ability to sell our products in those countries;

 

   

Differing local product preferences and product requirements, including fuel economy, vehicle emissions and safety;

 

   

Differing labor regulations and union relationships;

 

   

Consequences from changes in tax laws; and

 

   

Political and economic instability, natural calamities, war, and terrorism.

The effects of these risks may, individually or in the aggregate, materially adversely affect our business.

New laws, regulations or policies of governmental organizations regarding safety standards, or changes in existing ones, may have a significant negative effect on how we do business.

Our products must satisfy legal safety requirements. Meeting or exceeding government-mandated safety standards is difficult and costly, because crashworthiness standards tend to conflict with the need to reduce vehicle weight in order to meet emissions and fuel economy standards. While we are managing our product development and production operations on a global basis to reduce costs and lead times, unique national or regional standards or vehicle rating programs can result in additional costs for product development, testing and manufacturing. Governments often require the implementation of new requirements during the middle of a product cycle, which can be substantially more expensive than accommodating these requirements during the design of a new product.

 

33


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Risks related to our ownership interest in GMAC

Risks Related to GMAC Becoming a Bank Holding Company

GMAC’s business, financial condition and results of operations could be adversely affected by new regulations to which it is subject as a result of becoming a bank holding company.

On December 24, 2008, the Board of Governors of the Federal Reserve approved GMAC’s application to become a BHC under the Bank Holding Company Act of 1956, as amended. As a BHC, GMAC is subject to the comprehensive, consolidated supervision of the Federal Reserve, including risk-based and leverage capital requirements and information reporting requirements. In addition, GMAC’s banking subsidiary, GMAC Bank, is subject to regulation and examination primarily by the Federal Deposit Insurance Corporation (FDIC) and the Utah Department of Financial Institutions. This regulatory oversight is established to protect depositors, federal deposit insurance funds and the banking system as a whole, not security holders.

It is possible that certain of GMAC’s existing business activities will not be deemed to be permissible under applicable banking law. As a new BHC, GMAC is permitted a two-year grace period to comply with these restrictions on activities. GMAC may apply for three one-year extensions. GMAC is currently reviewing its business activities and may be required to make modifications that could have a material effect on its business. GMAC is also subject to restrictions on transactions between GMAC Bank and its affiliates. For example, we are currently an affiliate of GMAC Bank for purposes of Section 23A of the Federal Reserve Act (Section 23A). Section 23A prohibits GMAC Bank from purchasing certain low-quality assets from its affiliates or generally from engaging in specified covered transactions with any one affiliate that exceed 10% of its capital stock and surplus or with all of its affiliates that, in the aggregate, exceed 20% of its capital stock and surplus. In connection with GMAC’s application to become a BHC, GMAC requested and received from the Federal Reserve a limited exemption with respect to these restrictions. However, until such time as either we are no longer deemed an affiliate of GMAC and GMAC Bank or GMAC is unable to obtain further exemptions or waivers with respect to these restrictions, there will be substantial restrictions on the activities of GMAC Bank and GMAC’s ability to fund a material amount of assets through GMAC Bank will be restricted.

If GMAC is unable to satisfy applicable regulatory capital requirements in the future, it could become subject to enforcement actions and/or FDIC receivership.

As a BHC, if GMAC fails to satisfy regulatory capital or other requirements, it may be subject to serious consequences ranging in severity from being precluded from making acquisitions, to becoming subject to formal enforcement actions by the Federal Reserve and FDIC receivership. If this were to occur, such actions could impair GMAC from successfully executing its business plan and have a material adverse effect on its business, results of operations and financial position.

GMAC may not be successful in implementing its business plan as a bank holding company.

As a new BHC, GMAC intends to undertake new business activities. Doing so is subject to inherent risks. There can be no assurance that it will be able to execute on these plans in a timely manner, or at all, which would have a material adverse effect on its business, results of operations and financial position.

Other Risks Related to GMAC’s Business

GMAC’s business and the businesses of its subsidiaries, including Residential Capital, LLC (ResCap), require substantial capital, and continued disruption in GMAC’s funding sources and access to the capital markets would continue to have a material adverse effect on its liquidity and financial condition.

GMAC’s liquidity and ongoing profitability are, in large part, dependent upon its timely access to capital and the costs associated with raising funds in different segments of the capital markets. GMAC depends and will continue to depend on its ability to access diversified funding alternatives to meet future cash flow requirements and to continue to fund its operations. GMAC’s funding

 

34


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

strategy and liquidity position have been significantly adversely affected by the ongoing stress in the credit markets that began in the middle of 2007. These adverse conditions reached unprecedented levels through 2008, and have continued in recent months. The capital markets remain highly volatile and access to liquidity has been significantly reduced. These conditions, in addition to the reduction in GMAC’s credit ratings, have resulted in increased borrowing costs and GMAC’s inability to access the unsecured debt markets in a cost-effective manner. This has resulted in an increased reliance on asset-backed and other secured sources of funding, which also has been constrained in the current environment. Some of these facilities have not been renewed placing additional pressure on GMAC’s liquidity position, and GMAC’s inability to renew loans and facilities as they mature would have a further negative effect on its liquidity position. GMAC also has significant maturities of unsecured debt each year. In order to retire these instruments, it either will need to refinance this debt, which will be very difficult should the current volatility in the credit markets continue or worsen, or generate sufficient cash to retire the debt.

Upon GMAC’s approval to become a BHC, it received a $5.0 billion investment from the UST under their Troubled Asset Relief Program. Eligibility to participate in further government funding programs, such as the Temporary Liquidity Guarantee Program, is subject to the approval of various governmental authorities, which may include the Federal Reserve Board, the UST and the FDIC, and such approvals are subject to numerous conditions. GMAC may not be successful in completing the actions or satisfying the conditions required by the Federal Reserve to obtain approval for further government funding. GMAC’s inability to do so could have a material adverse effect on its business, results of operations and financial position.

Furthermore, GMAC recently provided a significant amount of funding to ResCap, and ResCap remains heavily reliant on support from GMAC in meeting its liquidity and capital requirements. Any negative events with respect to ResCap could serve as a further drain on GMAC’s financial resources.

ResCap’s liquidity has also been adversely affected, and may be further adversely affected in the future, by margin calls under certain of its secured credit facilities that are dependent in part on the lenders’ valuation of the collateral securing the relevant financing. Each of these credit facilities allows the lender, to varying degrees, to revalue the collateral to values that the lender considers to reflect market values. If a lender determines that the value of the collateral has decreased, it may initiate a margin call requiring ResCap to post additional collateral to cover the decrease. When ResCap is subject to such a margin call, it must provide the lender with additional collateral or repay a portion of the outstanding borrowings with minimal notice. Any such margin call could harm ResCap’s liquidity, results of operation, financial condition and business prospects. Additionally, in order to obtain cash to satisfy a margin call, ResCap may be required to liquidate assets at a disadvantageous time, which could cause it to incur further losses and adversely affect its results of operations and financial condition. Furthermore, continued volatility in the capital markets has made determination of collateral values uncertain compared to historical experience, and many of ResCap’s lenders are taking a much more conservative approach to valuations. As a result, the frequency and magnitude of margin calls has increased, and GMAC expects both to remain high compared to historical experience for the foreseeable future.

Recent developments in the market for many types of mortgage products (including mortgage-backed securities) have resulted in reduced liquidity for these assets. Although this reduction in liquidity has been most acute with regard to nonprime assets, there has been an overall reduction in liquidity across the credit spectrum of mortgage products. As a result, ResCap’s liquidity has been and will continue to be negatively affected by margin calls and changes to advance rates on its secured facilities. One consequence of this funding reduction is that ResCap may decide to retain interests in securitized mortgage pools that in other circumstances it would sell to investors, and ResCap will have to secure additional financing for these retained interests. If ResCap is unable to secure sufficient financing for them, or if there is further general deterioration of liquidity for mortgage products, it will adversely affect ResCap’s business.

GMAC’s borrowing costs and access to the debt capital markets depend significantly on its credit ratings.

The cost and availability of unsecured financing generally are dependent on GMAC’s short-term and long-term credit ratings. Each of Standard & Poor’s (S&P) Rating Services; Moody’s Investors Service, Inc. (Moody’s); Fitch, Inc. (Fitch); and Dominion Bond Rating Service (DBRS) rates GMAC’s debt. Most of the recent credit rating actions have been negative, and several of these agencies currently maintain a negative outlook with respect to GMAC’s ratings. Ratings reflect the rating agencies’ opinions of GMAC’s

 

35


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

financial strength, operating performance, strategic position, and ability to meet its obligations. Further downgrades of GMAC’s credit ratings would further increase borrowing costs and constrain GMAC’s access to unsecured debt markets, including capital markets for retail debt and, as a result, would negatively affect its business. In addition, future downgrades of GMAC’s credit ratings could increase the possibility of additional terms and conditions being added to any new or replacement financing arrangements, as well as affect elements of certain existing secured borrowing arrangements.

Agency ratings are not a recommendation to buy, sell, or hold any security, and may be revised or withdrawn at any time by the issuing organization. Each agency’s rating should be evaluated independently of any other agency’s rating.

GMAC’s indebtedness and other obligations are significant and could materially adversely affect its business.

GMAC has a significant amount of indebtedness. At December 31, 2008, GMAC had approximately $126 billion in principal amount of indebtedness outstanding. Interest expense on GMAC’s indebtedness constitutes approximately 65% of its total financing revenues. In addition, under the terms of its current indebtedness, GMAC has the ability to create additional unsecured indebtedness. If GMAC’s debt payments increase, whether due to the increased cost of existing indebtedness or the incurrence of additional indebtedness, GMAC may be required to dedicate a significant portion of its cash flow from operations to the payment of principal of, and interest on, its indebtedness, which would reduce the funds available for other purposes. GMAC’s indebtedness also could limit its ability to withstand competitive pressures and reduce its flexibility in responding to changing business and economic conditions.

The profitability and financial condition of GMAC’s operations are heavily dependent upon our performance, operations and prospects.

Our dealers, employees and retirees comprise a significant portion of GMAC’s customers. As a result, a significant adverse change in our business, including significant adverse changes in our liquidity position and access to the capital markets, the production or sale of our vehicles, the quality or resale value of our vehicles, the use of our marketing incentives, our relationships with our key suppliers, our relationship with the UAW and other labor unions, and other factors affecting us or our employees would have a significant adverse effect on GMAC’s profitability and financial condition.

GMAC provides vehicle financing through purchases of retail automotive and lease contracts with retail customers primarily of our dealers. GMAC also finances the purchase of new and used vehicles by our dealers through wholesale financing, extends other financing to our dealers, provides fleet financing for our dealers to buy vehicles they rent or lease to others, provides wholesale vehicle inventory insurance to our dealers, provides automotive extended service contracts through our dealers, and offers other services to our dealers. In 2008, GMAC’s share of our retail sales and sales to dealers was 32% and 81%, respectively, in markets where we operate. As a result, our level of automobile production and sales directly affects GMAC’s financing and leasing volume, the premium revenue for wholesale vehicle inventory insurance, the volume of automotive extended service contracts, and the profitability and financial condition of our dealers to whom GMAC provides wholesale financing, term loans, and fleet financing. In addition, the quality of our vehicles affects GMAC’s obligations under automotive extended service contracts relating to such vehicles. Further, the resale value of our vehicles, which may be affected by various factors relating to our business such as brand image or the number of new vehicles produced, affects the remarketing proceeds GMAC receives upon the sale of repossessed vehicles and off-lease vehicles at lease termination.

GMAC’s global automotive finance operations are highly dependent on our sales volume. In 2008, global vehicle sales declined rapidly, and there is no assurance that the global automotive market, or our share of that market, will not suffer a significant further downturn. Vehicle sales volume could be further adversely affected by any restructuring that would reduce the number of our retail channels and core brands or consolidate our dealer network.

In the event that we or any of our significant subsidiaries were to file for bankruptcy, sales volume could decrease as a result of a reduction in consumer confidence, and our business could be otherwise materially adversely affected. This would in turn have a materially adverse effect on GMAC’s business. In addition, pursuant to contractual arrangements with GMAC, whenever we offer vehicle financing and leasing incentives to customers (e.g., lower interest rates than market rates), we will do so exclusively through

 

36


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

GMAC, subject to certain limitations and exceptions. In the event of our bankruptcy, it is possible that we would reject this exclusivity arrangement with GMAC. If we did so, this could have a material adverse effect on GMAC’s business, profitability and financial condition.

It is difficult to predict with certainty all the consequences of a bankruptcy. However, there may be systemic economic effects, such as increased unemployment rates, that could further affect GMAC’s business.

GMAC has substantial credit exposure to us and a bankruptcy by us could affect certain of GMAC’s funding facilities.

GMAC has entered into various operating and financing arrangements with us. As a result of these arrangements, GMAC has substantial credit exposure to us.

As a marketing incentive we may sponsor residual support programs for retail leases as a way to lower customers’ monthly payments. Under residual support programs, the contractual residual value is adjusted above GMAC’s standard residual values. At lease origination, we pay GMAC the present value of the estimated amount of residual support we expect to owe at lease termination. When the lease terminates, we make a payment to GMAC if the estimated residual support payment is too low. Similarly, GMAC makes a payment to us if the estimated residual payment is too high and we overpaid GMAC. Additionally, under what we refer to as lease pull-ahead programs, customers are sometimes encouraged to terminate leases early in conjunction with the acquisition of a new GM vehicle. As part of these programs, GMAC waives all or a portion of the customer’s remaining payment obligation under the current lease. Under most programs, we compensate GMAC for the foregone revenue from the waived payments. Since these programs generally accelerate GMAC’s remarketing of the vehicle, the resale proceeds are typically higher than otherwise would have been realized had the vehicle been remarketed at lease contract maturity. The reimbursement from us for the foregone payments is, therefore, reduced by the amount of this benefit. We make estimated payments to GMAC at the end of each month in which customers have pulled their leases ahead. As with residual support payments, these estimates are adjusted once all the vehicles that could have been pulled ahead have terminated and been remarketed. To the extent that the original estimates were incorrect, we or GMAC may be obligated to pay each other the difference, as appropriate under the lease pull-ahead programs. We are also responsible for risk sharing on returned lease vehicles in the United States and Canada whose resale proceeds are below standard residual values (limited to a floor). In addition, we may sponsor rate support programs, which offer rates to customers below the standard market rates at which GMAC purchases retail contracts (such as 0% financing). Under rate support programs, we are obligated to pay GMAC the present value of the difference between the customer rate and our standard rates. The amount of this payment is determined on a monthly basis based on subvented contract originations in a given month, and payment for our rate support obligation is due to GMAC on the 15th of each following month.

GMAC’s credit exposure to us is significant. At December 31, 2008, GMAC had $2.5 billion in secured exposure, which included primarily wholesale vehicle financing to our dealerships, notes receivable from us, and vehicles leased directly to us. Further, GMAC had $1.9 billion in unsecured exposure, which included estimates of payments from us related to residual support and risk-sharing agreements. If we were to file for bankruptcy, payment on GMAC’s unsecured exposures could be delayed or might not occur at all. In addition, GMAC would become an unsecured creditor of us to the extent that proceeds from the sale of collateral related to secured exposures are insufficient to repay our obligations to GMAC. Under the terms of certain agreements between GMAC and us, GMAC has the right to offset certain of its exposures to us against amounts GMAC owes to us.

In connection with GMAC’s dealer floorplan securitizations, if we either: (1) become subject to liquidation under Chapter 7 of the U.S. Bankruptcy Code or a similar provision of state or federal law; or (2) cease to operate as an automobile manufacturer or undertake to sell all or substantially all of our automobile manufacturing assets or business, in either case, after a petition has been filed under Chapter 11 of the U.S. Bankruptcy Code or a similar provision of state or federal law, then an early amortization event will occur with respect to such securitizations. Principal collections on the dealer accounts will be paid in accordance with the transactions documents, and no additional borrowings may be made during an early amortization period. In addition, if either of the two specific events were to occur as discussed above, an immediate event of default would occur under GMAC’s $11.4 billion secured revolving credit facility that GMAC entered into in June 2008. In this circumstance, all amounts outstanding under this facility would become immediately due and payable and, if the amounts outstanding were not repaid, the collateral securing the facility could be sold by the lender under the facility.

 

37


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

GMAC’s profitability and financial condition have been materially adversely affected by declines in the residual value of off-lease vehicles, and the residual value of off-lease vehicles may continue to decrease.

GMAC’s expectation of the residual value of a vehicle subject to an automotive lease contract is a critical element used to determine the amount of the lease payments under the contract at the time the customer enters into it. As a result, to the extent the actual residual value of the vehicle, as reflected in the sales proceeds received upon remarketing at lease termination, is less than the expected residual value for the vehicle at lease inception, GMAC incurs additional depreciation expense and/or a loss on the lease transaction. General economic conditions, the supply of off-lease vehicles, and new vehicle market prices heavily influence used vehicle prices and thus the actual residual value of off-lease vehicles. Also contributing to the weakness in the used vehicle market are the historically low consumer confidence levels, which influence major purchases, and the weakening financial condition of auto dealers. In 2008, sharp declines in demand and used vehicle sale prices affected GMAC’s remarketing proceeds for these vehicles, and resulted in impairments of $1.2 billion recorded by GMAC in 2008. Weak residual values also contributed to total loss provisions of $626 million recorded by GMAC in 2008 on its balloon finance contract portfolio.

These trends may continue or worsen. Our brand image, consumer preference for our products, and our marketing programs that influence the new and used vehicle market for our vehicles also influence lease residual values. In addition, GMAC’s ability to efficiently process and effectively market off-lease vehicles affects the disposal costs and proceeds realized from the vehicle sales. While we provide support for lease residual values, including through residual support programs, this support by us does not in all cases entitle GMAC to full reimbursement for the difference between the remarketing sales proceeds for off-lease vehicles and the residual value specified in the lease contract. Differences between the actual residual values realized on leased vehicles and GMAC’s expectations of such values at contract inception could continue to have a negative effect on GMAC’s profitability and financial condition.

The occurrence of recent adverse developments in the mortgage finance and credit markets has adversely affected ResCap’s business, liquidity and its capital position and has raised substantial doubt about ResCap’s ability to continue as a going concern.

ResCap has been negatively affected by the events and conditions in the broader mortgage banking industry, most severely but not limited to the nonprime and non-conforming mortgage loan markets. Fair market valuations of mortgage loans held for sale, mortgage servicing rights, securitized interests that continue to be held by ResCap and other assets and liabilities ResCap records at fair value have significantly deteriorated due to weakening housing prices, increasing rates of delinquencies and defaults of mortgage loans. These deteriorating factors have also resulted in higher provision for loan losses on ResCap’s mortgage loans held for investment and real estate lending portfolios. The market deterioration has resulted in rating agency downgrades of asset-backed and mortgage-backed securities which in turn has led to fewer sources of, and significantly reduced levels of, liquidity available to finance ResCap’s operations. Most recently, the widely publicized credit defaults and/or acquisitions of large financial institutions in the marketplace has further restricted credit in the United States and international lending markets.

ResCap is highly leveraged relative to its cash flow and continues to recognize substantial losses resulting in a significant deterioration in capital. There continues to be a risk that ResCap will not be able to meet its debt service obligations, will default on its financial debt covenants due to insufficient capital and/or be in a negative liquidity position in 2009. ResCap remains heavily dependent on GMAC for funding and capital support, and there can be no assurance that GMAC will provide such support.

In light of ResCap’s liquidity and capital needs, combined with volatile conditions in the marketplace, there is substantial doubt about ResCap’s ability to continue as a going concern. If GMAC determines to no longer support ResCap’s capital or liquidity needs, or ResCap is unable to successfully execute its other initiatives, it would have a material adverse effect on ResCap’s business, results of operations and financial position.

 

38


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

ResCap has significant near-term liquidity issues. There is a significant risk that ResCap will not be able to meet its debt service obligations and other funding obligations in the near-term.

ResCap expects continued liquidity pressures for at least the early part of 2009. ResCap is highly leveraged relative to its cash flow. At December 31, 2008, ResCap’s liquidity portfolio (cash readily available to cover operating demands from across its business operations and maturing obligations) amounted to $0.5 billion.

ResCap expects that additional and continuing liquidity pressure, which is difficult to forecast with precision, will result from the obligation of its subsidiaries to advance delinquent principal, interest, property taxes, casualty insurance premiums and certain other amounts with respect to mortgage loans ResCap services that become delinquent. Recent increases in delinquencies with respect to ResCap’s servicing portfolio has increased the overall level of such advances, as well as extended the time over which ResCap expects to recover such amounts under the terms of its servicing contracts. ResCap also must find alternate funding sources for assets that must periodically be withdrawn from some of its financing facilities as maximum funding periods for those assets expire. In addition, in connection with the recent restructuring of ResCap’s credit facilities, ResCap became subject to requirements to maintain minimum consolidated tangible net worth and consolidated liquidity balances in order to continue its access to those facilities. ResCap will attempt to meet these and other liquidity and capital demands through a combination of operating cash and additional asset sales. The sufficiency of these sources of additional liquidity cannot be assured, and any asset sales, even if they raise sufficient cash to meet ResCap’s liquidity needs, may result in losses that negatively affect GMAC’s overall profitability and financial condition.

Moreover, even if ResCap is successful in implementing all of the actions described above, its ability to satisfy its liquidity needs and comply with any covenants included in its debt agreements requiring maintenance of minimum cash balances may be affected by additional factors and events (such as interest rate fluctuations and margin calls) that increase ResCap’s cash needs making ResCap unable to independently satisfy its near-term liquidity requirements.

GMAC has extensive financing and hedging arrangements with ResCap, which could be at risk of nonpayment if ResCap were to file for bankruptcy.

At January 31, 2009, GMAC had $4.1 billion in secured financing arrangements (of which $2.6 billion had been funded) and secured hedging agreements with ResCap, and GMAC owned $500 million of ResCap notes. Amounts outstanding under the secured financing and hedging arrangements fluctuate. If ResCap were to file for bankruptcy, ResCap’s repayments of its financing facilities, including those with GMAC, could be slower than if ResCap had not filed for bankruptcy. In addition, GMAC could be an unsecured creditor of ResCap to the extent that the proceeds from the sale of GMAC’s collateral are insufficient to repay ResCap’s obligations to GMAC. It is possible that other ResCap creditors would seek to recharacterize GMAC’s loans to ResCap as equity contributions or to seek equitable subordination of GMAC’s claims so that the claims of other creditors would have priority over GMAC’s claims. As a holder of unsecured notes, GMAC would not receive any distributions for the benefit of creditors in a ResCap bankruptcy before secured creditors are repaid. GMAC may also find it advantageous to provide debtor-in-possession financing to ResCap in a bankruptcy proceeding in order to preserve the value of the collateral ResCap has pledged to GMAC. In addition, should ResCap file for bankruptcy, GMAC’s investment related to ResCap’s equity position would likely be reduced to zero. Based on January 31, 2009 balances, this would result in a $3.1 billion charge to GMAC’s investment in ResCap.

Current conditions in the residential mortgage market and housing markets may continue to adversely affect ResCap’s earnings and financial condition.

Recently, the residential mortgage market in the United States, Europe, and other international markets in which ResCap conducts business has experienced a variety of difficulties and changed economic conditions that adversely affected ResCap’s earnings and financial condition in 2008 and 2007. Delinquencies and losses with respect to ResCap’s nonprime mortgage loans increased significantly and may continue to increase. Housing prices in many parts of the United States, the United Kingdom and other international markets have also declined or stopped appreciating, after extended periods of significant appreciation. In addition, the liquidity provided to the mortgage sector has recently been significantly reduced. This liquidity reduction combined with ResCap’s decision to reduce its exposure to the nonprime mortgage market caused its nonprime mortgage production to decline, and such

 

39


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

declines are expected to continue. Similar trends have emerged beyond the nonprime sector, especially at the lower end of the prime credit quality scale, and have had a similar effect on ResCap’s related liquidity needs and businesses in the United States, Europe, and other international markets. These trends have resulted in significant writedowns to ResCap’s mortgage loans held for sale and trading securities portfolios and additions to its allowance for loan losses for its mortgage loans held for investment and warehouse lending receivables portfolios. A continuation of these conditions, which GMAC anticipates in the near term, may continue to adversely affect ResCap’s financial condition and results of operations.

Moreover, the continued deterioration of the U.S. housing market and decline in home prices in 2007 and 2008 in many U.S. and international markets, which GMAC anticipates will continue for the near term, are likely to result in increased delinquencies or defaults on the mortgage assets ResCap owns and services. Further, loans that were made based on limited credit or income documentation also increase the likelihood of future increases in delinquencies or defaults on mortgage loans. An increase in delinquencies or defaults will result in a higher level of credit losses and credit-related expenses, as well as increased liquidity requirements to fund servicing advances, all of which in turn will reduce ResCap’s revenues and profits. Higher credit losses and credit-related expenses also could adversely affect ResCap’s financial condition.

ResCap’s lending volume is generally related to the rate of growth in U.S. residential mortgage debt outstanding and the size of the U.S. residential mortgage market. Recently, the rate of growth in total U.S. residential mortgage debt outstanding has slowed sharply in response to the reduced activity in the housing market and national declines in home prices. A decline in the rate of growth in mortgage debt outstanding reduces the number of mortgage loans available for ResCap to purchase or securitize, which in turn could lead to a reduction in ResCap’s revenue, profits and business prospects.

GMAC’s earnings may decrease because of increases or decreases in interest rates.

 

   

Rising interest rates will increase GMAC’s cost of funds;

 

   

Rising interest rates may reduce GMAC’s consumer automotive financing volume by influencing consumers to pay cash for, as opposed to financing, vehicle purchases;

 

   

Rising interest rates generally reduce GMAC’s residential mortgage loan production as borrowers become less likely to refinance, and the costs associated with acquiring a new home becomes more expensive;

 

   

Rising interest rates will generally reduce the value of mortgage and automotive financing loans and contracts and retained interests and fixed income securities held in GMAC’s investment portfolio.

GMAC is also subject to risks from decreasing interest rates. For example, a significant decrease in interest rates could increase the rate at which mortgages are prepaid, which could require GMAC to write down the value of its retained interests and mortgage servicing rights. Moreover, if prepayments are greater than expected, the cash GMAC receives over the life of its mortgage loans held for investment, and GMAC’s retained interests would be reduced. Higher-than-expected prepayments could also reduce the value of GMAC’s mortgage servicing rights and, to the extent the borrower does not refinance with GMAC, the size of its servicing portfolio. Therefore, any such changes in interest rates could harm GMAC’s revenues, profitability, and financial condition.

GMAC’s hedging strategies may not be successful in mitigating its risks associated with changes in interest rates and could affect its profitability and financial condition, as could GMAC’s failure to comply with hedge accounting principles and interpretations.

GMAC employs various economic hedging strategies to mitigate the interest rate and prepayment risk inherent in many of its assets and liabilities. GMAC’s hedging strategies rely on assumptions and projections regarding its assets, liabilities, and general market factors. If these assumptions and projections prove to be incorrect or GMAC’s hedges do not adequately mitigate the effect of changes in interest rates or prepayment speeds, GMAC may experience volatility in its earnings that could adversely affect its profitability and financial condition.

 

40


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

In addition, hedge accounting in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” requires the application of significant subjective judgments to a body of accounting concepts that is complex and for which the interpretations have continued to evolve within the accounting profession and amongst the standard setting bodies. In GMAC’s 2006 Form 10-K, GMAC restated prior period financial information to eliminate hedge accounting treatment that had been applied to certain callable debt hedged with derivatives.

ResCap’s ability to pay dividends to GMAC is restricted by contractual arrangements.

On June 24, 2005, GMAC entered into an operating agreement with ResCap and us to create separation between us and GMAC on the one hand, and GMAC and ResCap, on the other. The operating agreement restricts ResCap’s ability to declare dividends or prepay subordinated indebtedness to GMAC. This operating agreement was amended on November 27, 2006, and again on November 30, 2006, in conjunction with the GMAC Transaction. Among other things, these amendments removed us as a party to the agreement.

The restrictions contained in the ResCap operating agreement include the requirements that ResCap’s total equity be at least $6.5 billion for dividends to be paid. If ResCap is permitted to pay dividends pursuant to this provision, the cumulative amount of such dividends may not exceed 50% of ResCap’s cumulative net income (excluding payments for income taxes from GMAC’s election for federal income tax purposes to be treated as a limited liability company), measured from July 1, 2005, at the time such dividend is paid. These restrictions will cease to be effective if ResCap’s total equity has been at least $12.0 billion as of the end of each of two consecutive fiscal quarters or if GMAC ceases to be the majority owner. In connection with the GMAC Transaction, we were released as a party to this operating agreement, but the operating agreement remains in effect between ResCap and GMAC. At December 31, 2008, ResCap had consolidated total equity of $2.2 billion.

A failure of or interruption in the communications and information systems on which GMAC relies to conduct its business could adversely affect GMAC’s revenues and profitability.

GMAC relies heavily upon communications and information systems to conduct its business. Any failure or interruption of its information systems or the third party information systems on which GMAC relies could cause underwriting or other delays and could result in fewer applications being received, slower processing of applications, and reduced efficiency in servicing. The occurrence of any of these events could have a material adverse effect on GMAC’s business.

GMAC uses estimates and assumptions in determining the fair value of certain of its assets, in determining its allowance for credit losses, in determining lease residual values, and in determining its reserves for insurance losses and loss adjustment expenses. If GMAC’s estimates or assumptions prove to be incorrect, its cash flow, profitability, financial condition, and business prospects could be materially adversely affected.

GMAC uses estimates and various assumptions in determining the fair value of many of its assets, including certain loans held-for-investment for which GMAC elected fair value accounting, retained interests from securitizations of loans and contracts, mortgage servicing rights, and other investments, which do not have an established market value or are not publicly traded. GMAC also uses estimates and assumptions in determining its allowance for credit losses on its loan and contract portfolios, in determining the residual values of leased vehicles, and in determining its reserves for insurance losses and loss adjustment expenses. It is difficult to determine the accuracy of GMAC’s estimates and assumptions, and GMAC’s actual experience may differ materially from these estimates and assumptions. As an example, the continued decline of the domestic housing market, especially (but not exclusively) with regard to the nonprime sector, has resulted in increases of the allowance for loan losses at ResCap for 2006 and 2007. A material difference between GMAC’s estimates and assumptions and GMAC’s actual experience may adversely affect its cash flow, profitability, financial condition, and business prospects.

GMAC’s business outside the United States exposes GMAC to additional risks that may cause its revenues and profitability to decline.

GMAC conducts a significant portion of its business outside the United States, which exposes it to risks. The risks associated with GMAC’s operations outside the United States include:

 

   

multiple foreign regulatory requirements that are subject to change;

 

41


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

   

differing local product preferences and product requirements;

 

   

fluctuations in foreign currency exchange rates and interest rates;

 

   

difficulty in establishing, staffing, and managing foreign operations;

 

   

differing labor regulations;

 

   

consequences from changes in tax laws; and

 

   

political and economic instability, natural calamities, war, and terrorism.

The effects of these risks may, individually or in the aggregate, adversely affect GMAC’s revenues and profitability.

GMAC’s business could be adversely affected by changes in foreign currency exchange rates.

GMAC is exposed to risks related to the effects of changes in foreign currency exchange rates. Changes in currency exchange rates can have a significant effect on GMAC’s earnings from international operations as a result of foreign currency translation adjustments. While GMAC carefully watches and attempts to manage its exposure to fluctuation in currency exchange rates, these types of changes can have material adverse effects on its business and results of operations and financial condition.

GMAC is exposed to credit risk, which could affect its profitability and financial condition.

GMAC is subject to credit risk resulting from defaults in payment or performance by customers for its contracts and loans, as well as contracts and loans that are securitized and in which GMAC retains a residual interest. For example, the continued decline in the domestic housing market has resulted in an increase in delinquency rates related to mortgage loans that ResCap either holds or retains an interest in. Furthermore, a weak economic environment and the continued deterioration of the housing market could exert pressure on GMAC’s consumer automotive finance customers resulting in higher delinquencies, repossessions, and losses. There can be no assurances that GMAC’s monitoring of its credit risk as it affects the value of these assets and its efforts to mitigate credit risk through its risk-based pricing, appropriate underwriting policies, and loss mitigation strategies are or will be sufficient to prevent a further adverse effect on GMAC’s profitability and financial condition. As part of the underwriting process, GMAC relies heavily upon information supplied by third parties. If any of this information is intentionally or negligently misrepresented and the misrepresentation is not detected before completing the transaction, the credit risk associated with the transaction may be increased.

Fluctuations in valuation of investment securities or significant fluctuations in investment market prices could negatively affect revenues.

Investment market prices in general are subject to fluctuation. Consequently, the amount realized in the subsequent sale of an investment may differ significantly from the reported market value that could negatively affect GMAC’s revenues. Additionally, fluctuations in the value of investment securities available-for-sale could result in unrealized losses recorded in equity. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments, national and international events, and general market conditions.

GMAC may be required to repurchase contracts and provide indemnification if it breaches representations and warranties from its securitization and whole-loan transactions, which could harm GMAC’s profitability and financial condition.

When GMAC sells retail contracts or leases through whole-loan sales or securitizes retail contracts, leases, or wholesale loans to dealers, GMAC is required to make representations and warranties about the contracts, leases, or loans to the purchaser or securitization trust. GMAC’s whole-loan sale agreements generally require it to repurchase retail contracts or provide indemnification if GMAC breaches a representation or warranty given to the purchaser. Likewise, GMAC is required to repurchase retail contracts,

 

42


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

leases, or loans and may be required to provide indemnification if its breaches a representation or warranty in connection with its securitizations. Similarly, sales of mortgage loans through whole-loan sales or securitizations require GMAC to make representations and warranties about the mortgage loans to the purchaser or securitization trust. GMAC’s whole-loan sale agreements generally require it to repurchase or substitute loans if GMAC breaches a representation or warranty given to the purchaser. In addition, GMAC may be required to repurchase mortgage loans as a result of borrower fraud or if a payment default occurs on a mortgage loan shortly after its origination. Likewise, GMAC is required to repurchase or substitute mortgage loans if it breaches a representation or warranty in connection with its securitizations. The remedies available to a purchaser of mortgage loans may be broader than those available to GMAC against the original seller of the mortgage loan. Also, originating brokers and correspondent lenders often lack sufficient capital to repurchase more than a limited number of such loans and numerous brokers and correspondents are no longer in business. If a purchaser enforces its remedies against GMAC, it may not be able to enforce the remedies it has against the seller of the mortgage loan to GMAC or the borrower.

Like others in the mortgage industry, ResCap has experienced a material increase in repurchase requests. Significant repurchase activity could continue to harm GMAC’s profitability and financial condition.

Significant indemnification payments or contract, lease, or loan repurchase activity of retail contracts or leases or mortgage loans could harm GMAC’s profitability and financial condition.

GMAC has repurchase obligations in its capacity as servicer in securitizations and whole-loan sales. If in its capacity as a servicer GMAC breaches a representation, warranty, or servicing covenant with respect to an automotive receivable or mortgage loan, it may be required by the servicing provisions to repurchase that asset from the purchaser. If the frequency at which repurchases of assets occurs increases substantially from its present rate, the result could be a material adverse effect on GMAC’s financial condition, liquidity, and results of operations.

A loss of contractual servicing rights could have a material adverse effect on GMAC’s financial condition, liquidity, and results of operations.

GMAC is the servicer for all of the receivables it has originated and transferred to other parties in securitizations and whole-loan sales of automotive receivables. GMAC’s mortgage subsidiaries service the mortgage loans it has securitized, and GMAC services the majority of the mortgage loans it has sold in whole-loan sales. In each case, GMAC is paid a fee for its services, which fees in the aggregate constitute a substantial revenue stream for GMAC. In each case, GMAC is subject to the risk of termination under the circumstances specified in the applicable servicing provisions.

In most securitizations and whole-loan sales, the owner of the receivables or mortgage loans will be entitled to declare a servicer default and terminate the servicer upon the occurrence of specified events. These events typically include a bankruptcy of the servicer, a material failure by the servicer to perform its obligations, and a failure by the servicer to turn over funds on the required basis. The termination of these servicing rights, were it to occur, could have a material adverse effect on GMAC’s financial condition, liquidity, and results of operations and those of its mortgage subsidiaries. In 2008, GMAC’s consolidated mortgage servicing fee income was $1.8 billion.

The regulatory environment in which GMAC operates could have a material adverse effect on its business and earnings.

GMAC’s domestic operations are subject to various laws and judicial and administrative decisions imposing various requirements and restrictions relating to supervision and regulation by state and federal authorities. Such regulation and supervision are primarily for the benefit and protection of GMAC’s customers, not for the benefit of investors in its securities, and could limit GMAC’s discretion in operating its business. Noncompliance with applicable statutes or regulations could result in the suspension or revocation of any license or registration at issue, as well as the imposition of civil fines and criminal penalties.

GMAC’s operations are also heavily regulated in many jurisdictions outside the United States. For example, certain of GMAC’s foreign subsidiaries operate either as a bank or a regulated finance company, and GMAC’s insurance operations are subject to various

 

43


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

requirements in the foreign markets in which it operates. The varying requirements of these jurisdictions may be inconsistent with U.S. rules and may materially adversely affect GMAC’s business or limit necessary regulatory approvals, or if approvals are obtained, GMAC may not be able to continue to comply with the terms of the approvals or applicable regulations. In addition, in many countries the regulations applicable to the financial services industry are uncertain and evolving, and it may be difficult for GMAC to determine the exact regulatory requirements.

In light of current conditions in the U.S. financial markets and economy, regulators have increased their focus on the regulation of the financial services industry. For instance, in October 2008, Congress passed the Emergency Economic Stabilization Act of 2008, which in turn created the Troubled Asset Relief Program and the Capital Purchase Program. GMAC is unable to predict how these and any future programs will be administered or implemented or in what form, or whether any additional or similar changes to statutes or regulations, including the interpretation or implementation thereof, will occur in the future. Any such action could affect GMAC in substantial and unpredictable ways and could have an adverse effect on its business, financial condition and results of operations. GMAC is also affected by the policies adopted by regulatory authorities and bodies of the United States and other governments. For example, the actions of the Federal Reserve and international central banking authorities directly affect GMAC’s cost of funds for lending, capital raising and investment activities and may affect the value of financial instruments it holds. In addition, such changes in monetary policy may affect the credit quality of GMAC’s customers. Changes in domestic and international monetary policy are beyond GMAC’s control and difficult to predict.

GMAC’s inability to remain in compliance with regulatory requirements in a particular jurisdiction could have a material adverse effect on its operations in that market with regard to the affected product and on its reputation generally. No assurance can be given that applicable laws or regulations will not be amended or construed differently, that new laws and regulations will not be adopted, or that GMAC will not be prohibited by local laws from raising interest rates above certain desired levels, any of which could materially adversely affect GMAC’s business, financial condition, or results of operations.

Changes in accounting standards issued by the Financial Accounting Standards Board or other standard setting bodies may adversely affect GMAC’s reported revenues, profitability, and financial condition.

GMAC’s financial statements are subject to the application of U.S. generally accepted accounting principles, which are periodically revised and/or expanded. The application of accounting principles is also subject to varying interpretations over time. Accordingly, GMAC is required to adopt new or revised accounting standards or comply with revised interpretations that are issued from time to time by recognized authoritative bodies, including the Financial Accounting Standards Board and the SEC. Those changes could adversely affect GMAC’s reported revenues, profitability, or financial condition.

General business and economic conditions may significantly and adversely affect GMAC’s revenues, profitability, and financial condition.

GMAC’s business and earnings are sensitive to general business and economic conditions in the United States and in the markets in which it operates outside the United States. A downturn in economic conditions resulting in increased short-term and long-term interest rates, inflation, fluctuations in the debt capital markets, unemployment rates, consumer and commercial bankruptcy filings, or a decline in the strength of national and local economies and other factors that negatively affect household incomes could decrease demand for GMAC’s financing and mortgage products and increase mortgage and financing delinquency and losses on GMAC’s customer and dealer financing operations. GMAC has been negatively affected due to: (1) the significant stress in the residential real estate and related capital markets in 2008 and 2007, and, in particular, the lack of home price appreciation in many markets in which GMAC lends; and (2) decreases in new and used vehicle purchases, which have reduced the demand for automotive retail and wholesale financing.

If the rate of inflation were to increase, or if the debt capital markets or the economies of the United States or GMAC’s markets outside the United States were to continue in their current condition or further weaken, or if home prices or new and used vehicle purchases continue at the currently reduced levels or experience further declines, GMAC could continue to be adversely affected, and it could become more expensive for GMAC to conduct its business. For example, business and economic conditions that negatively

 

44


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

affect household incomes or housing prices could continue in their current condition or further decrease: (1) the demand for GMAC’s mortgage loans and new and used vehicle financing; and (2) the value of the collateral underlying GMAC’s portfolio of mortgage and new and used vehicle loans held for investment and interests that continue to be held by GMAC, and further increase the number of consumers who become delinquent or default on their loans. In addition, the rate of delinquencies, foreclosures, and losses on GMAC’s loans (especially its nonprime mortgage loans) as experienced recently could be higher during more severe economic slowdowns.

Any sustained period of increased delinquencies, foreclosures, or losses could further harm GMAC’s ability to sell its mortgage and new and used vehicle loans, the prices GMAC receives for its mortgage and new and used vehicle loans, or the value of GMAC’s portfolio of mortgage and new and used vehicle loans held for investment or interests from its securitizations, which could harm GMAC’s revenues, profitability, and financial condition. Continued adverse business and economic conditions could, and in the near-term likely will, further affect demand for housing, new and used vehicles, the cost of construction, and other related factors that have harmed, and could continue to harm, the revenues and profitability of GMAC’s business capital operations.

In addition, GMAC’s business and earnings are significantly affected by the fiscal and monetary policies of the U.S. government and its agencies and similar governmental authorities in the markets in which it operates outside the United States. GMAC is particularly affected by the policies of the Federal Reserve, which regulates the supply of money and credit in the United States. The Federal Reserve’s policies influence the new and used vehicle financing market and the size of the mortgage origination market, which significantly affects the earnings of GMAC’s businesses and the earnings of its business capital activities. The Federal Reserve’s policies also influence the yield on GMAC’s interest earning assets and the cost of its interest bearing liabilities. Changes in those policies are beyond GMAC’s control and difficult to predict, and could adversely affect its revenues, profitability and financial condition.

The worldwide financial services industry is highly competitive. If GMAC is unable to compete successfully or if there is increased competition in the automotive financing, mortgage, and/or insurance markets or generally in the markets for securitizations or asset sales, GMAC’s margins could be materially adversely affected.

The markets for automotive and mortgage financing, insurance, and reinsurance are highly competitive. The market for automotive financing has grown more competitive as more consumers are financing their vehicle purchases, primarily in North America and Europe. GMAC’s mortgage business faces significant competition from commercial banks, savings institutions, mortgage companies, and other financial institutions. GMAC’s insurance business faces significant competition from insurance carriers, reinsurers, third party administrators, brokers, and other insurance-related companies. Many of GMAC’s competitors have substantial positions nationally or in the markets in which they operate. Some of its competitors have lower cost structures, lower cost of capital, and are less reliant on securitization and sale activities. GMAC faces significant competition in various areas, including product offerings, rates, pricing and fees, and customer service. This competition may increase as GMAC has recently increased pricing on certain lending activities. If GMAC is unable to compete effectively in the markets in which it operates, its profitability and financial condition could be negatively affected.

The markets for asset and mortgage securitizations and whole-loan sales are competitive, and other issuers and originators could increase the amount of their issuances and sales. In addition, lenders and other investors within those markets often establish limits on their credit exposure to particular issuers, originators and asset classes, or they may require higher returns to increase the amount of their exposure. Increased issuance by other participants in the market, or decisions by investors to limit their credit exposure to — or to require a higher yield for — GMAC or to automotive or mortgage securitizations or whole loans, could negatively affect GMAC’s ability and that of its subsidiaries to price GMAC’s securitizations and whole-loan sales at attractive rates. The result would be lower proceeds from these activities and lower profits for GMAC and its subsidiaries.

*  *  *  *  *  *

Item 1B. Unresolved Staff Comments

None

*  *  *  *  *  *

 

45


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Item 2. Properties

Other than dealerships we have 207 locations in 35 states and 140 cities or towns in the United States. Of these locations, 48 are manufacturing sites, of which 18 are engaged in the final assembly of our cars and trucks and others manufacture automotive components and power products. Of the remainder, 28 are service parts operations responsible for distribution, some are warehouse and office buildings, and the remainder are facilities involved primarily in engineering and testing vehicles. In addition, we have 20 locations in Canada, and assembly, manufacturing, distribution, office or warehousing operations in 55 other countries, including equity interests in associated companies which perform assembly, manufacturing or distribution operations. The major facilities outside the United States and Canada, which are principally vehicle manufacturing and assembly operations, are located in:

 

•       Argentina

  

•       Colombia

  

•       Kenya

  

•       South Korea

  

•       Venezuela

•       Australia

  

•       Ecuador

  

•       Mexico

  

•       Spain

  

•       Vietnam

•       Belgium

  

•       Egypt

  

•       Poland

  

•       Sweden

  

•       Brazil

  

•       Germany

  

•       Russia

  

•       Thailand

  

•       China

  

•       India

  

•       South Africa

  

•       United Kingdom

  

We, our subsidiaries, or associated companies in which we own an equity interest, own most of the above facilities. Leased properties consist primarily of warehouses and administration, engineering and sales offices. The leases for warehouses generally provide for an initial period of five to 10 years, based upon prevailing market conditions and may contain renewal options. Leases for administrative offices are generally for shorter periods.

Our properties include facilities which, in our opinion, are suitable and adequate for the manufacture, assembly and distribution of our products.

Item 3. Legal Proceedings

The following section summarizes material pending legal proceedings to which the Corporation became, or was, a party in the year ended December 31, 2008, or after that date but before the filing of this Annual Report on Form 10-K, other than ordinary routine litigation incidental to the business. We and the other defendants affiliated with us intend to defend all of the following actions vigorously.

Canadian Export Antitrust Class Actions

Approximately eighty purported class actions on behalf of all purchasers of new motor vehicles in the United States since January 1, 2001, have been filed in various state and federal courts against General Motors Corporation, General Motors of Canada Limited (GM Canada), Ford Motor Company, Chrysler, LLC, Toyota Motor Corporation, Honda Motor Co., Ltd., Nissan Motor Company, Limited, and Bavarian Motor Works and their Canadian affiliates, the National Automobile Dealers Association, and the Canadian Automobile Dealers Association. The federal court actions have been consolidated for coordinated pretrial proceedings under the caption In re New Market Vehicle Canadian Export Antitrust Litigation Cases in the U.S. District Court for the District of Maine, and the more than 30 California cases have been consolidated in the California Superior Court in San Francisco County under the case captions Belch v. Toyota Corporation, et al. and Bell v. General Motors Corporation. In the California state court cases, oral arguments on the plaintiffs’ motion for class certification and defendants’ motion in limine will be heard on April 21, 2009.

The nearly identical complaints alleged that the defendant manufacturers, aided by the association defendants, conspired among themselves and with their dealers to prevent the sale to U.S. citizens of vehicles produced for the Canadian market and sold by dealers in Canada. The complaints alleged that new vehicle prices in Canada are 10% to 30% lower than those in the United States, and that preventing the sale of these vehicles to U.S. citizens resulted in the payment of higher than competitive prices by U.S. consumers. The complaints, as amended, sought injunctive relief under U.S. antitrust law and treble damages under U.S. and state antitrust laws, but did not specify damages. The complaints further alleged unjust enrichment and violations of state unfair trade practices act. On March 5, 2004, the U.S. District Court for the District of Maine issued a decision holding that the purported indirect purchaser classes

 

46


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

failed to state a claim for damages under federal antitrust law but allowed a separate claim seeking to enjoin future alleged violations to continue. The U.S. District Court for the District of Maine on March 10, 2006 certified a nationwide class of buyers and lessees under Federal Rule 23(b)(2) solely for injunctive relief, and on March 21, 2007 stated that it would certify 20 separate statewide class actions for damages under various state law theories under Federal Rule 23(b)(3), covering the period from January 1, 2001 to April 30, 2003. On October 3, 2007, the U.S. Court of Appeals for the First Circuit heard oral arguments on our consolidated appeal of the both class certification orders.

On March 28, 2008, the U.S. Court of Appeals for the First Circuit reversed the certification of the injunctive class and ordered dismissal of the injunctive claim. The U.S. Court of Appeals for the First Circuit also vacated the certification of the damages class and remanded to the U.S. District Court for the District of Maine for determination of several issues concerning federal jurisdiction and, if such jurisdiction still exists, for reconsideration of that class certification on a more complete record. On remand, plaintiffs have again moved to certify a damages class, with argument on that motion projected for March, 2009.

American Export Antitrust Class Actions

On September 25, 2007, a claim was filed in the Ontario Superior Court of Justice on behalf of a purported class of actual and intended purchasers of vehicles in Canada claiming that a similar alleged conspiracy was now preventing lower-cost U.S. vehicles from being sold to Canadians. No determination has been made that the case may be maintained as a class action, and it is not possible to determine the likelihood of liability or reasonably ascertain the amount of any damages.

*  *  *  *  *  *  *

Health Care Litigation — 2007 Agreement

On September 27, 2007, the UAW and eight putative class representatives filed a class action, UAW, et al. v. General Motors Corporation, in the U.S. District Court for the Eastern District of Michigan on behalf of hourly retirees, spouses and dependents, seeking to enjoin us from making unilateral changes to hourly retiree healthcare coverage upon termination of the UAW Health Care Agreement in 2011. Plaintiffs claim that hourly retiree healthcare benefits are vested and cannot be modified, and that our announced intention to make changes violates the federal Labor Relations Management Act of 1947 and ERISA. Although we believe that we may lawfully change retiree healthcare benefits, we have entered into the Settlement Agreement with the UAW which contemplates creation of an independent VEBA trust into which we will transfer significant funding, which thereafter would be solely responsible for establishing and funding a new benefit plan that would provide healthcare benefits for hourly retirees, spouses and dependents.

*  *  *  *  *  *  *

General Motors Securities Litigation

The federal district court in the Eastern District of Michigan has approved settlements of the General Motors Securities Litigation and Shareholder Derivative Suits described below. The district court granted final approval to the proposed settlement in the federal derivative suites in December 2008, and final approval to the proposed settlement in the GM Securities Litigation in January 2009. An objector filed a notice of appeal to the district court’s orders in January 2009. As part of the settlement in the federal shareholder derivative suits, the shareholder derivative cases pending in Wayne County Circuit Court in the State of Michigan were dismissed with prejudice in December 2008. A complete description of the cases appears below.

On September 19, 2005, Folksam Asset Management filed Folksam Asset Management, et al. v. General Motors Corporation, et al., a purported class action complaint in the U.S. District Court for the Southern District of New York naming as defendants GM, GMAC, and our Chairman and Chief Executive Officer G. Richard Wagoner, Jr., former Vice Chairman and Chief Financial Officer John Devine, Treasurer Walter Borst, and former Chief Accounting Officer Peter Bible. Plaintiffs purported to bring the claim on behalf of purchasers of our debt and/or equity securities during the period February 25, 2002 through March 16, 2005. The complaint alleges that all defendants violated Section 10(b) and that the individual defendants also violated Section 20(a) of the Exchange Act.

 

47


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

The complaint also alleged violations by all defendants of Section 11 and Section 12(a) and by the individual defendants of Section 15 of the Securities Act of 1933, as amended, in connection with certain registered debt offerings during the class period. In particular, the complaint alleged that our cash flows during the class period were overstated based on the “reclassification” of certain cash items described in our Annual Report on Form 10-K for the year ended December 31, 2004. The reclassification involved cash flows relating to the financing of GMAC wholesale receivables from dealers that resulted in no net cash receipts and our decision to revise the Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2003. The complaint also alleged misrepresentations relating to forward-looking statements of our 2005 earnings forecast which was later revised significantly downward. In October 2005, a similar suit, Galliani, et al. v. General Motor Corporation, et al., which asserted claims under the Exchange Act based on substantially the same factual allegations, was filed and subsequently consolidated with the Folksam case. The consolidated suit was recaptioned as In re General Motors Corporation Securities Litigation. Under the terms of the GMAC Transaction, we are indemnifying GMAC in connection with these cases.

On November 18, 2005, plaintiffs in the Folksam case filed an amended complaint, which added several additional investors as plaintiffs, extended the end of the class period to November 9, 2005 and named as additional defendants three current and one former member of our audit committee, as well as our independent registered public accountants, Deloitte & Touche LLP. In addition to the claims asserted in the original complaint, the amended complaint added a claim against Mr. Wagoner and Mr. Devine for rescission of their bonuses and incentive compensation during the class period. It also included further allegations regarding our accounting for pension obligations, restatement of income for 2001 and financial results for the first and second quarters of 2005. Neither the original complaint nor the amended complaint specified the amount of damages sought, and we have no means to estimate damages the plaintiffs will seek based upon the limited information available in the complaint. The court’s provisional designations of lead plaintiff and lead counsel on January 17, 2006 were made final on February 6, 2006. Plaintiffs subsequently filed a second amended complaint, which added various underwriters as defendants.

Plaintiffs filed a third amended securities complaint in In re General Motors Corporation Securities and Derivative Litigation on August 15, 2006. (As explained below, certain shareholder derivative cases were consolidated with In re General Motors Corporation Securities Litigation for coordinated or consolidated pretrial proceedings and the caption was modified). The amended complaint in the GM securities litigation did not include claims against the underwriters previously named as defendants, alleged a proposed class period of April 13, 2000 through March 20, 2006, did not include the previously asserted claim for the rescission of incentive compensation against Mr. Wagoner and Mr. Devine and contained additional factual allegations regarding our restatements of financial information filed with our reports to the SEC for the years 2000 through 2005. On October 13, 2006, the GM defendants filed a motion to dismiss the amended complaint in the GM securities litigation, which remains pending. On December 14, 2006, plaintiffs filed a motion for leave to file a fourth amended complaint in the event the court grants the GM defendants’ motion to dismiss. The GM defendants have opposed the motion for leave to file a fourth amended complaint.

Shareholder Derivative Suits

On November 10, 2005, Albert Stein filed a purported shareholder derivative action, Stein v. Bowles, et al., in the U.S. District Court for the Eastern District of Michigan, ostensibly on behalf of the Corporation, against the members of our Board of Directors at that time. The complaint alleged that defendants breached their fiduciary duties of due care, loyalty and good faith by, among other things, causing GM to overstate our income (as reflected in our restatement of 2001 earnings and second quarter 2005 earnings) and exposing us to potential damages in SEC investigations and investor lawsuits. The suit sought damages based on defendants’ alleged breaches and an order requiring defendants to indemnify us for any future litigation losses. Plaintiffs claimed that the demand on our Board to bring suit itself (ordinarily a prerequisite to suit under Delaware law) was excused because it would be “futile.” The complaint did not specify the amount of damages sought, and defendants have no means to estimate damages the plaintiffs will seek based upon the limited information available in the complaint.

On December 15, 2005, Henry Gluckstern filed a purported shareholder derivative action, Gluckstern v. Wagoner, et al., in the U.S. District Court for the Eastern District of Michigan, ostensibly on behalf of the Corporation, against our Board of Directors. This suit was substantially identical to Stein v. Bowles, et al. Also on December 15, 2005, John Orr filed a substantially identical purported shareholder derivative action, Orr v. Wagoner, et al., in the U.S. District Court for the Eastern District of Michigan, ostensibly on behalf of the Corporation, against our Board of Directors.

 

48


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

On December 2, 2005, Sharon Bouth filed a similar purported shareholder derivative action, Bouth v. Barnevik, et al., in the Circuit Court of Wayne County, Michigan, ostensibly on behalf of the Corporation, against the members of our Board of Directors and a GM officer not on the Board. The complaint alleged that defendants breached their fiduciary duties of due care, loyalty and good faith by, among other things, causing us to overstate our earnings and cash flow and improperly account for certain transactions and exposing us to potential damages in SEC investigations and investor lawsuits. The suit sought damages based on defendants’ alleged breaches and an order requiring defendants to indemnify us for any future litigation losses. Plaintiffs claimed that demand on our Board was excused because it would be “futile.” The complaint did not specify the amount of damages sought, and defendants have no means to estimate damages the plaintiffs will seek based upon the limited information available in the complaint.

On December 16, 2005, Robin Salisbury filed an action in the Circuit Court of Wayne County, Michigan, Salisbury v. Barnevik, et al., substantially identical to the Bouth case described above. The Salisbury and Bouth cases have been consolidated and plaintiffs have stated they intend to file an amended consolidated complaint. The directors and the non-director officer named in these cases have not yet filed their responses to the Bouth and Salisbury complaints. On July 21, 2006, the court stayed the proceedings in Bouth and Salisbury. The court subsequently continued the stay until mid-April 2008.

Plaintiffs filed amended complaints in In re General Motors Corporation Securities and Derivative Litigation on August 15, 2006. The amended complaint in the shareholder derivative litigation alleged that our Board of Directors breached its fiduciary obligations by failing to oversee our operations properly and prevent alleged improprieties in connection with our accounting with regard to cash flows, pension-related liabilities and supplier credits. The defendants filed a motion to dismiss the amended complaint. On November 9, 2006, the court granted the plaintiffs leave to file a second consolidated and amended derivative complaint, which adds allegations concerning recent changes to our bylaws and the resignation of a director from our Board of Directors. The defendants have filed a motion to dismiss plaintiffs’ second consolidated and amended derivative complaint.

Consolidation of Securities and Shareholder Derivative Actions in the Eastern District of Michigan

On December 13, 2005, defendants in In re General Motors Corporation Securities Litigation (previously Folksam Asset Management v. General Motors Corporation, et al. and Galliani v. General Motors Corporation, et al.) and Stein v. Bowles, et al. filed a Motion with the Judicial Panel on Multidistrict Litigation to transfer and consolidate these cases for pretrial proceedings in the U.S. District Court for the Eastern District of Michigan.

On January 5, 2006, defendants submitted to the Judicial Panel on Multidistrict Litigation an Amended Motion seeking to add to their original Motion the Rosen, Gluckstern and Orr cases for consolidated pretrial proceedings in the U.S. District Court for the Eastern District of Michigan. On April 17, 2006, the Judicial Panel on Multidistrict Litigation entered an order transferring In re General Motors Corporation Securities Litigation to the U.S. District Court for the Eastern District of Michigan for coordinated or consolidated pretrial proceedings with Stein v. Bowles, et al.; Rosen, et al. v. General Motors Corp., et al.; Gluckstern v. Wagoner, et al. and Orr v. Wagoner, et al. (While the motion was pending, plaintiffs voluntarily dismissed Rosen.) In October 2007, the U.S. District Court for the Eastern District of Michigan appointed a special master for the purpose of facilitating settlement negotiations in the consolidated case, now captioned In re General Motors Corporation Securities and Derivative Litigation. The parties reached an agreement to settle the GM Securities litigation on July 21, 2008, which required us to pay $277 million. The district court granted final approval to the settlement in January 2009, and an objector filed a notice of appeal to that approval order on January 30, 2009.

On August 6, 2008, the parties reached an agreement to settle the shareholder derivative suits pending in the United States District Court for the Eastern District of Michigan. As this agreement requires, our management recommended to our Board of Directors and its committees that we implement and maintain certain corporate governance changes for a period of four years, and following Board and committee approvals these changes have been implemented. The district court granted final approval to the settlement in the GM shareholder derivative litigation in December 2008, and an objector filed a notice of appeal to the district court’s order on January 30, 2009.

As part of the settlement in the shareholder derivative suits in the United States District Court for the Eastern District of Michigan, the shareholder derivative cases pending in Wayne County Circuit Court were dismissed with prejudice in December 2008.

*  *  *  *  *  *  *

 

49


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

ERISA Class Actions

GMIMCo is one of numerous defendants in several purported class action lawsuits filed in March and April 2005 in the U.S. District Court for the Eastern District of Michigan, alleging violations of ERISA with respect to the Delphi company stock plans for salaried and hourly employees. The cases have been consolidated under the case caption In re Delphi ERISA Litigation in the Eastern District of Michigan for coordinated pretrial proceedings with other Delphi stockholder lawsuits in which GMIMCo is not named as a defendant. The complaints essentially allege that GMIMCo, a named fiduciary of the Delphi plans, breached its fiduciary duties under ERISA to plan participants by allowing them to invest in the Delphi Common Stock Fund when it was imprudent to do so, by failing to monitor State Street, the entity appointed by GMIMCo to serve as investment manager for the Delphi Common Stock Fund, and by knowingly participating in, enabling or failing to remedy breaches of fiduciary duty by other defendants. No determination has been made that a class action can be maintained against GMIMCo, and there have been no decisions on the merits of the claims. Delphi has reached a settlement of these cases that, if implemented, would provide for dismissal of all claims against GMIMCo related to this litigation without payment by GMIMCo. That settlement has been approved by both the District Judge in the Eastern District of Michigan and the Bankruptcy Judge in the Southern District of New York presiding over Delphi’s bankruptcy proceeding. However, implementation of the settlement remains conditioned upon i) the resolution of a pending appeal of the district court’s approval and ii) the implementation of Delphi’s plan of reorganization approved by the Bankruptcy Court. Accordingly, the disposition of the case remains uncertain, and it is not possible to determine whether liability is probable or the amount of damages, if any.

On March 8, 2007, a purported class action lawsuit was filed in the U.S. District Court for the Southern District of New York captioned Young, et al. v. General Motors Investment Management Corporation, et al. The case, brought by four plaintiffs who are alleged to be participants in the General Motors Savings-Stock Purchase Program for Salaried Employees and the General Motors Personal Savings Plan for Hourly-Rate Employees, purports to bring claims on behalf of all participants in these two plans as well as participants in the General Motors Income Security Plan for Hourly-Rate Employees and the Saturn Individual Savings Plan for Represented Members against GMIMCo and State Street. The complaint alleges that GMIMCo and State Street breached their fiduciary duties to plan participants by allowing participants to invest in five different funds that each primarily held the equity of a single company: the EDS Fund, the DIRECTV Fund, the News Corp. Fund, the Raytheon Fund and the Delphi Fund, all of which plaintiffs allege were imprudent investments because of their inherent risk and poor performance relative to more prudent investment alternatives. The complaint also alleges that GMIMCo breached its fiduciary duties to plan participants by allowing participants to invest in mutual funds offered by FMR Corp. under the Fidelity brand name. Plaintiffs allege that by investing in these funds, participants paid excessive fees and costs that they would not have incurred had they invested in more prudent investment alternatives. The complaint seeks a declaration that defendants have breached their fiduciary duties, an order requiring defendants to compensate the plans for their losses resulting from their breaches of fiduciary duties, the removal of defendants as fiduciaries, an injunction against further breaches of fiduciary duties, other unspecified equitable and monetary relief and attorneys’ fees and costs.

On April 12, 2007, a purported class action lawsuit was filed in the U.S. District Court for the Southern District of New York captioned Mary M. Brewer, et al. v. General Motors Investment Management Corporation, et al. The case was brought by a plaintiff who alleges that she is a participant in the Delphi Savings-Stock Purchase Program for Salaried Employees and purports to bring claims on behalf of all participants in that plan as well as participants in the Delphi Personal Savings Plan for Hourly-Rate Employees; the ASEC Manufacturing Savings Plan and the Delphi Mechatronic Systems Savings-Stock Purchase Program against GMIMCo and State Street. The complaint alleges that GMIMCo and State Street breached their fiduciary duties to plan participants by allowing participants to invest in five different funds that each primarily held the equity of a single company: the EDS Fund, the DIRECTV Fund, the News Corp. Fund, the Raytheon Fund and the GM Common Stock Fund, all of which plaintiffs allege were imprudent investments because of their inherent risk and poor performance relative to more prudent investment alternatives. The complaint also alleges that GMIMCo breached its fiduciary duties to plan participants by allowing participants to invest in mutual funds offered by FMR Corp. under the Fidelity brand name. Plaintiffs allege that by investing in these funds, participants paid excessive fees and costs that they would not have incurred had they invested in more prudent investment alternatives. The complaint seeks a declaration that defendants have breached their fiduciary duties, an order requiring defendants to compensate the plans for their losses resulting from their breaches of fiduciary duties, the removal of defendants as fiduciaries, an injunction against further breaches of fiduciary duties, other unspecified equitable and monetary relief and attorneys’ fees and costs.

 

50


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

On March 24, 2008 the U.S. District Court for the Southern District of New York granted GMIMCo’s motions to dismiss Young and Brewer on statute of limitations grounds. Plaintiffs have appealed the dismissal in both cases. Oral argument in the consolidated appeal is scheduled for late March 2009.

No determination has been made that either case may be maintained as a class action. The scope of both actions is uncertain, and it is not possible to determine the likelihood of liability or reasonably ascertain the amount of any damages.

*  *  *  *  *  *  *

Asbestos Litigation

Like most automobile manufacturers, we have been subject in recent years to asbestos-related claims. We have used some products which incorporated small amounts of encapsulated asbestos. These products, generally brake linings, are known as asbestos-containing friction products. There is a significant body of scientific data demonstrating that these asbestos-containing friction products are not unsafe and do not create an increased risk of asbestos-related disease. We believe that the use of asbestos in these products was appropriate. A number of the claims are filed against us by automotive mechanics and their relatives seeking recovery based on their alleged exposure to the small amount of asbestos used in brake components. These claims generally identify numerous other potential sources for the claimant’s alleged exposure to asbestos that do not involve us or asbestos-containing friction products, and many of these other potential sources would place users at much greater risk. Most of these claimants do not have an asbestos-related illness and may not develop one. This is consistent with the experience reported by other automotive manufacturers and other end users of asbestos.

Two other types of claims related to alleged asbestos exposure that are asserted against us — locomotive and premises — represent a significantly lower exposure to liability than the automotive friction product claims. Like other locomotive manufacturers, we used a limited amount of asbestos in locomotive brakes and in the insulation used in some locomotives. (We sold our locomotive manufacturing business in 2005). These uses have been the basis of lawsuits filed against us by railroad workers seeking relief based on their alleged exposure to asbestos. These claims generally identify numerous other potential sources for the claimant’s alleged exposure to asbestos that do not involve us or locomotives. Many of these claimants do not have an asbestos-related illness and may never develop one. Moreover, the West Virginia and Ohio supreme courts have ruled that federal law preempts asbestos tort claims asserted on behalf of railroad workers. Such preemption means that federal law eliminates the possibility that railroad workers could maintain state law claims against us. In addition, a relatively small number of claims are brought by contractors who are seeking recovery based on alleged exposure to asbestos-containing products while working on premises owned by us. These claims generally identify numerous other potential sources for the claimant’s alleged exposure to asbestos that do not involve us.

*  *  *  *  *  *  *

Pick-Up Truck Parking Brake Litigation

We have been sued in four class action lawsuits alleging that certain GM C/K pick-up trucks, model years 1998 through 2004, have defective parking brakes. The cases are Bryant v. General Motors Corporation, filed on March 11, 2005 in the Circuit Court for Miller County, Arkansas; Hunter v. General Motors Corporation, filed on January 19, 2005 in Superior Court in Los Angeles, California; Chartrand v. General Motors Corporation, et al. filed on October 26, 2005 in Supreme Court, British Columbia, Canada; and Goodridge v. General Motors Corporation, et al. filed on November 18, 2005 in the Superior Court of Justice, Ontario, Canada. The complaints allege that parking brake spring clips wear prematurely and cause failure of the parking brake system, and seek compensatory damages for the cost of correcting the alleged defect, interest costs and attorney’s fees. The two Canadian cases also seek punitive damages and “general damages” of $500 million. On August 15, 2006, the Miller County Circuit Court in the Bryant case certified a nationwide class consisting of original and subsequent owners of GM series 1500 pick-up trucks and sport utility vehicles, model years 1999 through 2002, equipped with automatic transmissions and registered in the United States. On June 19, 2008, the Supreme Court of Arkansas affirmed the certification decision. In December 2008, class certification was denied in the

 

51


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Chartrand case. In January 2009, the U.S. Supreme Court declined review of the Bryant certification order. Our motion for summary judgment is currently pending in the trial court. Plaintiffs have filed a motion for certification of a statewide class in the Hunter case, but the court has not yet heard argument on that request.

*  *  *  *  *  *  *

GM/OnStar Analog Equipment Litigation

We or our wholly-owned subsidiary OnStar Corporation or both of us are parties to more than 20 putative class actions filed in various states, including Michigan, Ohio, New Jersey, Pennsylvania and California. All of these cases have been consolidated for pretrial purposes in a multi-district proceeding under the caption In re OnStar Contract Litigation in the U.S. District Court for the Eastern District of Michigan. The litigation arises out of the discontinuation by OnStar of services to vehicles equipped with analog hardware. OnStar was unable to provide services to such vehicles because the cellular carriers which provide communication service to OnStar terminated analog service beginning in February 2008. In the various cases, the plaintiffs are seeking certification of nationwide or statewide classes of owners of vehicles currently equipped with analog equipment, alleging various breaches of contract, misrepresentation and unfair trade practices. This proceeding is in the early stages of development and has been stayed while the court considers the defendants’ motions to dismiss the claims. Class certification motions have not been filed and the parties have completed minimal document discovery. It is not possible at this time to determine whether class certification or liability is probable as to GM or OnStar or to reasonably ascertain the amount of any recoverable damages.

Nova Scotia Bondholders Litigation

In Aurelius Capital Partners LP et al v. General Motors Corporation et al, initiated on March 2, 2009 in the Supreme Court of Nova Scotia, holders of bonds issued in 2003 by General Motors Nova Scotia Finance Company (GM Nova Scotia) and guaranteed by us assert that certain transactions, two returns of capital in May 2008 and an amendment to a credit agreement to which we and GM Canada are parties, violated Sections 238 and 241 of the Canadian Business Corporations Act. Plaintiffs seek a declaration that each of these transactions is “oppressive, unfairly prejudicial and unfairly disregarded the interests of creditors.” They further seek orders to set aside the two alleged May 2008 transactions, compel us to disgorge the sums received, and enjoin GM Canada from guaranteeing or securing the debt of any other entity. Finally, the Complaint requests the award of “damages and compensation” jointly and severally against General Motors Corporation, GM Canada, GM Nova Scotia, a GM Nova Scotia affiliate and certain individual directors of GM Canada or of GM Nova Scotia and its affiliate. Because this action was very recently filed and has not been investigated or analyzed, no views regarding the likely outcome can be expressed at this time.

*  *  *  *  *  *  *

Environmental Matters

Greenhouse Gas Lawsuit

In California ex rel. Lockyer v. General Motors Corporation, et al., the California Attorney General brought suit against a group of major vehicle manufacturers including us for damages allegedly suffered by the state as a result of greenhouse gas emissions from the manufacturers’ vehicles, principally based on a common law nuisance theory. On September 18, 2007, the U.S. District Court for the Northern District of California granted the defendants’ motion to dismiss the complaint on the grounds that the claim under the federal common law of nuisance raised non-justiciable political questions beyond the court’s jurisdiction. The court also dismissed without prejudice the nuisance claim under California state law. Plaintiff filed an appeal with the U.S. Court of Appeals for the Ninth Circuit on October 16, 2007, and briefing is complete. Oral argument was set for March 10, 2009 but vacated at the request of the California Attorney General, citing the possibility that California may withdraw its case if greenhouse gas emissions are regulated by the U.S. government under the Clean Air Act.

 

52


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Carbon Dioxide Emission Standard Litigation

In a number of cases, we and the Alliance of Automobile Manufacturers, the Association of International Automobile Manufacturers, Chrysler, various automobile dealers have brought suit for declaratory and injunctive relief from state legislation imposing stringent controls on new motor vehicle CO2 emissions. These cases argue that such state regulation of CO2 emissions is preempted by two federal statutes, the Energy Policy and Conservation Act and the Clean Air Act. The cases were brought against the CARB on December 7, 2004, in the U.S. District Court for the Eastern District of California (Fresno Division); against the Vermont Agency of Natural Resources and the Vermont Department of Environmental Conservation on November 18, 2005, in the U.S. District Court for the District of Vermont; and against the Rhode Island Department of Environmental Management on February 13, 2006, in the U.S. District Court for the District of Rhode Island.

On September 12, 2007, the U.S. District Court for the District of Vermont issued an order rejecting plaintiffs’ argument and dismissing the complaint. The industry plaintiffs, including us, have appealed to the U.S. Court of Appeals for the Second Circuit. On December 12, 2007, the U.S. District Court for the Eastern District of California issued an order granting summary judgment in favor of the defendant State of California and interveners on industry’s claims related to federal preemption. The court did not lift the order enjoining California from enforcing the AB 1493 Rules in the absence of an EPA waiver. The industry’s response to the ruling is under consideration. A related challenge in the California Superior Court in Fresno is pending. On December 21, 2007, the U.S. District Court for the District of Rhode Island denied the state’s motion to dismiss the industry challenge and announced steps for the case to proceed to trial. Also on December 27, 2007, several New Mexico auto dealers filed a federal legal challenge to adoption of the standards in that state.

*  *  *  *  *  *  *

EPA Environmental Appeal Board Region V Hazardous Waste Complaint

In March 2006 an Administrative Law Judge found us liable for the improper handling and storage of used solvents in violation of hazardous waste rules under the Resource Conservation Recovery Act (RCRA) at three plants in Region V and assessed a $568,116 penalty, and on June 22, 2008 the EPA Environmental Appeal Board reversed and remanded that ruling. As previously reported, EPA Regions II, III and V have separately brought enforcement actions against several of our assembly plants seeking penalties for alleged noncompliance with the RCRA rules for handling and storing solvents under similar circumstances. We are is concluding settlement discussions with EPA to resolve all related claims from the various EPA Regions. Total penalties are anticipated to be less than $100,000.00.

*  *  *  *  *  *  *

Financial Assurance Enforcement

The EPA has notified us that they intend to bring an administrative enforcement action for alleged historic failures to comply with the RCRA’s annual financial assurance requirements. We anticipate that the EPA will seek penalties exceeding $100,000.

*  *  *  *  *  *  *

Item 4. Submission of Matters to a Vote of Security Holders

None

*  *  *  *  *  *  *

 

53


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

We list our $1 2/3 par value common stock on the stock exchanges specified on the cover page of this Annual Report on Form 10-K under the trading symbol “GM.”

There were 333,639 and 345,296 holders of record of our common stock at December 31, 2008 and 2007, respectively. The following table sets forth the high and low sale prices of our common stock and the quarterly dividends declared for the last two years.

 

          2008 Quarters
          1st    2nd    3rd    4th

Cash dividends per share of common stock

   $ 0.25    $ 0.25    $    $

Price range of common stock (a)

  

High

   $ 29.28    $ 24.24    $ 16.35    $ 9.90
  

Low

   $ 17.47    $ 10.57    $ 8.51    $ 1.70
          2007 Quarters
          1st    2nd    3rd    4th

Cash dividends per share of common stock

   $ 0.25    $ 0.25    $ 0.25    $ 0.25

Price range of common stock (a)

  

High

   $ 37.24    $ 38.66    $ 38.27    $ 43.20
   Low    $ 28.81    $ 28.86    $ 29.10    $ 24.50

 

(a) New York Stock Exchange composite interday prices as listed in the price history database available at www.NYSEnet.com.

In July 2008, our Board of Directors voted to suspend dividends on our common stock indefinitely. Our dividend policy is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.

Under the terms of our UST Loans, we are prohibited from paying dividends without the consent of the UST and, if we declare a dividend in excess of $100 million, without the approval of the Presidential Designee. Refer to Note 15 to the consolidated financial statements.

The table below contains information about securities authorized for issuance under equity compensation plans. The features of these plans are described further in Note 26 to the consolidated financial statements.

 

Plan Category

   Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
   Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
   Number of Securities
Remaining Available
for Future Issuance Under

Equity Compensation
Plans(a)

Equity compensation plans approved by security holders

        

2007 GM Long Term Incentive Plan and the GM Stock Incentive Plan

   75,988,029    $ 50.90    12,497,850

Equity compensation plans not approved by security holders (b)

        

GM Salaried Stock Option Plan

   22,455,871    $ 55.44   
            

Total equity compensation plans

   98,443,900    $ 51.94    12,497,850
            

 

(a) Excludes securities reflected in the first column, “Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights.”

 

(b) All equity compensation plans except the GM Salaried Stock Option Plan were approved by the stockholders. The GM Salaried Stock Option Plan was adopted by the Board of Directors in 1998 and expired on December 31, 2007. The purpose of the plan was to recognize the importance and contribution of our employees in the creation of stockholder value, to further align compensation with business success and to provide employees with the opportunity for long-term capital accumulation through the grant of options to acquire shares of our common stock.

 

54


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Purchases of Equity Securities

We made no purchases of our common stock in the three months ended December 31, 2008.

*  *  *  *  *  *

Item 6. Selected Financial Data

 

     Years Ended December 31,
     2008     2007     2006     2005     2004
     (Dollars in millions except per share amounts)

Total net sales and revenue (a)

   $ 148,979     $ 179,984     $ 204,467     $ 192,143     $ 192,196
                                      

Income (loss) from continuing operations (b)

   $ (30,860 )   $ (43,297 )   $ (2,423 )   $ (10,621 )   $ 2,415

Income from discontinued operations (c)

           256       445       313       286

Gain from sale of discontinued operations (c)

           4,309                  

Cumulative effect of a change in accounting principle (d)

                       (109 )    
                                      

Net income (loss)

   $ (30,860 )   $ (38,732 )   $ (1,978 )   $ (10,417 )   $ 2,701
                                      

$1 2/3 par value common stock

          

Basic earnings (loss) per share from continuing operations before cumulative effect of accounting change

   $ (53.32 )   $ (76.52 )   $ (4.29 )   $ (18.78 )   $ 4.27

Basic earnings per share from discontinued operations (c)

           8.07       0.79       0.55       0.51

Basic loss per share from cumulative effect of a change in accounting principle (d)

                       (0.19 )    
                                      

Basic earnings (loss) per share

   $ (53.32 )   $ (68.45 )   $ (3.50 )   $ (18.42 )   $ 4.78
                                      

Diluted earnings (loss) per share from continuing operations before cumulative effect of accounting change (d)

   $ (53.32 )   $ (76.52 )   $ (4.29 )   $ (18.78 )   $ 4.26

Diluted earnings per share from discontinued operations (c)

           8.07       0.79       0.55       0.50

Diluted loss per share from cumulative effect of accounting
change (d)

                       (0.19 )    
                                      

Diluted earnings (loss) per share

   $ (53.32 )   $ (68.45 )   $ (3.50 )   $ (18.42 )   $ 4.76
                                      

Cash dividends declared per share

   $ 0.50     $ 1.00     $ 1.00     $ 2.00     $ 2.00

Total assets (a)(b)(e)

   $ 91,047     $ 148,883     $ 186,304     $ 474,268     $ 480,772

Notes and loans payable (a)(g)

   $ 46,540     $ 44,339     $ 48,171     $ 287,715     $ 301,965

Stockholders’ equity (deficit) (b)(d)(f)(h)

   $ (86,154 )   $ (37,094 )   $ (5,652 )   $ 14,442     $ 27,669

 

Certain prior period amounts have been reclassified in the consolidated statements of operations to conform to the current year presentation.

 

(a) In November 2006, we sold a 51% controlling ownership interest in GMAC, resulting in a significant decrease in total consolidated net sales and revenue, assets and notes and loans payable.

 

(b) In September 2007, we recorded full valuation allowances of $39.0 billion against our net deferred tax assets in Canada, Germany and the United States.

 

(c) In August 2007, we completed the sale of the commercial and military operations of our Allison business. The results of operations, cash flows and the 2007 gain on sale of Allison have been reported as discontinued operations for all periods presented.

 

(d) At December 31, 2005, we recorded an asset retirement obligation of $181 million in accordance with the requirements of FIN No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143.” The cumulative effect on net loss, net of related income tax effects, of recording the asset retirement obligations was $109 million, or $0.19 per share on a diluted basis.

 

55


(e) At December 31, 2006, we recognized the funded status of our benefit plans on our consolidated balance sheet with an offsetting adjustment to Accumulated other comprehensive loss in stockholders’ equity (deficit) of $16.9 billion in accordance with the adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R).”

 

(f) At January 1, 2007, we recorded a decrease to Retained earnings of $425 million and a decrease of $1.2 billion to Accumulated other comprehensive loss in accordance with the early adoption of the measurement provisions of SFAS No. 158.

 

(g) In December 2008, we entered into the UST Loan Agreement, pursuant to which the UST agreed to provide us with a $13.4 billion UST Loan Facility. At December 31, 2008, we had borrowed $4.0 billion under the UST Loan Facility.

 

(h) At January 1, 2007, we recorded an increase to Retained earnings of $137 million with a corresponding decrease to our liability for uncertain tax positions in accordance with FIN No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.”

*  *  *  *  *  *  *

 

56


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are primarily engaged in the worldwide production and marketing of cars and trucks. We operate in two businesses, consisting of our automotive operations, which we also refer to as Automotive, GM Automotive or GMA, that includes our four automotive segments consisting of GMNA, GME, GMLAAM and GMAP, and our financing and insurance operations (FIO). Our finance and insurance operations are primarily conducted through GMAC, a wholly-owned subsidiary through November 2006. On November 30, 2006, we sold a 51% controlling ownership interest in GMAC to a consortium of investors. After the sale, we have accounted for our 49% ownership interest in GMAC under the equity method. GMAC provides a broad range of financial services, including consumer vehicle financing, automotive dealership and other commercial financing, residential mortgage services, automobile service contracts, personal automobile insurance coverage and selected commercial insurance coverage.

Automotive Industry

In 2008, the global automotive industry has been severely affected by the deepening global credit crisis, volatile oil prices and the recession in North America and Western Europe, decreases in the employment rate and lack of consumer confidence. The industry continued to show growth in Eastern Europe, the LAAM region and in Asia Pacific, although the growth in these areas moderated from previous levels and is beginning to show the effects of the credit market crisis which began in the United States and has since spread to Western Europe and the rest of the world. Global industry vehicle sales to retail and fleet customers were 67.1 million units in 2008, representing a 5.1% decrease compared to 2007. We expect industry sales to be approximately 57.5 million units in 2009.

Our global vehicle sales for 2008 were 8.4 million units compared to 9.4 million units in 2007. Vehicle sales increased for GMLAAM and GMAP and declined for GMNA and GME. Our global market share in 2008 was 12.4% compared to 13.3% in 2007. Market share increased in 2008 compared to 2007 from 17.0% to 17.1% for GMLAAM and from 6.9% to 7.0% for GMAP, and declined over the same period from 23.1% to 21.5% for GMNA and from 9.4% to 9.3% for GME.

Competition and factors such as commodity and energy prices and foreign currency exchange imbalances continued to exert pricing pressure in the global automotive market in 2008. We expect global competition to increase over the next few years due primarily to aggressive investment by manufacturers in established markets in the United States and Western Europe and the presence of local manufacturers in key emerging markets such as China and India.

Commodity price increases, particularly for steel, aluminum, copper and precious metals have historically contributed to substantial cost pressures in the industry for vehicle manufacturers as well as suppliers. During the second half of 2008, the prices of these commodities decreased significantly reflecting the drop in global demand brought about by the tightening of the credit markets, recession in the U.S. and Western Europe and volatile oil prices. In addition, the historically low value of the Japanese Yen against the U.S. Dollar has benefited Japanese manufacturers exporting vehicles or components to the United States. Due in part to these pressures, industry pricing for comparably equipped products has continued to decline in most major markets. In the United States, actual prices for vehicles with similar content have declined at an accelerating pace over the last decade. We expect that this challenging pricing environment will continue for the foreseeable future.

Recent Developments

Reflecting a dramatic deterioration in economic and market conditions in the three months ended December 31, 2008, new vehicle sales in the United States declined rapidly, falling to their lowest per-capita levels in 50 years. Our revenues fell precipitously due to the deteriorating market conditions and in part reflecting escalating public speculation about a potential bankruptcy, consuming liquidity that one year prior was considered adequate to fund our operations including then contemplated restructuring efforts. We determined that despite far reaching actions to restructure our U.S. business, our liquidity would fall to levels below that needed to operate, and we were compelled to turn to the U.S. Government for financial assistance. On December 2, 2008, we submitted a

 

57


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Restructuring Plan for Long-Term Viability to the Senate Banking Committee and the House of Representatives Financial Services Committee (Restructuring Plan). Key elements of the Restructuring Plan included:

 

   

A dramatic shift in our U.S. product portfolio, with 22 of 24 new vehicle launches in 2009-2012 being fuel efficient cars and crossovers;

 

   

Full compliance with EISA and extensive investment in a wide array of advanced propulsion technologies;

 

   

Reduction in brands, nameplates and dealerships to focus available resources and growth strategies on our profitable operations;

 

   

Full labor cost competitiveness with foreign manufacturers in the U.S. by no later than 2012;

 

   

Further manufacturing and structural cost reductions through increased productivity and employment reductions; and

 

   

Balance sheet restructuring and supplemented liquidity through temporary federal assistance.

To bridge to more normal market conditions, we requested temporary federal assistance of $18.0 billion, comprised of a $12.0 billion term loan and a $6.0 billion line of credit to sustain operations and accelerate implementation of our restructuring. The $12.0 billion term loan was intended to provide adequate liquidity in our baseline liquidity scenario, with the $6.0 billion line of credit intended to provide supplemental liquidity we anticipated requiring in our downside scenario, as submitted on December 2, 2008. Our baseline industry sales volume and market share assumptions in the United States for 2009, as of December 2, 2008 was 12.0 million units and a 22.5% market share. Our baseline industry global sales volume assumption was 63.8 million units. Our downside industry sales volume assumption in the United States for 2009, as of December 2, 2008, was 10.5 million units. Our downside industry global sales volume assumption was 60.3 million units.

On December 31, 2008, we entered into the UST Loan Agreement pursuant to which the UST agreed to provide us with a $13.4 billion UST Loan Facility to sustain our operations through March 31, 2009. We borrowed $4.0 billion under the UST Loan Facility on December 31, 2008, an additional $5.4 billion on January 21, 2009 and $4.0 billion on February 17, 2009. As a condition to obtaining the UST Loan Facility, we agreed to achieve certain restructuring targets within designated time frames as more fully described below.

Pursuant to the UST Loan Agreement, on February 17, 2009, we submitted to the UST a Viability Plan to achieve and sustain our long-term viability, international competitiveness and energy efficiency. The Viability Plan included a description of specific actions intended to result in the following:

 

   

Repayment of all UST Loans, over a period extending beyond the current maturity date of December 30, 2011;

 

   

Our ability to comply with federal fuel efficiency and emissions requirements and commence domestic manufacturing of advanced technology vehicles;

 

   

Our achievement of a positive net present value, using reasonable assumptions and taking into account all existing and projected future costs;

 

   

Rationalization of costs, capitalization and capacity with respect to our manufacturing workforce, suppliers and dealerships; and

 

   

A product mix and cost structure that is competitive in the U.S. marketplace.

 

58


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

The Viability Plan addresses the requirements set forth in the UST Loan Agreement. Specifically, we agreed to use our best efforts to achieve the following restructuring targets:

 

   

Reduction of outstanding unsecured public debt by not less than two-thirds through conversion of existing public debt into equity, debt and/or cash or by other appropriate means;

 

   

Reduction of the total amount of compensation, including wages and benefits, paid to our U.S. employees so that, by no later than December 31, 2009, the average of such total amount, per hour and per person, is an amount that is competitive with the average total amount of such compensation, as certified by the Secretary of the United States Department of Labor, paid per hour and per person to employees of Nissan, Toyota or Honda whose site of employment is in the U.S;

 

   

Elimination of the payment of any compensation or benefits to our or our subsidiaries’ U.S. employees who have been fired, laid-off, furloughed or idled, other than customary severance pay;

 

   

Application, by December 31, 2009, of work rules for our and our subsidiaries’ U.S. employees, in a manner that is competitive with the work rules for employees of Nissan, Toyota or Honda whose site of employment is in the U.S.; and

 

   

Not less than one-half of the value of each future payment or contribution made by us and our subsidiaries to a VEBA account (or similar account) shall be made in the form of our common stock, and the value of any such payment or contribution shall not exceed the amount that was required for such period under the settlement agreement, dated February 21, 2008, among us, certain unions and class representatives, as in place as of December 31, 2008.

On February 17, 2009, the UST Loan Agreement was amended to waive the requirement that we provide term sheets relative to the conversion of at least two-thirds of our public unsecured debt and of at least one-half the value of our outstanding VEBA obligation to equity.

A summary of each of the significant elements of the Viability Plan is included below.

U.S. Brands and Nameplates – We will focus our resources in the U.S. primarily on our core brands: Chevrolet, Cadillac, Buick and GMC. Of the remaining brands, Pontiac — which is part of the Buick-Pontiac-GMC retail channel — will be a highly focused niche brand. HUMMER is subject to strategic review including its potential sale. A HUMMER sale or phase out decision will be made in the three months ended March 31, 2009, with final resolution expected no later than 2010. Saturn will remain in operation through the end of the planned lifecycle for all Saturn products (2010-2011). In the interim, should Saturn retailers as a group or other investors present a plan that would allow a spin off or sale of Saturn Distribution Corporation, an indirect wholly owned subsidiary, we would be open to any such possibility. If a spin-off or sale does not occur, we intend to phase out the Saturn brand at the end of the current product lifecycle. On February 20, 2009, Saab Automobile AB filed for protection under the reorganization laws in Sweden so that it could reorganize itself into a stand-alone entity independent from us.

Our product plan calls for a 25% reduction in the number of vehicle nameplates from 48 in 2008 to 36 by 2012. We anticipate that this will lead to higher per vehicle profit as we will be able to provide additional marketing support and concentrate engineering and capital spending on higher volume vehicles.

Dealers – Due to our long operating history and legacy locations, many dealerships now operate from outdated facilities that are also no longer in the prime locations required to succeed. As a result, our broad dealer network in major markets has become a disadvantage for both the dealerships and us. We intend to reduce our dealers from 6,246 in 2008 to 4,700 in 2012, a 25% reduction and a further reduction to 4,100 by 2014. Most of this reduction will take place in metro and suburban markets where dealership overcapacity is most prevalent.

Manufacturing Operations – We will reduce the total number of powertrain, stamping and assembly plants in the U.S. from 47 in 2008 to 33 in 2012. In addition to these consolidations, we have been implementing an integrated global manufacturing strategy, based on common lean manufacturing principles and processes. Implementation of this strategy provides the infrastructure for flexible production in our assembly facilities where multiple body styles from different architectures can be built in a given plant. Flexible manufacturing enables us to respond to changing market conditions more quickly and contributes to higher overall capacity utilization, resulting in lower fixed costs per vehicle sold, and lower and more efficient capital investment.

 

59


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Labor Cost – We intend to reduce our hourly and salaried employment levels by 47,000 on a global basis. We will reduce salaried employment levels by 10,000 employees during 2009; reduce U.S. salaries from 3% to 10% depending on the employees level; reduce salaried retiree benefits; and we have negotiated the suspension of the JOBS Bank program with the UAW. Refer to Note 21 to the consolidated financial statements.

Since execution of the UST Loan Agreement, we have been in intense discussions with the UAW relative to competitive improvements. Agreements concerning two items have been completed and are now being implemented. First, a special attrition program has been negotiated to assist restructuring efforts by reducing excess employment costs through voluntary incentivized attrition of the current hourly workforce. Second, we and the UAW have agreed to suspend the JOBS Bank program, which provided full income and benefit protection in lieu of layoff for an indefinite period of time.

In addition to the above, we have reached a tentative agreement with the UAW regarding modification to the GM/UAW labor agreement. This tentative agreement is subject to ratification by the UAW membership.

These competitive improvements will further substantially reduce our labor costs and represent a major move to close the competitive gap with U.S. transplant competitors. In addition, we and the UAW have agreed to improve competitive work rules, which are also anticipated to significantly reduce labor costs.

While these changes materially improve our competitiveness and help us realize a substantial portion of the labor cost savings targeted in the Viability Plan, further progress will be required to achieve the full targeted savings.

Capitalization – We are currently engaged in negotiations with the UAW and counsel for the class of GM retirees and their respective advisors to pursue modifications to the Settlement Agreement in accordance with the requirements of the UST Loan Agreement. Consistent with the terms of the UST Loan Agreement, we are seeking to convert at least half the value of our future payments to the VEBA to our common stock rather than cash, with the total value of our VEBA payments not to exceed the amount provided under the VEBA Settlement Agreement. Extensive due diligence regarding our current situation and future prospects and plans is now underway by the parties to the relevant agreements. While the UAW, class counsel and their advisors understand that the restructuring of our VEBA obligations is a necessary component of the Viability Plan and have agreed to work toward executing an agreement to modify the VEBA Settlement Agreement by March 31, 2009, we have not yet reached any agreement to restructure the VEBA payments.

We are also currently engaged in negotiations with advisors to the unofficial committee of the unsecured bondholders to reduce our public unsecured debt by not less than two-thirds through an exchange of the bonds for equity and other appropriate consideration in accordance with the requirements of the UST Loan Agreement. These negotiations are ongoing, and we are committed to commencing an exchange offer by March 31, 2009 as required by the UST Loan Agreement.

In connection with the warrant provided to the UST in connection with the UST Loan Agreement and the debt to equity conversion of at least two-thirds of our unsecured debt and the conversion of at least one-half the value of our outstanding VEBA obligation to equity, we anticipate new equity issued pursuant to the UST warrant, in the Bond Exchange and to the VEBA would represent substantially all of our pro forma common stock outstanding.

Pursuant to the terms of the UST Loan Facility, we submitted to the UST on February 17, 2009 our plan to return to profitability and to continue to operate as a going concern (Viability Plan). In developing the Viability Plan we considered two scenarios, baseline and downside. The baseline scenario is generally more conservative than third parties’ forecasts. Both sets of forecasts assume an increase in oil prices to $130 per barrel by 2014, which is a more rapid rise in prices than the consensus of third-party commentators. We believe that rising oil prices will drive a segment shift away from trucks and toward cars and crossover vehicles between 2009 and 2014.

 

     2009    2010    2011    2014
     (units in millions)

U.S. industry sales

           

Baseline

   10.5    12.5    14.3    16.8

Downside

   9.5    11.5    12.8    15.3

Global industry sales

           

Baseline

   57.5    62.3    68.3    82.5

Downside

   52.3    57.2    60.6    74.8

 

60


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

In order to execute the Viability Plan, we have requested U.S. Government funding totaling $22.5 billion to cover our baseline liquidity requirements, the initial $18.0 billion requested in our December 2, 2008 downside scenario plus an additional $4.5 billion to cover our downside liquidity requirements to reflect changes in various assumptions subsequent to the December 2, 2008 submission. We have proposed, as an alternative to debt funding, that the funding could be met through a combination of a secured term loan of $6.0 billion and preferred equity of $16.5 billion under a Viability Plan baseline scenario representing an increase of $4.5 billion over our December request and $9.1 billion incremental to the $13.4 billion outstanding at February 28, 2009. We have suggested to the UST that the current amount outstanding under the UST Loan Facility of $13.4 billion plus the additional $3.1 billion requested in 2009 could be provided in the form of preferred stock. We believe this structure would provide the necessary medium-term funding we need and provide a higher return to the UST, commensurate with the higher returns the UST receives on its other preferred stock investments in financial institutions. Under the Viability Plan downside scenario, an additional $7.5 billion of funding would be required, which we have requested in the form of a secured revolving credit facility. The collateral used to secure the current $13.4 billion UST Loan Facility would be used to secure the proposed $7.5 billion secured revolving credit facility and the $6.0 billion term loan. Our Viability Plan also assumes loans of $7.7 billion under the provisions of EISA (DOE Loans) from the DOE. Our baseline industry vehicle sales forecast for 2009 is 10.5 million total vehicles in the United States and 57.5 million vehicles globally. Our market share forecast for 2009 is 22% in the United States and 12% globally. In 2009, our baseline liquidity forecast reflects $2.0 billion of funding from the UST in March 2009 and an additional $2.6 billion in April 2009 in addition to the $13.4 billion received to date; a net $2.3 billion from other non-U.S. governmental entities; $2.0 billion in DOE Loans; and the sale of certain assets for net proceeds of $1.5 billion. We currently have approximately $1 billion of outstanding Series D convertible debentures that mature on June 1, 2009. Our funding plan described above does not include the payment at maturity of the principal amount of these debentures. If we are unable to restructure the Series D convertible debentures prior to June 1, 2009, or otherwise satisfactorily address the payment due on June 1, 2009, a default would arise with respect to payment of these obligations, which could also trigger cross defaults in other outstanding debt, which would potentially require us to seek relief through a filing under the U.S. Bankruptcy Code. Refer to “Liquidity Overview” for additional information.

Basis of Presentation

This MD&A should be read in conjunction with the accompanying consolidated financial statements which have been prepared assuming that we will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, our recurring losses from operations, stockholders’ deficit, and inability to generate sufficient cash flow to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our FIO business primarily consists of the operating results of GMAC for the eleven months ended November 30, 2006 on a consolidated basis and includes our 49% share of GMAC’s operating results for the month of December 2006 and the full years of 2007 and 2008 on an equity method basis. FIO also includes Other Financing, which includes two special purpose entities holding automotive leases previously owned by GMAC and its affiliates that we retained as well as the elimination of intersegment transactions with GMA and Corporate and Other (Other).

Certain reclassifications have been made to the 2007 and 2006 financial information to conform to the current period presentation.

The results of operations and cash flows of Allison have been reported as discontinued operations for all periods presented. Historically, Allison was included in GMNA.

Consistent with industry practice, our market share information includes estimates of industry sales in certain countries where public reporting is not legally required or otherwise available on a consistent basis.

 

61


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Consolidated Results of Operations

 

    Years Ended December 31,     2008 vs. 2007 Change   2007 vs. 2006 Change
    2008     2007     2006     Amount     Percentage   Amount     Percentage
    (Dollars in millions)

Net sales and revenue

             

Automotive sales

  $ 147,732     $ 177,594     $ 170,651     $ (29,862 )   (16.8)%   $ 6,943     4.1%

Financial services and insurance revenue

    1,247       2,390       33,816       (1,143 )   (47.8)%     (31,426 )   (92.9)%
                                           

Total net sales and revenue

    148,979       179,984       204,467       (31,005 )   (17.2)%     (24,483 )   (12.0)%
                                           

Costs and expenses

             

Automotive cost of sales

    149,311       165,573       163,214       (16,262 )   (9.8)%     2,359     1.4%

Selling, general and administrative expense

    14,253       14,412       13,650       (159 )   (1.1)%     762     5.6%

Financial services and insurance expense

    1,292       2,209       29,188       (917 )   (41.5)%     (26,979 )   (92.4)%

Other expenses

    5,407       2,099       4,238       3,308     157.6%     (2,139 )   (50.5)%
                                           

Operating loss

    (21,284 )     (4,309 )     (5,823 )     (16,975 )   n.m.     1,514     26.0%

Equity in loss of GMAC LLC

    (6,183 )     (1,245 )     (5 )     (4,938 )   n.m.     (1,240 )   n.m.

Automotive interest and other income (expense), net

    (1,921 )     (699 )     170       (1,222 )   (174.8)%     (869 )   n.m.
                                           

Loss from continuing operations before income taxes, equity income and minority interests

    (29,388 )     (6,253 )     (5,658 )     (23,135 )   n.m.     (595 )   (10.5)%

Income tax expense (benefit)

    1,766       37,162       (3,046 )     (35,396 )   (95.2)%     40,208     n.m.

Equity income, net of tax

    186       524       513       (338 )   (64.5)%     11     2.1%

Minority interests, net of tax

    108       (406 )     (324 )     514     126.6%     (82 )   (25.3)%
                                           

Loss from continuing operations

    (30,860 )     (43,297 )     (2,423 )     12,437     28.7%     (40,874 )   n.m.

Income from discontinued operations, net of tax

          256       445       (256 )   (100.0)%     (189 )   (42.5)%

Gain on sale of discontinued operations, net of tax

          4,309             (4,309 )   (100.0)%     4,309    
                                           

Net loss

  $ (30,860 )   $ (38,732 )   $ (1,978 )   $ 7,872     20.3%   $ (36,754 )   n.m.
                                           

Automotive cost of sales rate

    101.1%       93.2%       95.6%       7.9 pts.   n.m.     (2.4 ) pts.   n.m.

Net margin from continuing operations

    (20.7)%       (24.1)%       (1.2)%       3.4 pts.   n.m.     (22.9 ) pts.   n.m.

 

n.m. = not meaningful

2008 Compared to 2007

Total net sales and revenue decreased in the year ended 2008 by $31.0 billion (or 17.2%) due to declining Automotive sales of $29.9 billion. This decrease reflects the decline in the global automotive industry that resulted from tightening credit markets, a recession in the U.S. and Western Europe, volatile oil prices and declining consumer confidence around the world. These factors first affected the U.S. economy in late 2007 and continued to deteriorate and spread during 2008 to Western Europe and most recently to the emerging markets in Asia and South America. Automotive sales decreased by $26.3 billion at GMNA due to declining volumes and unfavorable mix of $23.1 billion and an increase in the accrual for residual support programs for leased vehicles of $1.8 billion, primarily due to the decline in residual values of fullsize pick-up trucks and sport utility vehicles in the middle of 2008. Automotive sales also decreased at GME by $3.1 billion and at GMAP by $2.5 billion, partially offset by an increase at GMLAAM of $1.4 billion. We expect vehicle net volume to decline in 2009 as the result of a challenging global economy.

Operating loss increased in the year ended 2008 by $17.0 billion to $21.3 billion due to: (1) changes in vehicle net volume and mix of $11.0 billion; (2) charges of $5.8 billion related to GMNA restructuring, special attrition programs and facility idling; (3) increased

 

62


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

charges of $2.8 billion related to Delphi; (4) expenses of $1.7 billion related to the salaried post-65 healthcare settlement; (5) increased asset impairment charges of $1.3 billion; and (6) charges of $0.3 billion related to our Salaried Window Program, a voluntary early retirement program extended to certain of our U.S. salaried employees in 2008. The effect of these items was mitigated by a $4.9 billion curtailment gain related to the UAW hourly medical plan and a nonrecurring charge of $1.6 billion in 2007 related to pension prior service cost.

Our Loss from continuing operations decreased in the year ended 2008 by $12.4 billion (or 28.7%) due to: (1) a decrease in Income tax expense (benefit) of $35.4 billion resulting from the $39.0 billion valuation allowance established against deferred tax assets in the U.S., Canada and Germany in 2007; and (2) a $2.1 billion improvement in our proportionate share of GMAC’s results of operations, which was a prior year loss of $1.2 billion that improved to current year income of $0.9 billion, primarily as the result of GMAC recording a gain due to the extinguishment of debt. These improvements were partially offset by: (1) the items mentioned above related to the increase in our Operating loss of $17.0 billion; (2) impairment charges of $7.1 billion related to our GMAC Common Membership Interests; and (3) an impairment charge of $1.0 billion related to our GMAC Preferred Membership Interests.

The execution of our Viability Plan calls for a reduction in the total number of our powertrain, stamping and assembly plants and the elimination of certain brands and nameplates. As a result of this reduction it is reasonably possible that we may be required to record impairment charges related to these facilities, the tooling related to certain brands or nameplates or accelerate the depreciation on these assets as they will be utilized over a shorter period of time than their current estimated useful life, and the impairment charges or increases in depreciation may be significant. Based on the currently anticipated restructuring actions in the Viability Plan, this will result in the acceleration of over $1.6 billion of depreciation or impairment expense in 2009, which previously would have been recognized in future periods.

Further details on the results of our businesses and segments are presented later in this MD&A.

2007 Compared to 2006

Total net sales and revenue decreased in the year ended 2007 by $24.5 billion (or 12.0%) primarily due to the deconsolidation of GMAC in November 2006 following the GMAC Transaction. This deconsolidation resulted in a $33.6 billion decrease in Total net sales and revenue in 2007, which was offset by: (1) increased Automotive sales of $7.0 billion in 2007, resulting from growth outside of North America reduced by declining sales at GMNA; and (2) additional Other Financing revenue in 2007 of $2.1 billion from two special purpose entities holding outstanding leases previously owned by GMAC, which were included in GMAC’s net income for the first 11 months of 2006.

Operating loss decreased in the year ended 2007 by $1.5 billion (or 26.0%) due to special attrition program related charges in 2006 of $6.4 billion that did not recur in 2007 and improved results in Other Financing in 2007 of $0.9 billion from two special purpose entities holding leases previously owned by GMAC, which were included in GMAC’s net income for the first eleven months of 2006. These improvements were offset by: (1) the effect of the GMAC deconsolidation where in 2006 GMAC contributed $1.8 billion of operating profit but in 2007 GMAC’s results were recorded as Equity in loss of GMAC LLC; (2) the accelerated recognition of previously unamortized pension prior service cost of $1.6 billion in 2007; (3) increased net charges in 2007 of $1.6 billion related to Delphi; and (4) increased restructuring and asset impairment related charges in 2007 of $0.7 billion.

Loss from continuing operations increased in the year ended 2007 by $40.9 billion as a result of the $39.0 billion valuation allowance established in the three months ended September 30, 2007 against our net deferred tax assets in the United States, Canada and Germany and our proportionate share of losses from our equity investment in GMAC of $1.2 billion.

In addition to the items identified in the previous paragraphs, our Net loss for the year ended 2007 of $38.7 billion also included our gain on sale of Allison of $4.3 billion.

In August 2007, we completed the sale of the commercial and military operations of Allison, formerly a division of our Powertrain Operations. The negotiated purchase price of $5.6 billion in cash plus assumed liabilities was paid at closing. The purchase price was subject to adjustment based on the amount of Allison’s net working capital and debt on the closing date, which resulted in an adjusted

 

63


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

purchase price of $5.4 billion. A gain on the sale of Allison in the amount of $5.3 billion, $4.3 billion after-tax, inclusive of the final purchase price adjustments, was recognized in 2007. Allison designs and manufactures commercial and military automatic transmissions and is a global provider of commercial vehicle automatic transmissions for on-highway vehicles, including trucks, specialty vehicles, buses and recreational vehicles, off-highway and military vehicles, as well as hybrid propulsion systems for transit buses. We retained our Powertrain Operations’ facility near Baltimore, Maryland which manufactures automatic transmissions primarily for our trucks and hybrid propulsion systems. The results of operations and cash flows of Allison have been reported in the consolidated financial statements as discontinued operations for all periods presented. Historically, Allison had been reported in GMNA.

Further information on each of our businesses and segments is presented below.

Changes in Consolidated Financial Condition

Accounts and Notes Receivable, Net

Accounts and notes receivable, net decreased by $2.0 billion (or 20.6%) to $7.7 billion at December 31, 2008 from $9.7 billion at December 31, 2007. The decrease was due to lower sales volumes at the end of 2008 of $1.3 billion, including $0.7 billion at GMNA, $0.5 billion at GME and $0.1 billion at GMAP, and Foreign Currency Translation of $0.7 billion, primarily at GME of $0.3 billion and GMAP of $0.2 billion. In addition, dividends receivable decreased by $0.1 billion at GMAP.

Inventories

Inventories decreased by $1.9 billion (or 12.8%) to $13.0 billion at December 31, 2008 from $14.9 billion at December 31, 2007. This decrease is due to closing facilities, down-time and inventory reduction efforts at GMNA of $1.3 billion and at GME of $0.3 billion, offset by increases of $0.5 billion at GMAP and $0.3 billion at GMLAAM. Foreign Currency Translation contributed to the decrease by $0.8 billion at GMAP, $0.6 billion at GME and $0.3 billion at GMLAAM. These decreases were offset by the deferral of vehicle sales to high risk dealers in the U.S. and Canada of $0.8 billion.

Equipment on Operating Leases, Net

Equipment on operating leases, net decreased by $1.9 billion (or 35.9%) to $3.4 billion at December 31, 2008 from $5.3 billion at December 31, 2007 due to reductions in daily rental volumes at GMNA of $1.5 billion. In addition GME decreased $0.4 billion due to a reduction in the rental fleet and lower residual values.

Financing Equipment on Operating Leases, Net

Financing equipment on operating leases, net decreased by $4.5 billion (or 67.2%) to $2.2 billion at December 31, 2008 from $6.7 billion at December 31, 2007. The decrease is due to the planned reduction of Equipment on operating leases, net which we retained as part of the GMAC Transaction.

Equity in Net Assets of GMAC LLC

Equity in Net Assets of GMAC LLC decreased $6.6 billion (or 93.0%) to $0.5 billion at December 31, 2008 from $7.1 billion at December 31, 2007. The decrease is due to impairment charges of $7.1 billion related to our Common Membership Interests, offset by our proportionate share of GMAC’s income of $0.9 billion.

Property, net

Property, net decreased by $3.3 billion (or 7.7%) to $39.7 billion at December 31, 2008 from $43.0 billion at December 31, 2007. This decrease is due to: (1) Foreign Currency Translation of $1.0 billion at GMAP, $0.4 billion at GME and $0.2 billion at GMNA; (2) property disposals and write-downs of $0.9 billion at GMNA; and (3) impairments of $0.5 billion at GME and $0.5 billion at GMNA.

 

64


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Goodwill and Intangible Assets, net

Goodwill and intangible assets, net decreased by $801 million (or 72.8%) to $265 million at December 31, 2008 from $1.1 billion at December 31, 2007 due to the impairment of our remaining goodwill of $610 million at GME and GMNA.

Noncurrent Deferred Income Tax Assets

Noncurrent deferred income tax assets decreased $2.0 billion (or 95.3%) to $0.1 billion at December 31, 2008 from $2.1 billion at December 31, 2007 due to establishing valuation allowances against deferred tax assets.

Prepaid Pension

Prepaid pension decreased $20.1 billion (or 99.5%) to $0.1 billion at December 31, 2008 from $20.2 billion at December 31, 2007. This decrease is primarily due to a combination of actual losses on plan assets, the transfer of the Delphi pension liability and other curtailments and amendments. These factors also resulted in a significant increase in the Noncurrent Pension liability.

Short-term Borrowings and Current Portion of Long-term Debt

Short-term borrowings and current portion of long-term debt increased by $9.8 billion (or 163.3%) to $15.8 billion at December 31, 2008 from $6.0 billion at December 31, 2007. This increase is due to borrowings on secured revolving credit facilities of $4.5 billion, borrowings from the UST of $4.0 billion, and the reclassification of $3.0 billion of debt from non-current to current. These increases were offset by payments at maturity of $1.2 billion and the exchange of $0.5 billion of convertible debt for our common equity.

Financing Debt

Financing debt decreased $3.7 billion (or 75.5%) to $1.2 billion at December 31, 2008 from $4.9 billion at December 31, 2007. The decrease is due to the planned repayment of debt secured by Equipment on operating leases, net, which we retained after selling 51% of our equity interest in GMAC.

Long-term Debt

Long-term debt decreased $3.8 billion (or 11.4%) to $29.6 billion at December 31, 2008 from $33.4 billion at December 31, 2007. The decrease is due to the reclassification of $3.0 billion of debt from non-current to current and a $0.3 billion decrease in British Pound denominated debt obligation due to the British Pound weakening against the U.S. Dollar.

Noncurrent Postretirement Benefits Other Than Pensions

Noncurrent Postretirement benefits other than pensions decreased $18.5 billion (or 39.0%) to $28.9 billion at December 31, 2008 from $47.4 billion at December 31, 2007. The decrease in the liability for Postretirement benefits other than pensions was primarily driven by the reduction in accumulated postretirement benefit obligation (APBO) resulting from the UAW Settlement Agreement and the elimination of salaried post-65 retiree healthcare benefits.

Noncurrent Pensions Liability

Noncurrent Pensions liability increased $13.8 billion (or 121.1%) at December 31, 2008 to $25.2 billion from $11.4 billion at December 31, 2007. The increase in the Noncurrent Pensions liability is primarily due to a combination of actual losses on plan assets, the transfer of the Delphi pension liability and other curtailments and amendments. These factors also resulted in the decrease of the Prepaid pension described above.

 

65


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Further information on each of our businesses and geographic segments is discussed below.

GM Automotive Results of Operations

 

     Years Ended December 31,     2008 vs. 2007 Change    2007 vs. 2006 Change  
     2008     2007     2006     Amount     Percentage    Amount     Percentage  
     (Dollars in millions)  

Total net sales and revenue

   $ 147,732     $ 177,594     $ 170,907     $ (29,862 )   (16.8)%    $ 6,687     3.9 %
                                             

Automotive cost of sales

     149,723       164,946       163,579       (15,223 )   (9.2)%      1,367     0.8 %

Selling, general and administrative expense

     13,147       13,590       12,965       (443 )   (3.3)%      625     4.8 %

Other expenses

     610                   610     —%          %
                                             

Operating loss

     (15,748 )     (942 )     (5,637 )     (14,806 )   n.m.      4,695     83.3 %

Automotive interest and other expense, net

     (884 )     (1,042 )     (698 )     158     15.2%      (344 )   (49.3 )%
                                             

Loss from continuing operations before income taxes, equity income and minority interests

     (16,632 )     (1,984 )     (6,335 )     (14,648 )   n.m.      4,351     68.7 %

Equity income, net of tax

     184       522       521       (338 )   (64.8)%      1     0.2 %

Minority interests, net of tax

     103       (406 )     (334 )     509     125.4%      (72 )   (21.6 )%
                                             

Loss from continuing operations before income taxes

   $ (16,345 )   $ (1,868 )   $ (6,148 )   $ (14,477 )   n.m.    $ 4,280     69.6 %
                                             

Income from discontinued operations, net of tax

   $     $ 256     $ 445     $ (256 )   (100.0)%    $ (189 )   (42.5 )%

Gain on sale of discontinued operations, net of tax

   $     $ 4,309     $     $ (4,309 )   (100.0)%    $ 4,309     n.m.  

Automotive cost of sales rate

     101.3%       92.9%       95.7%       8.4 pts.     n.m.      (2.8 ) pts.   n.m.  

Net margin from continuing operations before income taxes, equity income and minority interests

     (11.3)%       (1.1)%       (3.7)%       (10.2 ) pts.   n.m.      2.6 pts.     n.m.  
     (Volume in thousands)  

Production Volume (a)

     8,144       9,286       9,181       (1,142 )   (12.3)%      105     1.1 %

Vehicle Sales (b)(c)

               

Industry

     67,120       70,708       67,595       (3,588 )   (5.1)%      3,113     4.6 %

GM

     8,356       9,370       9,095       (1,014 )   (10.8)%      275     3.0 %

GM market share — Worldwide

     12.4%       13.3%       13.5%       (0.9 ) pts.   n.m.      (0.2 ) pts.   n.m.  

 

n.m. = not meaningful

 

(a) Production volume represents the number of vehicles manufactured by our assembly facilities and also includes vehicles produced by certain joint ventures.

 

(b) Vehicle sales primarily represent sales to the ultimate customer.

 

(c) Vehicle sales data may include rounding differences.

 

66


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

The following discussion highlights key changes in operating results by Automotive region. The drivers of these changes are discussed in the regional analysis that follows this section.

2008 Compared to 2007

Industry Global Vehicle Sales

Industry vehicle sales decreased in the year ended 2008 by 3.6 million vehicles (or 5.1%) to 67.1 million vehicles. This decline started in North America and extended into the other regions, especially during the second half of 2008, reflecting the effect of slowing economies, tightening credit markets, volatile oil prices and declining consumer confidence around the world. North America decreased by 3.0 million vehicles (or 15.5%) to 16.6 million vehicles and Europe decreased by 1.2 million vehicles (or 5.0%) to 22.0 million vehicles. These decreases were offset by industry sales increases in the Asia Pacific region by 388,000 vehicles (or 1.9%) to 21.1 million vehicles and the LAAM region by 210,000 vehicles (or 2.9%) to 7.5 million vehicles.

GM Global Vehicle Sales

Our global vehicle sales decreased in the year ended 2008 by 1.0 million vehicles (or 10.8%) to 8.4 million vehicles. Sales decreased at GMNA by 952,000 vehicles and at GME by 142,000 vehicles, offset by increases of 40,000 vehicles at GMLAAM and 39,000 vehicles at GMAP, consistent with the sales volume changes that occurred within the industry.

GM Global Production Volume

Our global production volume decreased in the year ended 2008 by 1.1 million vehicles (or 12.3%) to 8.1 million vehicles. Production volume decreased at GMNA by 818,000 vehicles, at GME by 278,000 vehicles, and at GMAP by 47,000 vehicles, offset by an increase at GMLAAM of 1,000 vehicles.

Total Net Sales and Revenue

Total net sales and revenue decreased in the year ended 2008 by $29.9 billion (or 16.8%). This decrease was driven by a decline in Total net sales and revenue of $26.3 billion at GMNA, $3.1 billion at GME and $2.5 billion at GMAP. The decrease was offset by an increase of $1.4 billion at GMLAAM.

Automotive Cost of Sales

Automotive cost of sales decreased in the year ended 2008 by $15.2 billion (or 9.2%). This decrease resulted from declines in Automotive cost of sales of $14.7 billion at GMNA, $1.4 billion at GME and $1.0 billion at GMAP, offset by an increase of $1.4 billion at GMLAAM.

Selling, General and Administrative Expense

Selling, general and administrative expense decreased in the year ended 2008 by $443 million (or 3.3%). This decrease was the result of a decrease of $683 million at GMNA offset by increases of $150 million at GMAP, $48 million at GMLAAM and $35 million at GME.

Other expenses

Other expenses increased by $610 million due to the impairment of Goodwill of $456 million at GME and $154 million at GMNA.

Automotive Interest and Other Expense, Net

Automotive interest and other expense, net decreased in the year ended 2008 by $158 million (or 15.2%). This decrease resulted from lower net interest expense at GMNA of $463 million and higher net interest income at GMLAAM of $6 million, offset by lower net interest income at GME of $170 million and at GMAP of $95 million.

 

67


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Equity Income, Net of Tax

Equity income, net of tax, decreased in the year ended 2008 by $338 million (or 64.8%) primarily as a result of decreased equity earnings from investments of $223 million at GMNA, $117 million at GMAP, and $10 million at GMLAAM offset by an increase of $12 million at GME.

Minority Interests, Net of Tax

Minority interests, net of tax, decreased in the year ended 2008 by $509 million (or 125.4%) as the result of decreased earnings of consolidated affiliates of $386 million at GMAP, $74 million at GMNA and $49 million at GME.

Discontinued Operations

In August 2007, we completed the sale of the commercial and military operations of Allison, resulting in a Gain on sale of discontinued operations, net of tax of $4.3 billion. Exclusive of the gain on sale, Income from discontinued operations, net of tax was $0.3 billion in 2007.

The execution of our Viability Plan calls for a reduction in the total number of our powertrain, stamping and assembly plants and the elimination of certain brands and nameplates. As a result of this reduction it is reasonably possible that we may be required to record impairment charges related to these facilities, the tooling related to certain brands or nameplates or accelerate the depreciation on these assets as they will be utilized over a shorter period of time than their current estimated useful life, and the impairment charges or increases in depreciation may be significant. Based on the currently anticipated restructuring actions in the Viability Plan, this will result in the acceleration of depreciation or impairment expense in 2009 of $0.9 billion at GME and $0.7 billion at GMNA which previously would have been recognized in future periods.

2007 Compared to 2006

Industry Global Vehicle Sales

Industry vehicle sales grew strongly in all regions outside North America in the year ended 2007, increasing by 3.1 million vehicles (or 4.6%) to 70.7 million vehicles. Industry vehicle sales increased in the Asia Pacific region by 1.5 million vehicles (or 7.7%) to 20.7 million vehicles; Europe increased by 1.2 million vehicles (or 5.7%) to 23.1 million vehicles; and the LAAM region increased by 1.0 million vehicles (or 15.9%) to 7.3 million vehicles. Industry vehicle sales decreased in North America by 613,000 vehicles (or 3.0%), to 19.6 million vehicles.

GM Global Vehicle Sales

Our global vehicle sales increased in the year ended 2007 by 275,000 vehicles (or 3.0%) to 9.4 million vehicles, which was the third consecutive year that we sold more than 9.0 million vehicles. Vehicle sales increased by 201,000 vehicles at GMLAAM, 188,000 vehicles at GMAP and 178,000 vehicles at GME, offset by a decline in vehicle sales at GMNA of 291,000 vehicles.

GM Global Production Volume

Our global production volume increased in the year ended 2007 by 105,000 vehicles (or 1.1%). Production volume increased in all regions outside North America, including increased volumes at GMAP of 335,000 vehicles, at GMLAAM of 130,000 vehicles, and at GME of 22,000 vehicles, whereas GMNA declined by 382,000 vehicles.

Total Net Sales and Revenue

Total net sales and revenue increased in the year ended 2007 by $6.7 billion (or 3.9%). The increase in Total net sales and revenue was due to increases of $5.3 billion at GMAP, $4.3 billion at GMLAAM and $4.2 billion at GME, offset by a decline in Total net sales and revenue of $4.2 billion at GMNA as well as a $2.9 billion increase in intercompany sales between segments that are eliminated in consolidations.

 

68


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Automotive Cost of Sales

Automotive cost of sales increased in the year ended 2007 by $1.4 billion (or 0.8%). The increase in Automotive cost of sales resulted from increases of $4.7 billion at GMAP, $4.4 billion at GME and $3.5 billion at GMLAAM, offset by a decline in Automotive cost of sales of $8.3 billion at GMNA as well as a $2.9 billion increase related to intercompany sales between segments that are eliminated in consolidations.

Selling, General and Administrative Expense

Selling, general and administrative expense increased in the year ended 2007 by $0.6 billion (or 4.8%). The increase in Selling, general and administrative expense was driven by increases of $0.3 billon at GMAP, $0.2 billion at each of GME and GMLAAM, and was offset by a decrease of $0.1 billion at GMNA.

Automotive Interest and Other Expense, Net

Automotive interest and other expense, net increased in the year ended 2007 by $0.3 billion (or 49.3%). The increase in Automotive interest and other expense, net was due to a $0.8 billion decrease in net interest and other income at GMAP, offset by decreases in net expense of $0.3 billion at GMLAAM, $0.1 billion at GME and $0.1 billion at GMNA.

Equity Income, Net of Tax

Equity income, net of tax increased in the year ended 2007 by $1 million (or 0.2%). This change was the result of increased equity earnings from investments of $60 million at GMAP due to improved performance at Shanghai GM that was offset by decreased equity income due to the sale of part of our equity stake in Suzuki during 2006, $15 million at GMLAAM, and $8 million at GME, offset by a decrease of $82 million at GMNA.

Minority Interests, Net of Tax

Minority interests, net of tax increased in the year ended 2007 by $72 million (or 21.6%). The increase results from increased earnings of consolidated affiliates, primarily $76 million at GMAP in 2007.

Discontinued Operations

In August 2007, we completed the sale of the commercial and military operations of Allison, resulting in a Gain on sale of discontinued operations, net of tax of $4.3 billion. Exclusive of the gain on sale, Income from discontinued operations, net of tax was $0.3 billion and $0.4 billion in 2007 and 2006, respectively.

Supplemental Categories for Expenses

We evaluate GMA and make certain decisions using supplemental categories for variable expenses and non-variable expenses. We believe these categories provide us with useful information and that investors would also find it beneficial to view the business in a similar manner.

We believe contribution costs, structural costs and impairment, restructuring and other charges provide meaningful supplemental information regarding our expenses because they place GMA expenses into categories that allow us to assess the cost performance of GMA. We use these categories to evaluate our expenses, and believe that these categories allow us to readily view operating trends, perform analytical comparisons, benchmark expenses among geographic segments and assess whether the North American turnaround plan and globalization strategy for reducing costs are on target. We use these categories for forecasting purposes, evaluating management and determining our future capital investment allocations. Accordingly, we believe these categories are useful to investors in allowing for greater transparency of the supplemental information that we use in our financial and operational decision-

 

69


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

making. These categories of expenses do not include the results of hedging activities with respect to certain commodity prices and foreign currency exchange rates and the effect of foreign currency gains and losses on financial assets and liabilities, which are included in Automotive cost of sales but are analyzed separately.

While we believe that contribution costs, structural costs and impairment, restructuring and other charges provide useful information, there are limitations associated with the use of these categories. Contribution costs, structural costs, impairment, restructuring and other charges may not be completely comparable to similarly titled measures of other companies due to potential differences between companies in the method of calculation. As a result, these categories have limitations and should not be considered in isolation from, or as a substitute for, other measures such as Automotive cost of sales and Selling, general and administrative expense. We compensate for these limitations by using these categories as supplements to Automotive cost of sales and Selling, general and administrative expense.

The total of contribution costs, structural costs, impairment, restructuring and other charges equals the total of Automotive cost of sales and Selling, general and administrative expense for GMA as summarized below:

 

     Years Ended December 31,     2008 vs. 2007 Change    2007 vs. 2006 Change
     2008     2007    2006     Amount     %    Amount     %
     (Dollars in billions)

Contribution costs (a)

   $ 108.4     $ 123.2    $ 118.3     $ (14.8 )   (12.0)%    $ 4.9     4.1%

Structural costs (b)

     50.1       52.4      51.8       (2.3 )   (4.4)%      0.6     1.2%

Impairment, restructuring and other charges (c)

     5.4       2.4      6.9       3.0     125.0%      (4.5 )   (65.2)%

Derivative and certain foreign currency related items (d)

     (1.0 )     0.5      (0.5 )     (1.5 )   n.m.      1.0     n.m.
                                            

Total GMA

   $ 162.9     $ 178.5    $ 176.5     $ (15.6 )   (8.7)%    $ 2.0     1.1%
                                            

Automotive cost of sales

   $ 149.7     $ 164.9    $ 163.5     $ (15.2 )   (9.2)%    $ 1.4     0.9%

Selling, general and administrative expense

     13.2       13.6      13.0       (0.4 )   (2.9)%      0.6     4.6%
                                            

Total GMA

   $ 162.9     $ 178.5    $ 176.5     $ (15.6 )   (8.7)%    $ 2.0     1.1%
                                            

 

n.m. = not meaningful

 

(a) Contribution costs are expenses that we consider to be variable with production. The amount of contribution costs included in Automotive cost of sales was $107.5 billion, $122.2 billion and $117.2 billion in the years ended 2008, 2007 and 2006, respectively, and those costs were comprised of material cost, freight and policy and warranty expenses. The amount of contribution costs classified in Selling, general and administrative expenses was $0.9 billion, $1.0 billion and $1.1 billion in the years ended for 2008, 2007 and 2006, respectively. These costs were incurred primarily in connection with our dealer advertising programs.

 

(b) Structural costs are expenses that do not generally vary with production and are recorded in both Automotive cost of sales and Selling, general and administrative expense. Such costs include manufacturing labor, pension and OPEB costs, engineering expense and marketing related costs. Certain costs related to restructuring and impairments that are included in Automotive cost of sales are also excluded from structural costs. The amount of structural costs included in Automotive cost of sales was $38.1 billion, $39.9 billion and $39.9 billion in the years ended 2008, 2007 and 2006, respectively, and the amount of structural costs included in Selling, general and administrative expense was $12.0 billion, $12.5 billion and $11.9 billion in the years ended 2008, 2007 and 2006, respectively.

 

(c) Impairment, restructuring and other charges are primarily included in Automotive cost of sales. In 2008, $0.2 billion related to the Salaried Window Program was included in Selling, general and administrative expense.

 

(d) Foreign currency and certain derivative related items are included in Automotive cost of sales.

 

70


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Contribution Costs

Contribution costs decreased in the year ended 2008 by $14.8 billion (or 12.0%). Lower global wholesale deliveries to dealers, primarily in North America and Europe, resulted in decreased contribution costs of $17.7 billion. Foreign Currency Translation, increased transportation costs, and other factors, net of favorable material performance, increased contribution costs by $2.9 billion.

Contribution costs increased in the year ended 2007 by $4.9 billion (or 4.1%) as a result of Foreign Currency Translation of $3.7 billion, richer product mix and increased policy and warranty costs. Overall material performance was flat year-over-year as improvements realized from supplier productivity, global sourcing and optimizing supplier footprints offset higher raw material costs and product enhancements on new vehicles. Increased global prices for steel, aluminum, copper and precious metals increased contribution costs by $1.3 billion in 2007 compared to 2006.

Structural Costs

Structural costs decreased in the year ended 2008 by $2.3 billion (or 4.4%) due to: (1) manufacturing savings of $1.4 billion at GMNA from lower manufacturing costs and hourly headcount levels resulting from attrition programs and productivity improvements; (2) reductions in incentive compensation and profit sharing costs of $0.6 billion, primarily at GMNA; (3) and lower manufacturing costs at GME of $0.3 billion.

Structural costs increased in the year ended 2007 by $0.6 billion (or 1.2%). Global engineering and product development costs increased in 2007 due to increased global vehicle development and advanced technology spending. Total structural cost expenditures increased at GMAP and GMLAAM due to higher production costs and new product launches associated with volume growth. The effect of Foreign Currency Translation also increased structural costs. OPEB costs decreased in 2007 at GMNA primarily due to the 2005 UAW Health Care Settlement Agreement reached with the UAW to mitigate hourly retiree healthcare costs and manufacturing labor costs declined as production related headcount levels were reduced by the 2006 UAW Attrition Program.

Impairment, Restructuring and Other Charges

We recorded certain charges and gains related primarily to restructuring and other initiatives at GMA, which are included in Automotive cost of sales. Additional details regarding these charges and gains are included in Notes 16, 21 and 22 to the consolidated financial statements. The following table summarizes these charges and gains:

 

     Years Ended December 31,  
         2008             2007             2006      
     (Dollars in millions)  

Special attrition programs

   $ 3,500     $     $ 6,385  

Restructuring initiatives

     2,654       918       (412 )

Asset impairments

     974       279       686  

Change in amortization period for pension prior service costs

           1,310        

Net curtailment gains

     (3,941 )            

Salaried post-65 healthcare settlement

     1,172              

Other

     757       (85 )     188  
                        

Total restructuring and other charges

   $ 5,116     $ 2,422     $ 6,847  
                        

The 2008 amounts are related to the following:

 

   

Charges of $3.5 billion for restructuring initiatives at GMNA related to special attrition programs;

 

   

Charges of $2.7 billion for restructuring initiatives primarily related to headcount reductions as follows: GMNA, $2.3 billion; GME, $263 million; GMAP, $98 million;

 

   

Charges of $974 million for product specific asset impairments as follows: GMNA, $412 million; GME, $497 million; GMLAAM, $27 million; GMAP, $38 million;

 

71


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

   

$3.7 billion net curtailment gain related to the accelerated recognition of unamortized net prior service credits due to the Settlement Agreement for the UAW hourly medical plan and a $257 million net curtailment gain related to the accelerated recognition of unamortized net prior service credits related to the IUE-CWA agreement;

 

   

Charges of $1.2 billion at GMNA for a settlement loss associated with the elimination of healthcare coverage for U.S. salaried retirees over age 65 beginning January 1, 2009; and

 

   

Charges of $340 million related to our agreement with the Canadian Auto Workers Union (CAW), charges of $170 million related to pension plan enhancements for both current and future IUE-CWA retirees, charges of $197 million at GMNA related to support we provided to American Axle & Manufacturing Holdings, Inc. and charges of $50 million related to the Salaried Window Program.

The 2007 amounts are related to the following:

 

   

Charges of $918 million for restructuring initiatives as follows: GMNA, $290 million; GME, $579 million; GMAP, $49 million;

 

   

Charges of $265 million and $14 million for product-specific asset impairments at GMNA and GMAP, respectively;

 

   

Charges of $1.3 billion for additional pension charges at GMNA related to the accelerated recognition of unamortized prior service cost; and

 

   

$85 million favorable adjustment in conjunction with cessation of production at a previously divested business.

The 2006 amounts are related to the following:

 

   

Net charges of $6.4 billion for restructuring initiatives at GMNA related to special attrition programs;

 

   

$412 million net reduction for various restructuring and other matters including favorable revisions of $1.1 billion to the reserves recorded in 2005 related to facility capacity actions, as a result of the favorable effects of the 2006 UAW Attrition Program and to the reserve for postemployment benefits, primarily due to higher than anticipated headcount reductions associated with facility idling activities partially offset by restructuring charges of $642 million as follows: GMNA, $146 million; GME, $437 million; GMLAAM, $43 million; GMAP, $16 million;

 

   

Charges for product-specific asset impairments as follows: GMNA, $405 million; GME, $60 million; GMAP, $61 million as well as additional impairment charges of $70 million and $89 million resulting from write-downs of facilities at GMNA and GME, respectively; and

 

   

Charges of $224 million recorded in conjunction with cessation of production at a previously divested business, partially offset by a $36 million gain related to the sale of the majority of our investment in Suzuki.

Derivative and Foreign Currency Related Items

Results of hedging activities with respect to certain foreign currency and commodity price risks, as well as the effect of foreign currency gains and losses on financial assets and liabilities are included in Automotive cost of sales, but are excluded from structural and contribution costs. Such costs decreased $1.5 billion in the year ended 2008, compared to 2007, and increased $1.0 billion in the year ended 2007, compared to 2006. The decrease in 2008 was primarily due to foreign currency gains at GMNA driven by the appreciation of the U.S. Dollar against the Canadian Dollar. The increase in 2007 was primarily due to lower derivative mark-to-market gains in 2007 compared to 2006 as a result of less significant commodity price increases in 2007.

 

72


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

GM Automotive Segment Results of Operations

GM North America

 

     Years Ended December 31,     2008 vs. 2007 Change    2007 vs. 2006 Change
     2008     2007     2006     Amount     Percentage    Amount     Percentage
     (Dollars in millions)

Total net sales and revenue

   $ 86,187     $ 112,448     $ 116,653     $ (26,261 )   (23.4)%    $ (4,205 )   (3.6)%
                                             

Automotive cost of sales

     91,441       106,097       114,373       (14,656 )   (13.8)%      (8,276 )   (7.2)%

Selling, general and administrative expense

     7,633       8,316       8,456       (683 )   (8.2)%      (140 )   (1.7)%

Other expenses

     154                   154     n.m.          n.m.
                                             

Operating loss

     (13,041 )     (1,965 )     (6,176 )     (11,076 )   n.m.      4,211     68.2%

Automotive interest and other expense, net

     (862 )     (1,325 )     (1,399 )     463     34.9%      74     5.3%
                                             

Loss from continuing operations before income taxes, equity income and minority interests

     (13,903 )     (3,290 )     (7,575 )     (10,613 )   n.m.      4,285     56.6%

Equity income (loss), net of tax

     (201 )     22       104       (223 )   n.m.      (82 )   (78.8)%

Minority interests, net of tax

     28       (46 )     (63 )     74     160.9%      17     27.0%
                                             

Loss from continuing operations before income taxes

   $ (14,076 )   $ (3,314 )   $ (7,534 )   $ (10,762 )   n.m.    $ 4,220     56.0%
                                             

Income from discontinued operations, net of tax

   $     $ 256     $ 445     $ (256 )   (100.0)%    $ (189 )   (42.5)%

Gain on sale of discontinued operations, net of tax

   $     $ 4,309     $     $ (4,309 )   (100.0)%    $ 4,309     n.m.

Automotive cost of sales rate

     106.1%       94.4%       98.0%       11.7 pts.   n.m.      (3.6 ) pts.   n.m.

Net margin from continuing operations before income taxes, equity income and minority interests

     (16.1)%       (2.9)%       (6.5)%       (13.2 ) pts.   n.m.      3.6 pts.   n.m.
     (Volume in thousands)

Production Volume (a)

               

Cars

     1,543       1,526       1,821       17     1.1%      (295 )   (16.2)%

Trucks

     1,906       2,741       2,828       (835 )   (30.5)%      (87 )   (3.1)%
                                             

Total

     3,449       4,267       4,649       (818 )   (19.2)%      (382 )   (8.2)%
                                             

Vehicle Sales (b) (c)

               

Industry — North America

     16,557       19,588       20,201       (3,030 )   (15.5)%      (613 )   (3.0)%

GMNA

     3,564       4,516       4,807       (952 )   (21.1)%      (291 )   (6.1)%

GM market share — North America

     21.5%       23.1%       23.8%       (1.6 ) pts.   n.m.      (0.7 ) pts.   n.m.

Industry — U.S.

     13,501       16,473       17,060       (2,972 )   (18.0)%      (587 )   (3.4)%

GM market share — U.S. industry

     22.1%       23.5%       24.2%       (1.4 ) pts.   n.m.      (0.7 ) pts.   n.m.

GM cars market share — U.S. industry

     18.6%       19.7%       20.7%       (1.1 ) pts.   n.m.      (1.0 ) pts.   n.m.

GM trucks market share — U.S. industry

     25.6%       26.7%       27.1%       (1.1 ) pts.   n.m.      (0.4 ) pts.   n.m.

 

n.m. = not meaningful

 

(a) Production volume represents the number of vehicles manufactured by our assembly facilities and also includes vehicles produced by certain joint ventures.

 

(b) Vehicle sales primarily represent sales to the ultimate customer.

 

(c) Vehicle sales data may include rounding differences.

 

73


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

2008 Compared to 2007

Industry Vehicle Sales

In the year ended 2008 industry vehicle sales in North America decreased by 3.0 million vehicles (or 15.5%). Industry vehicle sales decreased in the first three quarters of 2008 with a sharp decline in the fourth quarter. Industry vehicle sales decreased by 324,000 vehicles (or 6.9%), decreased by 510,000 vehicles (or 9.6%) and decreased by 766,000 vehicles (or 15.5%) in the first, second and third quarters of 2008, respectively. The sharp fourth quarter decline resulted in decreased vehicle sales of 1.4 million vehicles (or 30.8%). The decrease in industry vehicle sales is directly attributable to the recession in the United States brought about by the tightening of the credit markets, turmoil in the mortgage markets, reductions in housing values and volatile oil prices, all of which contributed to declining consumer confidence. In the short-term, we anticipate quarterly industry vehicle sales to remain below levels reported in the prior 24 months due to the economic factors mentioned above.

Total Net Sales and Revenue

The economic factors, mentioned above, and the resulting recession in the United States, caused a similar effect on our North American vehicle sales in 2008. Our vehicle sales decreased by 952,000 vehicles (or 21.1%) to 3.6 million vehicles in 2008, with 379,000 (or 36.0%) of the decrease occurring in the fourth quarter. Our actual vehicle sales were 947,000 vehicles, 964,000 vehicles, 978,000 vehicles and 675,000 vehicles in the first, second, third and fourth quarters of 2008, respectively. Our United States vehicle sales in 2008 followed the industry trend with steady decreases in the first three quarters with a sharp decline in the fourth quarter. Our United States vehicle sales decreased by 103,000 vehicles (or 11.4%), decreased by 214,000 vehicles (or 21.2%) and decreased by 218,000 vehicles (or 20.9%) in the first, second, and third quarters of 2008, respectively. The sharp fourth quarter decline resulted in decreased vehicle sales of 350,000 vehicles (or 39.0%). As a result of the decreasing trend in vehicle sales we anticipate, in the short-term, our vehicle sales to remain at or below levels reported in the fourth quarter of 2008.

In the year ended 2008 Total net sales and revenue decreased by $26.3 billion (or 23.4%) due primarily to: (1) a decline in volumes and unfavorable mix of $23.1 billion resulting from continuing market challenges; (2) a $1.8 billion increase in the accrual for residual support programs for leased vehicles, primarily due to the decline in residual values of fullsize pick-up trucks and sport utility vehicles in the middle of 2008; (3) unfavorable pricing of $0.7 billion; (4) a decrease in sales of components, parts and accessories of $0.6 billion; partially offset by (5) Foreign Currency Translation of $0.3 billion due to a strengthening of the U.S. Dollar in relation to the Canadian Dollar. Contributing to the volume decline is $0.8 billion that was deferred in the fourth quarter of 2008 related to deliveries to dealers that did not meet the criteria for revenue recognition, either because collectability was not reasonably assured or the risks and rewards of ownership were not transferred at the time of delivery.

Automotive Cost of Sales

In the year ended 2008, Automotive cost of sales decreased $14.7 billion (or 13.8%) primarily due to: (1) decreased costs related to lower production volumes of $14.0 billion; (2) net curtailment gain of $3.8 billion related to the Settlement Agreement; (3) manufacturing savings of $1.4 billion from lower manufacturing costs and hourly headcount levels resulting from attrition programs and productivity improvements; (4) favorable Foreign Currency Translation gains of $1.4 billion due primarily to the appreciation of the U.S. Dollar against the Canadian Dollar; (5) pension prior service costs of $1.3 billion recorded in 2007; and (6) a favorable adjustment of $0.9 billion related to the fair value of commodity, foreign exchange and currency derivatives. These decreases were partially offset by: (1) charges related to restructuring and other costs associated with our special attrition programs, certain Canadian facility idlings and finalization of our negotiations with the CAW of $5.8 billion; (2) expenses of $1.2 billion related to the salaried post-65 healthcare settlement; (3) unfavorable commodity derivative fair value adjustments of $0.8 billion; (4) increased Delphi related charges of $0.6 billion related to certain cost subsidies reimbursed during the year; and (5) increased warranty expenses of $0.5 billion.

Selling, General and Administrative Expense

In the year ended 2008 Selling, general and administrative expense decreased by $683 million (or 8.2%) due to: (1) reductions in incentive compensation and profit sharing costs of $398 million; (2) decreased advertising, selling and sales promotion expenses of

 

74


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

$332 million; and (3) decreased administrative expenses of $252 million including the receipt of a $100 million insurance settlement. These decreases were partially offset by $236 million related to the Salaried Window Program and increased bad debt expense of $44 million.

Other Expense

In the year ended 2008 Other expense increased $154 million due to an impairment charge related to goodwill.

Automotive Interest and Other Expense, Net

In the year ended 2008 Automotive interest and other expense, net decreased by $463 million (or 34.9%) primarily due to decreased interest expense of $653 million primarily reflecting lower interest rates. This decrease was partially offset by a decrease in interest income of $226 million driven by lower cash balances.

Equity Income (Loss), Net of Tax

In the year ended 2008 Equity income (loss), net of tax decreased by $223 million due to impairment charges and lower income from our investments in NUMMI and CAMI. Our equity income related to NUMMI decreased $113 million primarily due to an impairment charge of $94 million and decreased income of $43 million primarily due to lower volume and increases in material and freight costs. Our equity income related to CAMI decreased $104 million due to lower income of $79 million related to lower volume and an unfavorable adjustment for a tax claim liability and an impairment charge of $25 million.

The execution of our Viability Plan calls for a reduction in the total number of our powertrain, stamping and assembly plants and the elimination of certain brands and nameplates. As a result of this reduction we expect to accelerate the depreciation on these assets to be utilized over a shorter period of time than their current useful life. Based on the currently anticipated restructuring actions in the Viability Plan, this will result in accelerated depreciation of $0.7 billion in 2009, which previously would have been recognized in future periods.

2007 Compared to 2006

Industry Vehicle Sales

In the year ended 2007 industry vehicle sales in North America decreased by 613,000 vehicles (or 3.0%) due to weakness in the economy resulting from a decline in the housing market and volatile oil prices.

Total Net Sales and Revenue

In the year ended 2007 Total net sales and revenue decreased by $4.2 billion (or 3.6%) due to a decline in volumes, net of favorable mix, of $4.6 billion, which was partially offset by the effect of favorable pricing on vehicles sold of $0.4 billion related to fullsize pick-up trucks launched in 2007. The decrease in volume was driven by a reduction in year end dealer inventories of 160,000 vehicles from 2006 year end levels as a result of lower U.S. industry sales volumes and the effect of our declining market share in the United States and a reduction in daily rental volume of 108,000 vehicles.

Automotive Cost of Sales

In the year ended 2007 Automotive cost of sales decreased by $8.3 billion (or 7.2%) due to restructuring and impairment charges of $0.5 billion in 2007, compared to $6.2 billion in 2006. In 2006, we recorded restructuring charges related to the 2006 UAW Attrition Program which were not incurred in 2007. Also contributing to the decrease in 2007 were: (1) lower production volumes, partially

 

75


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

offset by mix which had a favorable net effect of $3.8 billion; (2) savings on retiree pension/OPEB costs of $1.8 billion, primarily due to the 2005 UAW Health Care Settlement Agreement; and (3) manufacturing savings of $1.0 billion from lower hourly headcount levels driven by the 2006 UAW Attrition Program and productivity improvements.

These cost reductions were partially offset by: (1) additional expense of $1.3 billion due to the accelerated recognition of pension unamortized prior service costs ; (2) material and freight costs of $0.8 billion; (3) engineering costs of $0.6 billion related to increased investment in future products; (4) warranty related costs of $0.5 billion primarily as a result of favorable adjustments to warranty reserves in 2006 which did not occur in 2007; (5) a decrease of $0.5 billion on gains from commodity derivative contracts used to hedge forecasted purchases of raw materials; and (6) increased Foreign Currency Translation losses of $0.3 billion due to the appreciation of the Canadian Dollar against the U.S. Dollar.

Selling, General and Administrative Expense

In the year ended 2007 Selling, general and administrative expense decreased by $0.1 billion (or 1.7%) due to ongoing cost reduction initiatives as well as a reduction in dealerships we own.

Automotive Interest and Other Expense, Net

In the year ended 2007 Automotive interest and other expense, net decreased by $74 million (or 5.3%) primarily due to reductions in debt balances with other segments utilizing certain proceeds from the Allison sale.

Equity Income (Loss), Net of Tax

In the year ended 2007 Equity income (loss), net of tax decreased by $82 million (or 78.8%) due to decreased income from GMNA’s investment in NUMMI as a result of increased project spending and pre-production expenses due to the launch of the Pontiac Vibe and increases in material, freight and labor costs.

Income from Discontinued Operations, Net of Tax

In August 2007, we completed the sale of the commercial and military operations of Allison, resulting in a gain of $4.3 billion. Income and the gain on sale from this business have been reported as discontinued operations for all periods presented.

 

76


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

GM Europe

 

    Years Ended December 31,     2008 vs. 2007 Change   2007 vs. 2006 Change
    2008     2007     2006     Amount     Percentage   Amount     Percentage
    (Dollars in millions)

Total net sales and revenue

  $ 34,388     $ 37,478     $ 33,278     $ (3,090 )   (8.2)%   $ 4,200     12.6%
                                           

Automotive cost of sales

    33,838       35,254       30,868       (1,416 )   (4.0)%     4,386     14.2%

Selling, general and administrative expense

    2,816       2,781       2,600       35     1.3%     181     7.0%

Other expense

    456                   456     n.m.         n.m.
                                           

Operating loss

    (2,722 )     (557 )     (190 )     (2,165 )   n.m.     (367 )   (193.2)%

Automotive interest and other income (expense), net

    (154 )     16       (122 )     (170 )   n.m.     138     113.1%
                                           

Loss from continuing operations before income taxes, equity income and minority interests

    (2,876 )     (541 )     (312 )     (2,335 )   n.m.     (229 )   (73.4)%

Equity income, net of tax

    56       44       36       12     27.3%     8     22.2%

Minority interests, net of tax

    22       (27 )     (21 )     49     181.5%     (6 )   (28.6)%
                                           

Loss from continuing operations before income taxes

  $ (2,798 )   $ (524 )   $ (297 )   $ (2,274 )   n.m.   $ (227 )   (76.4)%
                                           

Automotive cost of sales rate

    98.4%       94.1%       92.8%       4.3 pts.   n.m.     1.3  pts.   n.m.

Net margin from continuing operations before income taxes, equity income and minority interests

    (8.4)%       (1.4)%       (0.9)%       (7.0 ) pts.   n.m.     (0.5 ) pts.   n.m.
    (Volume in thousands)

Production Volume (a)

    1,550       1,828       1,806       (278 )   (15.2)%     22     1.2%

Vehicle Sales (b) (c)

             

Industry — Europe

    21,981       23,136       21,895       (1,156 )   (5.0)%     1,241     5.7%

GM Europe

    2,041       2,183       2,005       (142 )   (6.5)%     178     8.9%

GM market share — Europe

    9.3%       9.4%       9.2%       (0.1 ) pts.   n.m.     0.2  pts.   n.m.

GM market share — Germany

    8.8%       9.5%       10.1%       (0.7 ) pts.   n.m.     (0.6 ) pts.   n.m.

GM market share — United Kingdom

    15.4%       15.2%       14.3%       0.2 pts.   n.m.     0.9  pts.   n.m.

GM market share — Russia

    11.1%       9.6%       6.5%       1.5 pts.   n.m.     3.1  pts.   n.m.

 

n.m. = not meaningful

 

(a) Production volume represents the number of vehicles manufactured by our assembly facilities and also includes vehicles produced by certain joint ventures.

 

(b) Vehicle sales primarily represent sales to the ultimate customer, including unit sales of Chevrolet brand products in the region. The financial results from sales of Chevrolet brand products produced by GM Daewoo are reported as part of GMAP.

 

(c) Vehicle sales data may include rounding differences.

2008 Compared to 2007

Industry Vehicle Sales

In the year ended 2008, industry vehicle sales began to decline in the second quarter followed by a sharp decline in the third and fourth quarters. Industry vehicle sales increased by 232,000 vehicles (or 4.1%) and by 132,000 vehicles (or 2.2%) in the first and second quarters of 2008, respectively. Industry vehicle sales decreased by 356,000 vehicles (or 6.4%) and by 1.2 million vehicles (or

 

77


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

20.2%) in the third and fourth quarters of 2008, respectively. The decline of industry vehicle sales reflects the direct effect of the recession in Western Europe and the indirect effect of the tightening of credit markets, volatile oil prices, slowdown of economic growth and declining consumer confidence around the world. In the short-term, we anticipate quarterly industry vehicle sales to remain below levels reported in the prior 24 months due to the economic factors mentioned above.

In the year ended 2008 industry vehicle sales decreased by 1.2 million vehicles (or 5.0%). The decline in industry vehicle sales primarily resulted from a decrease of 577,000 vehicles (or 29.7%) in Spain; a decrease of 360,000 vehicles (or 13.0%) in Italy; a decrease in the United Kingdom of 314,000 vehicles (or 11.2%), a net decrease in various other markets in Western Europe of 230,000 vehicles (or 2.4%); and a decrease in Turkey of 109,000 vehicles (or 17.2%). These decreases were partially offset by an increase of 343,000 vehicles (or 12.7%) in Russia and an increase of 103,000 vehicles (or 17.3%) in Ukraine.

Total Net Sales and Revenue

The trend in our vehicle sales mirrored that of the industry trend mentioned above. Our vehicle sales increased by 17,000 vehicles (or 3.1%) and by 15,000 vehicles (or 2.6%) in the first and second quarters of 2008, respectively. Our vehicle sales decreased by 65,000 vehicles (or 12.4%) and by 109,000 vehicles (or 20.6%) in the third and fourth quarters of 2008, respectively. The decline with each quarter in our vehicle sales is attributable to the same economic factors affecting the industry mentioned above. We anticipate, in the short-term, our vehicle sales will remain at levels below that of the first three quarters of 2008.

In the year ended 2008 Total net sales and revenue decreased by $3.1 billion (or 8.2%) due to: (1) a decrease of $4.4 billion due to lower wholesale sales volume outside of Russia; (2) a decrease of $0.6 billion for unfavorable vehicle mix; offset by (3) a net favorable effect of $2.0 billion in Foreign Currency Translation, driven mainly by the strengthening of the Euro and Swedish Krona, offset partially by the weakening of the British Pound versus the U.S. Dollar.

In line with the industry trends noted above, GME’s revenue, which excludes sales of Chevrolet brand products, decreased most significantly in Spain, where wholesale volumes decreased by 67,000 vehicles (or 46.9%), followed by the United Kingdom, where wholesale volumes decreased by 43,000 vehicles (or 10.5%), and Italy, where wholesale volumes decreased by 41,000 vehicles (or 21.3%). These decreases were partially offset as wholesale volumes in Russia increased by 22,000 vehicles (or 29.6%).

Automotive Cost of Sales

In the year ended 2008 Automotive cost of sales decreased by $1.4 billion (or 4.0%) due to: (1) a decrease of $3.5 billion related to lower wholesale sales volume; (2) a decrease of $0.3 billion for unfavorable vehicle mix; (3) a decrease of $0.3 billion related to lower manufacturing costs; offset by (4) an unfavorable effect of $2.4 billion in Foreign Currency Translation; and (5) an increase of $0.5 billion related to impairment charges related to special tooling and product related machinery and equipment for the Saab 9-3 and 9-5 product lines.

Selling, General and Administrative Expense

In the year ended 2008 Selling, general and administrative expense increased by $35 million (or 1.3%) due to: (1) an unfavorable effect of $87 million in Foreign Currency Translation; offset by (2) a decrease of $35 million in administrative and other expenses; and (3) a decrease of $17 million in sales and marketing expenses.

Other Expense

In the year ended 2008 Other expense increased by $0.5 billion due to an impairment charge related to goodwill.

Automotive Interest and Other Income (Expense), Net

In the year ended 2008 Automotive interest and other income (expense), net decreased by $170 million primarily as a result of a $115 million favorable settlement of VAT claims with the United Kingdom tax authorities in 2007 and a decrease of $35 million in interest income.

 

78


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Minority Interests, Net of Tax

In the year ended 2008 Minority interests, net of tax increased by $49 million due to declines in profits at our 60% owned Isuzu Motors Polska.

If we are able to implement all aspects our Viability Plan, we would expect to record accelerated depreciation or impairments in 2009 of $0.9 billion, which previously would have been recognized in future periods. Additionally, we have conducted a strategic review of our global Saab business and have offered it for sale. Given the urgency of stemming sizeable outflows associated with Saab operations, Saab filed for reorganization protection under the laws of Sweden on February 20, 2009. We anticipate that we will no longer consolidate Saab beginning in the three months ending March 31, 2009 and anticipate recording a significant loss which could exceed $1.0 billion on de-consolidation.

2007 Compared to 2006

Industry Vehicle Sales

In the year ended 2007 industry vehicle sales increased by 1.2 million vehicles (or 5.7%). The growth in industry vehicle sales primarily resulted from an increase of 674,000 vehicles (or 33.2%) in Russia; increases in various other markets in central and southeastern Europe of 188,000 vehicles (or 9.2%); increases in Italy of 171,000 vehicles (or 6.6%); increases in the Ukraine of 163,000 vehicles (or 37.8%); increases in France of 85,000 vehicles (or 3.4%); increases in Poland of 77,000 vehicles (or 26.2%); and increases in the United Kingdom of 65,000 vehicles (or 2.4%). These increases were partially offset by a decrease of 290,000 vehicles (or 7.7%) in Germany.

Total Net Sales and Revenue

In the year ended 2007 Total net sales and revenue increased by $4.2 billion (or 12.6%) due to: (1) a favorable effect of $2.9 billion in Foreign Currency Translation, driven mainly by the strengthening of the Euro, British Pound and Swedish Krona versus the U.S. Dollar; (2) an increase of $1.6 billion due to higher wholesale sales volume outside of Germany; and (3) an increase of $0.4 billion due to improvements in pricing outside of Germany, primarily on the Opel/Vauxhall Corsa. Offsetting these increases was a decrease of $1.3 billion related to lower wholesale volumes and unfavorable pricing in Germany.

In line with the industry trends noted above, GME’s revenue, which excludes sales of Chevrolet brand products, increased most significantly in Russia, where wholesale volumes increased by 51,000 vehicles (or 215.0%), followed by the United Kingdom, where wholesale volumes increased 35,000 vehicles (or 9.2%). Wholesale volumes in Germany decreased by 68,000 vehicles (or 18.9%).

Automotive Cost of Sales

In the year ended 2007 Automotive cost of sales increased by $4.4 billion (or 14.2%) due to: (1) an unfavorable effect of $2.9 billion as a result of Foreign Currency Translation; (2) an increase of $0.5 billion for unfavorable vehicle and country mix, primarily as a result of higher freight and duties associated with vehicles imported into Russia and from Korea; and (3) an increase of $0.4 billion related to higher wholesale sales volume.

Automotive cost of sales rate deteriorated in 2007 primarily due to the unfavorable effect of vehicle and country mix in Automotive cost of sales, partially offset by the favorable effect of price in Total net sales and revenue.

Selling, General and Administrative Expense

In the year ended 2007 Selling, general and administrative expense increased by $0.2 billion (or 7.0%) primarily due to Foreign Currency Translation.

Automotive Interest and Other Income (Expense), Net

In the year ended 2007 Automotive interest and other income (expense), net increased by $138 million (or 113.1%) primarily as a result of a $115 million favorable settlement of VAT claims with the United Kingdom tax authorities.

 

79


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

GM Latin America/Africa/Mid-East

 

     Years Ended December 31,     2008 vs. 2007 Change   2007 vs. 2006 Change
     2008     2007     2006     Amount     Percentage   Amount     Percentage
     (Dollars in millions)

Total net sales and revenue

   $ 20,260     $ 18,894     $ 14,627     $ 1,366     7.2%   $ 4,267     29.2%
                                            

Automotive cost of sales

     18,143       16,776       13,305       1,367     8.1%     3,471     26.1%

Selling, general and administrative expense

     1,057       1,009       764       48     4.8%     245     32.1%
                                            

Operating income

     1,060       1,109       558       (49 )   (4.4)%     551     98.7%

Automotive interest and other income (expense), net

     246       240       (31 )     6     2.5%     271     n.m.
                                            

Income from continuing operations before income taxes, equity income and minority interests

     1,306       1,349       527       (43 )   (3.2)%     822     156.0%

Equity income, net of tax

     21       31       16       (10 )   (32.3)%     15     93.8%

Minority interests, net of tax

     (32 )     (32 )     (25 )         —%     (7 )   (28.0)%
                                            

Income from continuing operations before income taxes

   $ 1,295     $ 1,348     $ 518     $ (53 )   (3.9)%   $ 830     160.2%
                                            

Automotive cost of sales rate

     89.6%       88.8%       91.0%       0.8  pts.   n.m.     (2.2 ) pts.   n.m.

Net margin from continuing operations before income taxes, equity income and minority interests

     6.4%       7.1%       3.6%       (0.7 ) pts.   n.m.     3.5  pts.   n.m.
     (Volume in thousands)

Production Volume (a)

     961       960       830       1     0.1%     130     15.7%

Vehicle Sales (b) (c)

              

Industry — LAAM

     7,477       7,267       6,269       210     2.9%     998     15.9%

GMLAAM

     1,276       1,236       1,036       40     3.2%     201     19.3%

GM market share — LAAM

     17.1%       17.0%       16.5%       0.1  pts.   n.m.     0.5  pts.   n.m.

GM market share — Brazil

     19.5%       20.3%       21.3%       (0.8 ) pts.   n.m.     (1.0 ) pts.   n.m.

 

n.m. = not meaningful

 

(a) Production volume represents the number of vehicles manufactured by our assembly facilities and also includes vehicles produced by certain joint ventures.

 

(b) Vehicle sales primarily represent sales to the ultimate customer.

 

(c) Vehicle sales data may include rounding differences.

2008 Compared to 2007

Industry Vehicle Sales

In the year ended 2008, industry vehicle sales began to moderate in the third quarter with a sharp decline in the fourth quarter. Industry vehicle sales increased by 199,000 vehicles (or 12.1%), increased by 237,000 vehicles (or 13.5%) and increased by 101,000 vehicles (or 5.3%) in the first, second and third quarters of 2008, respectively. Industry vehicle sales decreased by 328,000 vehicles (or 16.6%) in the fourth quarter of 2008. The decline in vehicle sales, in the second half of 2008, is attributable to the negative global economic effect of the tightening of the credit markets, volatile oil prices, slowdown of economic growth and declining consumer confidence. We expect this trend in the vehicle sales to continue into 2009 due to the economic factors mentioned above.

In the year ended 2008, industry vehicle sales in the LAAM region increased by 210,000 vehicles (or 2.9%) primarily due to increases in Brazil of 358,000 vehicles (or 14.5%), Argentina of 43,000 vehicles (or 7.4%), Peru of 41,000 vehicles (or 81.2%), Egypt

 

80


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

of 35,000 vehicles (or 15.4%), Chile of 28,000 vehicles (or 12.1%), Ecuador of 24,000 vehicles (or 27.7%), and other Northern African units of 17,000 vehicles (or 4.1%), offset by declines in Venezuela of 220,000 vehicles (or 44.7%), and South Africa of 124,000 vehicles (or 20.2%).

Total Net Sales and Revenue

The trend in our vehicle sales was similar to the industry trend as vehicle sales began to moderate in the third quarter and fell sharply during the fourth quarter of 2008. Our vehicle sales increased by 54,000 vehicles (or 19.8%), increased by 52,000 vehicles (or 17.8%) and increased by 9,000 vehicles (or 2.9%) in the first, second and third quarters of 2008, respectively. Our vehicle sales decreased by 75,000 vehicles (or 22.1%) in the fourth quarter of 2008. The decline in our vehicle sales during the second half of 2008 is attributable to the same economic factors mentioned above. We anticipate this trend in our vehicle sales to continue into 2009.

In the year ended 2008 Total net sales and revenue increased by $1.4 billion (or 7.2%) primarily due to: (1) favorable vehicle pricing of $1.0 billion primarily at GM Venezolana driven by high inflation and at GM do Brasil as a result of industry growth and high demand in the first half of 2008; (2) favorable effect of Foreign Currency Translation of $0.5 billion, mainly related to the Brazilian Real; and (3) favorable product mix of $0.5 billion; offset by (4) $0.6 billion in decreased wholesale volumes across GMLAAM business units, including wholesale volume declines at GM Venezolana of 81,000 vehicles, GM Colmotores of 24,000 vehicles and GM South Africa of 14,000 vehicles, partially offset by increased wholesale volumes at GM do Brasil of 33,000 vehicles and GM Ecuador of 13,000 vehicles.

Automotive Cost of Sales

In the year ended 2008 Automotive cost of sales increased by $1.4 billion (or 8.1%) due to: (1) increased content cost of $0.7 billion driven by an increase in imported material costs at GM Venezolana and high inflation across the region primarily at GM Venezolana, GM Argentina and GM South Africa; (2) unfavorable Foreign Currency Translation of $0.5 billion; (3) unfavorable product mix of $0.3 billion; and (4) foreign exchange transaction losses on purchases of Treasury bills in the region of $0.2 billion; offset by (5) decreased volume in the region of $0.5 billion.

Automotive cost of sales rate deteriorated due to increased volumes in lower margin business units.

Selling, General and Administrative Expense

In the year ended 2008 Selling, general and administrative expense increased by $48 million (or 4.8%) due to high inflation primarily at GM Venezolana and GM Argentina of $31 million and unfavorable Foreign Currency Translation effects of $16 million.

Automotive Interest and Other Income (Expense), Net

In the year ended 2008 Automotive interest and other income (expense), net increased by $6 million (or 2.5%) due to: (1) higher cash balances resulting in an increase in net interest income of $48 million primarily at GM do Brasil of $37 million; and (2) favorable Foreign Currency Translation effect of $13 million; offset by (3) less favorable adjustments as compared to 2007 of $55 million relating to tax contingencies recorded by GM do Brasil.

2007 Compared to 2006

Industry Vehicle Sales

In the year ended 2007 industry vehicle sales in the LAAM region increased by 1.0 million vehicles (or 15.9%) due to strong growth throughout the region. This included increases in Brazil of 535,000 vehicles (or 27.7%), Venezuela of 149,000 vehicles (or 43.3%), Argentina of 119,000 vehicles (or 26.3%), Egypt of 70,000 vehicles (or 44.9%), Colombia of 60,000 vehicles (or 31.1%), and Israel of 44,000 vehicles (or 28.7%). These increases were partially offset as industry vehicle sales in South Africa decreased by 34,000 vehicles (or 5.2%).

 

81


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

Total Net Sales and Revenue

In the year ended 2007 Total net sales and revenue increased by $4.3 billion (or 29.2%) due to: (1) $2.9 billion in higher wholesale volumes across most GMLAAM business units, including increases at GM do Brasil of 67,000 vehicles, GM Venezolana of 63,000 vehicles and GM Argentina of 63,000 vehicles, which more than offset a small decrease at GM Ecuador of 6,000 vehicles; (2) favorable effect of Foreign Currency Translation of $0.7 billion, primarily related to the Brazilian Real and Colombian Peso; (3) favorable vehicle pricing of $0.5 billion; and (4) favorable vehicle mix of $0.2 billion.

Automotive Cost of Sales

In the year ended 2007 Automotive cost of sales increased by $3.5 billion (or 26.1%) due to: (1) increased volume in the region of $2.3 billion; (2) unfavorable Foreign Currency Translation of $0.7 billion; (3) higher content cost of $0.3 billion; and (4) unfavorable product mix of $0.1 billion.

Automotive cost of sales rate improved due to higher pricing and favorable product mix.

Selling, General and Administrative Expense

In the year ended 2007 Selling, general and administrative expense increased by $245 million (or 32.1%) due to: (1) increased administrative, marketing and other expenses of $105 million throughout the region in support of the higher volume levels; (2) a $66 million charge recorded at GM do Brasil for additional retirement benefits under a government sponsored pension plan; (3) unfavorable Foreign Currency Translation effects of $40 million and; (4) an increase in the cost of these expenses compared to 2006 of $29 million.

Automotive Interest and Other Income (Expense), Net

In the year ended 2007 Automotive interest and other income (expense), net improved by $271 million due to: (1) a gain of $194 million as a result of GM do Brasil’s favorable resolution of prior tax cases; (2) reversals of previously established tax accruals of $81 million in 2007 associated with duties, federal excise tax and related matters that were no longer required; and (3) income of $25 million at GM South Africa relating to increased export incentives due to increases in volume of exports. These increases were partially offset by: (1) a $64 million charge related to previously recorded tax credits at GM do Brasil; and (2) $56 million of settlement and fines related to information submitted to the Brazil tax authorities for material included in consignment contracts at one of our facilities.

 

82


GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

GM Asia Pacific

 

    Years Ended December 31,     2008 vs. 2007 Change   2007 vs. 2006 Change
    2008     2007     2006     Amount     Percentage   Amount     Percentage
    (Dollars in millions)

Total net sales and revenue

  $ 17,828     $ 20,317     $ 15,004     $ (2,489 )   (12.3)%   $ 5,313     35.4%
                                           

Automotive cost of sales

    17,334       18,318       13,654       (984 )   (5.4)%     4,664     34.2%

Selling, general and administrative expense

    1,623       1,473       1,145       150     10.2%     328     28.6%
                                           

Operating income (loss)

    (1,129 )     526       205       (1,655 )