UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549-1004

 

Form 10-K

 

 

GENERAL MOTORS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

Registrant’s telephone number, including area code

(313) 556-5000

 

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

 

 

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

 

 

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 o

 

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 o 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 o

 

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 o

 

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 o Non-accelerated filer o Smaller reporting company o

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 o No þ

 

As of June 30, 2007, the aggregate market value of GM $1 2/3 par value common stock held by nonaffiliates of GM was approximately $21.4 billion. The closing price on June 30, 2007 as reported on the New York Stock Exchange was $37.80 per share.

 

As of February 25, 2008, the number of shares outstanding of GM $1 2/3 par value common stock was 566,059,249 shares.

 

Documents incorporated by reference are as follows:

 

 

 

GENERAL MOTORS CORPORATION

 

INDEX

 

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.”

 

 

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 regions: GM North America (GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM) and GM Asia Pacific (GMAP). Also, our finance and insurance operations are primarily conducted through GMAC LLC, the successor to General Motors Acceptance Corporation (GMAC LLC and General Motors Acceptance Corporation are referred to in this Annual Report on Form 10-K as GMAC). 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 (GMAC Transaction). Since the GMAC Transaction, we have accounted for our 49% ownership interest in GMAC using 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.

 

Our total worldwide car and truck deliveries were 9.4 million, 9.1 million and 9.2 million, in 2007, 2006 and 2005, 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:

 

 

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

 

 

As of December 31, 2007, we also had equity ownership stakes directly or indirectly through various regional subsidiaries, including GM Daewoo Auto & Technology Company (GM Daewoo), New United Motor Manufacturing, Inc. (NUMMI), Shanghai General Motors Co., Ltd. (Shanghai GM), SAIC-GM-Wuling Automobile Company Ltd. (SGMW) and CAMI Automotive Inc. These companies design, manufacture and market vehicles under the following brands:

 

 

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.

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

In addition to the information about us and our subsidiaries contained in this Annual Report on Form 10-K for the year ended December 31, 2007, extensive information about us can be found on our website located at www.gm.com, including information about our management team, our brands and products and our corporate governance principles.

 

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

 

 

Vehicle Unit Sales

 

Total industry sales of new motor vehicle units of domestic and foreign makes and our competitive position in 2007, 2006 and 2005 were as follows:

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

Fleet Sales and Deliveries

 

The sales and market share data provided above includes both retail and fleet vehicle unit sales. Our fleet sales are comprised of vehicle unit sales to daily rental car companies, as well as leasing companies and commercial fleet and government customers. Certain fleet transactions, particularly daily rental, are less profitable than average retail sales. In addition, in some sales to daily rental fleets we guarantee to repurchase the vehicles at contractually agreed upon values.

 

The table below reflects our fleet unit sales and the amount of those unit sales as a percentage of our total vehicle unit sales for the last three years.

 

 

Product Pricing

 

Historically, we have used a number of methods to promote our products, including the use of dealer, retail and fleet incentives such as rebates, finance incentives 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.

 

Since early 2006, we have executed a strategy, particularly in the United States, that combines an emphasis on value pricing (including reduced prices on most 2006 model year vehicles), enhanced vehicle content and improved powertrain warranties and the selective use of financial incentives. Additionally, as part of this strategy, in 2007 we sold almost 184,000 fewer vehicles to daily rental companies than in 2005 in the U.S., while steadily improving our profit margin on those sales. During 2008, we will continue to price vehicles competitively, including offering strategic and tactical incentives as required. We believe this strategy builds the reputation of our products and brands and enhances residual value for our products, while supporting improved pricing per transaction.

 

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 during the third quarter due to annual product changeovers and the fact that annual plant shutdowns are planned during this time to facilitate other plant 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.

 

The market for vehicles is cyclical and depends on general economic conditions and consumer spending. If general economic conditions deteriorate, consumers may defer purchasing or leasing new vehicles or opt for used vehicles, which would decrease the total number of new cars and light trucks sold. Fluctuations in the price of fuel also affect consumer preferences and spending.

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

Relationship with Dealers

 

Globally we market our vehicles through a network of independent retail dealers and distributors. At December 31, 2007, there were 6,776 GM vehicle dealers in the United States, 729 in Canada and 330 in Mexico. Additionally, there were a total of 14,052 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.

 

Authorized dealers operated the following number of GM dealerships:

 

 

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. GM dealers often offer more than one GM brand of vehicle in 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. GM 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, GM dealers generally provide their customers access to credit or lease financing, vehicle insurance and extended service contracts provided by GMAC or its subsidiaries.

 

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 2007, we incurred $8.1 billion in costs 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 $6.6 billion and $6.7 billion for similar company-sponsored research and other product development activities in 2006 and 2005, respectively.

 

 Research

 

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. In addition to continuing to improve the efficiency of our internal combustion engines, we are focused on introducing propulsion technologies that use alternative fuels as we intensify our efforts to offer consumer products powered by alternatives to traditional petroleum-based fuels. At the same time, we continue to pursue leadership in strategic technology such as active fuel management, variable valve timing, six-speed transmissions, advanced diesel engines, electronics and controls, battery technology, advanced materials, hydrogen fuel cell technology and hybrid and electrically-driven vehicles in order to improve the environmental performance of our vehicles, diversify energy sources for vehicles and provide fuel economy and efficiency around the world.

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

We introduced four hybrids in 2007, the Saturn Aura Green Line, Chevrolet Malibu Hybrid, Chevrolet Tahoe and GMC Yukon Hybrids. We have announced plans for additional hybrid vehicles that will debut in the next few years. These vehicles will be equipped with one of two different hybrid systems designed to meet different American driving patterns and needs. 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.

 

Following a November 2006 meeting with President George Bush, we along with DaimlerChrysler AG (now Chrysler LLC) and Ford Motor Company (Ford), announced that the three of us intend to make at least half of the vehicles we produce capable of operating on biofuels by 2012, as part of an overall national energy strategy. Biofuels, like ethanol, are renewable fuels that are manufactured from biomass substances such as corn, sugar cane, soy bean and timber. We recently entered into an agreement with Coskata on cellulosic ethanol development and production. Coskata’s process maximizes ethanol production from a variety of feedstocks. We are partnering with governmental agencies, fuel providers and fuel retailers across the United States to help promote availability and distribution of E85 ethanol, an alternative fuel used in flex fuel vehicles that is a combination of 15% unleaded gasoline and 85% ethanol, including supporting an infrastructure of fueling stations.

 

Our research into flexible fuels is demonstrated in vehicles produced around the world. In Brazil, substantially all of our domestic fleet is available with our “FlexPower” and “Econo Flex” flexible-fuel engines, which accept a variety of fuels and accounted for more than 96% of the vehicles sold domestically by GM do Brasil in 2007. 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 is the best-selling FlexFuel vehicle in Europe.

 

In addition, 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. In the fall of 2007, we began placing 100 Chevrolet Equinox Fuel Cell prototype vehicles with 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.

 

We have also announced that we have begun production engineering of the Saturn VUE plug-in hybrid vehicle and the Chevrolet Volt Extended-Range Electric Vehicle (E-REV). The Volt is the first vehicle to be built using our E-Flex family of electrically driven propulsion systems. Production engineering has started on a fuel cell variant of the E-Flex system. Advanced lithium-ion battery technology is the key enabling technology for the Volt E-REV and the Saturn VUE plug-in hybrid but is not yet commercially viable. During 2007, we signed contracts with a number of supplier groups to develop advanced lithium-ion battery technology for both vehicles.

 

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 certified biodiesel blends of up to 5% (B5) in our 2008 Duramax engine that we sell in the U.S., 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. We also developed a Special Equipment Option on the 6.6-liter Duramax for a 20% biodiesel blend (B20). The Special Equipment Option is available on certain configurations of the GMC Savana and Chevy Express Vans and the Chevy Silverado and GMC Sierra Heavy-Duty One-Ton Pickups.

 

Other examples of our technology leadership include telematics, stability control and other safety systems. Our OnStar in-vehicle security, communications and diagnostic system is the automotive industry’s leading telematics provider, available on more than 50 GM vehicles. The third generation of our StabiliTrak electronic stability control system 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.

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

See Environmental and Regulatory Matters below 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, during 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 our GMAP and GMLAAM regions.

 

In this integrated 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 capabilities and resources.

 

Under our global vehicle architecture strategy, future vehicles are developed by a network of global and regional development teams. We generally define architecture to include 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, in general, most of the non-visible parts of the vehicle, for example, steering, suspension, brake system, HVAC system and electrical system. These global teams work very closely with regional development teams, who are responsible for components that are unique to each brand, such as fascias and interior design, tuning of the vehicle to meet the brand character requirements and final validation to meet applicable government requirements.

 

We have eight different global architectures that are currently managed by global leadership teams in global engineering centers. Some vehicle architectures are focused on a single region or a limited number of regions, and we generally locate those global engineering centers in the most relevant regions.

 

The eight global architectures are:

 

 

We believe that this integrated global product development process will result in better cars and trucks across all of our markets and brands, developed faster and at a lower cost.

 

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 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. We attempt to manage our commodity price risk by using derivatives to economically hedge a portion of raw material purchases.

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

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 Corporation (Delphi), to supply us with parts and supplies could adversely affect us because our production capacity would be impacted without those parts and supplies. In 1999, we spun-off Delphi as a separate, U.S. publicly traded corporation; 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.

 

Competitive Position

 

The global automotive industry is growing, especially in emerging markets such as China and India, and highly competitive. 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 global market share was 13.3% for 2007, 13.5% for 2006 and 14.1% for 2005. Market leadership in individual countries in which we compete varies widely and we do not lead in every country.

 

We have had the largest market share in our largest market, the United States, for 77 years. The table below sets forth the respective U.S. market shares for 2007 and 2006 for us and our principal competitors in passenger cars and trucks in the United States:

 

 

Environmental and Regulatory Matters

 

 Automotive Emissions Control

 

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 U.S. Environmental Protection Agency (EPA) before we can sell vehicles in the United States and from the California Air Resources Board (CARB) before we can sell vehicles in California and other states that have adopted the California emissions requirements.

 

The EPA and the CARB both 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 during 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.

 

Both the EPA and the CARB emission requirements will become even more stringent in the future. In addition, in 2002 California passed legislation regulating the emissions of greenhouse gases. Since we believe this regulation is effectively a form of fuel economy requirement, it is discussed below under Automotive Fuel Economy. A new tier of exhaust emission standards for cars and light-duty trucks, the Low-Emission Vehicles II standards, began phasing in for vehicles in states that have California requirements in the 2004 model year. Similar federal Tier 2 standards began phasing in during 2004. In addition, both the CARB and the EPA have adopted more stringent standards applicable to heavy-duty trucks.

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

California law requires that a specified percentage of cars and certain light-duty trucks sold in the state must be zero emission vehicles (ZEVs), such as electric vehicles or hydrogen fuel cell vehicles. This requirement started at 10% in model year 2005 and increases 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.

 

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. Seven states, New York, Massachusetts, Maine, Vermont, Connecticut, Pennsylvania and Rhode Island, have these standards in effect now. New Jersey, Oregon and Washington have adopted the California standards effective beginning in the 2009 model year, and Maryland and New Mexico have adopted the California standards effective beginning in the 2011 model year. Additional states could also adopt the California standards in the future.

 

In addition to the exhaust emission programs described above, advanced onboard diagnostic (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.

 

New evaporative emission control requirements for cars and trucks began phasing in with the 1995 model year in California and the 1996 model year federally. Systems are being further modified to accommodate onboard refueling vapor recovery (ORVR) control standards. ORVR 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 have become more stringent, and we have implemented changes to comply with these more stringent requirements.

 

We are subject to similar laws and regulations, including vehicle exhaust emission standards, vehicle evaporative emission standards and OBD requirements, in other regions and countries throughout the world in which we sell cars and trucks. Two different regulatory regimes apply in Europe: the European Union (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 United Nations Economic Commission for Europe — Working Party 29 (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 environmentally friendly 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 during 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 (Euro 5), will apply from September 2009, while Euro 6 standards (Euro 6) are expected to apply from 2014. The OBD requirements associated with these new standards will become more challenging as well. The new European emission standards focus particularly on reducing emissions from diesels. 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.

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

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.

 

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 and evaporative emissions follow the EU. South Korea is transitioning to California style exhaust emission standards and considering adopting other aspects of the California emission program. In South Korea, OBD is required and evaporative emissions follow the EPA standard. China is implementing European standards, with Euro 4 first applying in Beijing starting January 1, 2008, then in other major cities such as Shanghai and Guangzhou by 2009, and then rolling out nationwide as the required fuel becomes available. China plans to adopt Euro 5 standards after 2010. 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.

 

Within Latin America, Africa and the Mid-East regions, some countries follow the U.S. test procedure and some follow the EU test procedure, with different levels of requirements.

 

 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 or remediation 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. Such statutes require that responsible parties fund remediation actions regardless of fault, legality of original disposal or ownership of a disposal site.

 

The future impact 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. Management expects 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, aggregated $104 million and $107 million in 2007 and 2006, respectively. It is possible that such remediation actions could require average annual expenditures in the range of $80 million to $110 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 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.

 

We pay annual Title V Operating Permit emission inventory fees of $1.3 million. We have costs of on-going source emission testing ranging from $.4 million to $2.5 million per year. We anticipate a similar range of costs in 2008 to comply with the Clean Air Act Amendments under the Title V Renewable Operating Permit Program. Additionally, we incurred costs of $38.1 million between 2005 and 2007 to comply with the Maximum Achievable Control Technology (MACT) Standards for Hazardous Air Pollutants under the Clean Air Act. Cost to comply with MACT standards for 2008 are estimated to be $2.7 million. We also expend over $5 million per year to comply with all regulatory reporting requirements, and we spend $1.5 million annually specifically for air quality reporting.

 

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 2006 target of an 8% reduction in carbon dioxide (CO₂) emissions from our worldwide facilities compared to 2005 emission levels. By 2006, we had reduced CO₂ emissions from our worldwide facilities by 22% compared to 2000 levels. Several of our facilities are included in 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, and the Department of Energy 1605(b) program since the inception of the

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

programs. 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. 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.

 

 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 2007 model year domestic passenger car fleet achieved a Corporate Average Fuel Economy (CAFE) of 29.9 miles per gallon (mpg), which exceeded the requirement of 27.5 mpg. The estimated CAFE for our 2008 model year domestic passenger cars is projected to be 29.2 mpg, which would also exceed the applicable requirement.

 

For our imported passenger cars, the 2007 model year CAFE was 31.9 mpg, which exceeded the requirement of 27.5 mpg. The CAFE estimate for 2008 model year GM imported passenger cars is 30.7 mpg, which would also exceed the applicable requirement.

 

Fuel economy standards for light-duty trucks became effective in 1979. Our light-duty truck CAFE for the 2007 model year was 22.6 mpg, which exceeds the requirement of 22.2 mpg. The National Highway Traffic Safety Administration (NHTSA) adopted new fuel economy standards for trucks beginning with 2008 models. These new rules include substantial changes to the structure of the truck CAFE program, including reformed standards based upon truck size. In November 2007, the U.S. Court of Appeals for the 9th Circuit ruled that the new truck rules were deficient and remanded the rules to the NHTSA. However, due to statutory timing constraints, the standards are effectively locked in for 2008, 2009 and 2010. The 2011 standards are expected to be reconsidered due to federal legislation and subsequent regulation. Under the existing truck rules, reformed standards are optional for 2008-2010. We plan to comply with these optional reform-based standards for 2008. Our reform standard for light-duty trucks for the 2008 model year is 21.9 mpg and our projected performance to this standard is 22.8 mpg. The rule sets the traditional (unreformed) truck CAFE standard at 22.5 mpg for 2008, 23.1 mpg for 2009 and 23.5 mpg for 2010.

 

As a result of the adoption of the Energy Independence and Security Act of 2007 (EISA) in 2007, the NHTSA is expected to finalize new CAFE requirements beginning with the 2011 model year. The CAFE provisions in the energy legislation include instructions to the NHTSA to set stepped fuel economy standards separately for cars and trucks beginning in the 2011 model year which would increase to 35 mpg by 2020 on a combined car and truck fleet basis. These levels will effectively require a 40% increase in fuel economy by 2020. Complying with these 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.

 

In addition, in 2002 California passed legislation known as Assembly Bill 1493 (AB 1493) requiring the CARB to regulate greenhouse gas emissions from new motor vehicles sold in the state beginning in the 2009 model year. Since CO₂ is the primary greenhouse gas emitted by automobiles, CO₂ emissions are directly proportional to the amount of fuel consumed by motor vehicles, and as a result, CO₂ emissions per mile are inextricably linked to fuel consumption per mile. We believe that AB 1493 by attempting to regulate CO₂ emissions per mile, is taking action tantamount to establishing state level fuel economy standards, which is prohibited by

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the U.S. federal fuel economy law. Nonetheless, the CARB promulgated rules under AB 1493 (AB 1493 Rules) establishing standards that effectively require about a 40% increase in new vehicle fuel economy for passenger cars by 2016. We have challenged these standards in court along with the Alliance of Automobile Manufacturers, Chrysler Corporation (Chrysler) and several dealers. Rulings adverse to the industry’s position were handed down in U.S. District Courts in Burlington, Vermont and Fresno, California. An appeal has been filed in the Vermont decision. The AB 1493 Rules cannot be enforced in any state unless the EPA grants a waiver of federal preemption. On December 19, 2007, the EPA denied California’s request for a waiver of the AB 1493 Rules.

 

Since the CARB has characterized the AB 1493 Rules as an “emission” regulation, other states have adopted the California CO₂ requirements pursuant to claimed authority under the U.S. Clean Air Act. As of December 2007, the following states have adopted the AB 1493 Rules imposing CO₂ requirements on new motor vehicles: 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.

 

We do not believe that it is technically possible to comply with the requirements of the AB 1493 Rules, given our current product portfolio and the extent of the technical improvements that we believe are possible in the near future. If the EPA grants a waiver of federal preemption of the AB 1493 Rules, and the lawsuits do not provide relief, we could be forced to cease selling certain vehicles in those states where the AB 1493 Rules are in effect. Depending upon how widely the AB 1493 Rules are applied, we might curtail production of certain popular and profitable vehicles that do not comply with the AB 1493 Rules.

 

In Europe, the EU has issued a regulatory proposal to regulate CO₂ emissions/fuel consumption by 2012. It will require manufacturers to meet an average CO₂ emission target depending on the average weight of its fleet. According to the current regulatory proposal, we will be required to reduce the average CO₂ emissions of our fleet by 20%. We do not expect the regulation to be finalized before 2009, so that we will know the terms of the final regulation only three years before we must begin to comply. We are developing a compliance plan by adopting operational CO₂ targets for each market entry in Europe.

 

In addition, the political discussion on CO₂ regulation in Europe is complicated by national initiatives to introduce CO₂ based taxation programs. Financial budgets are within the sovereignty of the EU Member States and therefore tax laws are different in all EU Member States. We are faced with significant challenges relative to the predictability of future tax laws and the introduction of thresholds that in some case are modified annually.

 

 Potential Impact 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 2008 models in the United States includes 15 models that get an EPA estimated 30 miles per gallon or better on the highway, more than any other vehicle manufacturer. 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 described above under Research, Development and Intellectual Property, we have established aggressive near-, mid- 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 and six-speed automatic transmissions. In addition, we currently provide hybrid-electric buses that are capable of improving the fuel efficiency of city buses by up to 50% and reducing some emissions by as much as 90%. In 2007, we launched the Saturn Aura Green Line and introduced the Chevrolet Malibu Hybrid, and will launch the Chevrolet Tahoe and GMC Yukon Hybrids in 2008. The Chevrolet Tahoe and GMC Yukon represent hybrids in the large sport utility vehicle market. In 2006, we launched the Saturn VUE Green Line with a GM hybrid system. By the end of 2008 we plan to offer eight different hybrid models. In addition, for the 2008 model year we offer 12 flex-fuel capable models that can run on E85 ethanol, gasoline or a combination of the two fuels. In Europe, Saab offers the 9-5 BioPower FlexFuel model and plans to extend its BioPower model offerings, and Opel sells several models that operate on compressed natural gas. We are also committed to biodiesel, through our 2008 Duramax engine sold in the U.S. Our diesel powertrains in Europe are approved for B5 biodiesel blends. In 2007, we demonstrated our commitment to electrically driven vehicles powered by fuel cells by launching “Project Driveway” which will place 100 fuel cell

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prototype vehicles with customers. We have extensive efforts underway to develop production fuel cell vehicles designed to run on hydrogen and emit only water. We believe that the development and global implementation of new, cost-effective energy technologies in all sectors, such as hydrogen fuel cells, 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/CO₂ requirements in major markets such as the United States, Europe and China 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 U.S. 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 impacts on our operations, including plant closings, reduced employment and loss of sales 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 (the Act) 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 Act 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 (ERISA) and the Pension Protection Act of 2006 (PPA), which govern the manner in which we administer our pensions for our retired employees and their spouses. The PPA is designed, among other things, to more appropriately reflect the value of pension assets and liabilities to determine funding requirements. Our U.S. hourly and salaried pension plans are overfunded under current rules and also under the PPA guidelines, many of which are not yet in effect. Given the amount of surplus and the investment strategy for the pension assets, we expect to maintain a surplus without making additional contributions to our U.S. hourly and salaried pension plans for the foreseeable future, assuming there are no material changes in present market conditions. 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 (OEC) 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 OEC 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.

 

 Significant Transactions

 

In August 2007, we completed the sale of the commercial and military operations of Allison. 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

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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, formerly a division of our Powertrain Operations, 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, 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, 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 3 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 LLC (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 a number of agreements with GMAC governing aspects of our relationship in the future, including agreements related to consumer and dealer financing by GMAC for the purchase and lease of our products in the United States (GMAC Services Agreement). Under the GMAC Services Agreement, GMAC will continue to finance a broad spectrum of consumer credits, consistent with current and historical practice, and will receive a negotiated return. GMAC will also continue to provide full consideration to consumer credit applications received from GM-franchised dealers and purchase consumer financing contracts from GM dealers in accordance with GMAC’s usual standards for creditworthiness, consistent with current and historical practice.

 

The GMAC Services Agreement also provides that, subject to certain conditions and limitations, we will offer vehicle financing and leasing incentives to U.S. customers, except for Saturn-brand products, exclusively through GMAC. We have 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 has agreed to certain targets, and if it does not meet these targets, we could impose certain fees and other monetary consequences or even revoke GMAC’s exclusivity in whole or in part. As long as GMAC’s exclusivity remains in effect, GMAC will pay us $105 million annually.

 

The GMAC Services Agreement also provides that we will make certain upfront residual support payments to GMAC with respect to leased vehicles and vehicles sold pursuant to balloon retail installment sale contracts to increase the vehicle’s contract residual value above certain thresholds set by an independently published guide.

 

We have entered into agreements with GMAC giving GMAC the right to use the GM name on certain insurance products. In exchange, GMAC will pay us a minimum guaranteed royalty fee of $15 million annually.

 

For further information about the business relationship between us and GMAC, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Factors Affecting Future and Current Results — GMAC — Sale of 51% Controlling Interest” and Note 1, Note 3 and Note 27 to the consolidated financial statements.

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Employees

 

As of December 31, 2007, we employed 266,000 employees, of whom 190,000 (71%) were hourly employees and 76,000 (29%) were salaried employees. The following represents our employment by region at December 31:

 

 

 

Approximately 78,000 of our U.S. employees (71%) were represented by unions at December 31, 2007. The International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) represents the largest portion of our U.S. employees who are union members, representing 75,000 employees. In addition, many of our hourly employees outside the United States are represented by various unions. As of December 31, 2007, we had 365,000 U.S. hourly retirees and 114,000 U.S. salaried retirees. In 2007 we entered into a new collective bargaining agreement with the UAW (2007 National Agreement), which includes among other terms a two-tiered wage structure, with lower wages and benefits for employees newly hired into certain non-core jobs. The 2007 National Agreement included the Memorandum of Understanding — Post-Retirement Medical Care (Retiree MOU) under which we agreed to fund a new independent Voluntary Employee Beneficiary Association Trust (New VEBA) that will be operated by the UAW and responsible for establishing and funding a new benefit plan that will permanently assume certain healthcare obligations for UAW retirees and others. On February 21, 2008, the UAW and the class representatives in the class action relating to the Retiree MOU filed on September 26, 2007 by the UAW and putative class representatives entered into a settlement agreement (Settlement Agreement) with us. If the Settlement Agreement is approved by the court hearing this class action, it will effect the transactions contemplated by the Retiree MOU.

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 Executive Officers of the Registrant

 

The names and ages, as of January 1, 2008, of our executive officers and their positions and offices with GM are as follows:

 

 

There are no family relationships, as defined in Item 401 of Regulation S-K, between any of the officers named above, and there is no arrangement or understanding between any of the officers named above and any other person pursuant to which he or she was selected as an officer. Each of the officers named above was elected by the Board of Directors or a committee of the Board to hold office until the next annual election of officers and until his or her successor is elected and qualified or until his or her earlier resignation or removal. The Board of Directors elects the officers immediately following each annual meeting of the stockholders and may appoint other officers between annual meetings.

 

G. Richard Wagoner, Jr. has been associated with General Motors since 1977. In October 1998, he was elected a director and President and Chief Operating Officer of General Motors. On June 1, 2000, Mr. Wagoner was named Chief Executive Officer and became Chairman of the Board of Directors on May 1, 2003. He is currently a director of GMAC.

 

Frederick A. Henderson became Vice Chairman and Chief Financial Officer for General Motors on January 1, 2006. Prior to his promotion, Mr. Henderson was a GM Group Vice President and Chairman of GME. Mr. Henderson has been associated with General Motors since 1984. He was named GM Group Vice President and President of GMAP effective January 1, 2002. Effective June 1, 2004, he was appointed Group Vice President and Chairman of GME. He is currently a director of GMAC.

 

Robert A. Lutz was named Vice Chairman, Product Development of General Motors, effective September 1, 2001. He was named Chairman of GMNA on November 13, 2001, and served in that capacity until April 4, 2005, when he assumed responsibility for Global Product Development. He also served as president of GME on an interim basis from March to June 2004.

 

Bo I. Andersson began his career with GM in 1987. He was appointed GM Vice President, Worldwide Purchasing, Production Control and Logistics on December 1, 2001 and GM Vice President, Global Purchasing and Supply Chain on March 1, 2005. He was appointed Group Vice President, Global Purchasing and Supply Chain on April 1, 2007.

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Kathleen S. Barclay has been associated with General Motors since 1985 and has been Vice President in charge of Global Human Resources since 1998.

 

Walter G. Borst has been associated with General Motors since 1980. He was named Treasurer in February 2003. Prior to that, Mr. Borst was Executive Director of Finance and Chief Financial Officer for our German subsidiary, Adam Opel AG, since October 2000. He is currently a director of GMAC.

 

Lawrence D. Burns has been associated with General Motors since 1969 and has been Vice President of Research and Development and Strategic Planning since 1998.

 

Troy A. Clarke joined General Motors in 1973. He was appointed Group Vice President and President, GMNA in July 2006. He was named Group Vice President and Executive Vice President, GMAP on February 4, 2004, and President of GMAP, effective June 1, 2004. Mr. Clarke was named GM Group Vice President of Manufacturing and Labor Relations in June 2002, and had been Vice President of Labor Relations since January 2001.

 

Gary L. Cowger was appointed Group Vice President, Global Manufacturing and Labor Relations in April 2005 and had previously been GM Group Vice President and President, GMNA since November 13, 2001. He has been associated with General Motors since 1965. Mr. Cowger became Group Vice President in charge of GM Manufacturing and Labor Relations on January 1, 2001.

 

Nicholas S. Cyprus joined General Motors as Controller and Chief Accounting Officer in December 2006. Mr. Cyprus was Senior Vice President, Controller and Chief Accounting Officer for the Interpublic Group of Companies from May 2004 to March 2006. Prior to that, he was Vice President, Controller and Chief Accounting Officer from 1999 to 2004 at AT&T Corporation.

 

Carl-Peter Forster has been GM Vice President and President, GME since June 2004 and was appointed GM Group Vice President and President, GME effective January 1, 2006. He has been Chairman of the Opel Supervisory Board since June 2004 and Chairman of Saab since April 2005. Mr. Forster was Chairman and Managing Director of Adam Opel AG from April 2001, and before that date he was responsible for vehicle development projects for BMW AG.

 

Steven J. Harris was elected General Motors Vice President, Global Communications February 1, 2006, when he returned to GM from retirement. He previously served as Vice President of GM Communications from 1999 until his retirement on January 1, 2004.

 

Maureen Kempston-Darkes has been associated with General Motors since 1975. She was named GM Group Vice President and President, GMLAAM effective January 1, 2002. She was president and general manager of GM Canada and Vice President of General Motors Corporation, from 1994 to 2001. She is a member of the Board of Directors of Thomson Corporation and the Canadian National Railway.

 

Robert S. Osborne joined General Motors as Group Vice President and General Counsel in September 2006. Prior to joining GM, he had been a senior partner in the law firm of Jenner & Block since 2002. He is also responsible for the Office of the Secretary and the Office of Export Compliance and is chair of our Senior Management Compliance Committee.

 

David N. Reilly was appointed Group Vice President and President, GMAP in July 2006 and had previously been President and Chief Executive Officer of GM Daewoo after leading GM’s transition team in the formation of GM Daewoo beginning in January 2002. Mr. Reilly joined General Motors in 1975 and served as Vice President — GM Europe for Sales, Marketing, and Aftersales beginning in 2001.

 

In December 2006, Mr. Reilly was charged with regard to certain alleged violations of South Korean labor laws. The criminal charges are based on the alleged illegal engagement of certain workers employed by an outsourcing agency in production activities at GM Daewoo, in which we own a majority interest. The charges were filed against Mr. Reilly in his capacity as the most senior GM executive in South Korea and the company’s Representative Director, who under South Korean law is the most senior member of management of a stock corporation, and is the person typically named as the individual respondent or defendant in any legal action brought against such

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company. These charges constitute a criminal offense under the laws of South Korea but would not constitute a criminal offense in the United States. Mr. Reilly has filed a formal request for trial to defend against the charges.

 

Thomas G. Stephens is the Group Vice President responsible for GM Global Powertrain and Global Quality. He joined General Motors in 1969 and was named Group Vice President for GM Powertrain in 2001. On January 2, 2007, Mr. Stephens was appointed global process leader for quality in addition to his Global Powertrain responsibilities.

 

Ralph J. Szygenda was named Group Vice President and Chief Information Officer on January 7, 2000. Mr. Szygenda is a member of the Board of Directors of the Handleman Company. He has been associated with GM since 1996.

 

Ray G. Young was appointed Group Vice President, Finance, on November 1, 2007. He joined General Motors at our Canadian headquarters in Oshawa, Ontario in 1986. In his previous post, Mr. Young was President and Managing Director of GM do Brasil and Mercosur Operations, beginning in January 2004, and prior to that served as chief financial officer of GMNA.

 

Segment Reporting Data

 

Operating segment and principal geographic area data for 2007, 2006 and 2005 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 U.S. Securities and Exchange Commission (SEC).

 

In addition to the information about us and our subsidiaries contained in this Annual Report on Form 10-K for the year ended December 31, 2007, extensive information about the Corporation can be found on our website, including information about our management team, our brands and products and our corporate governance principles.

 

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.

 

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 our business, results of operations and financial condition.

 

Risks related to us and our automotive business

 

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 impact 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. We anticipate that the number and extent of these regulations, and the costs 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,

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vehicle safety and fuel economy. These government regulatory requirements complicate our plans for global product development and may result in substantial costs, which can be difficult to pass through to our customers.

 

The CAFE requirements mandated by the U.S. government pose special concerns. In December 2007, the United States enacted the EISA, a new energy bill that 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 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.

 

In addition, a growing number of states are adopting regulations that establish CO₂ emission standards that effectively impose similarly increased fuel economy standards for new vehicles sold in those states. 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 automotive industry has filed legal challenges to these state standards in California, Vermont and Rhode Island. On September 12, 2007, the U.S. District Court for the District of Vermont rejected the industry’s position that such state regulation of CO₂ emissions is preempted by federal fuel economy and air pollution laws. While the plaintiffs including us have appealed this decision, there can be no assurance that the Court of Appeals will reverse the lower court’s order.

 

On December 12, 2007, the U.S. District Court for the Eastern District of California ruled against the federal preemption arguments made by the automotive industry but did not lift its order enjoining California from enforcing the AB 1493 Rules in the absence of an EPA waiver. A response to the ruling is under consideration. A related challenge in California state court 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 challenge under U.S. law to New Mexico’s adoption of the standards. There can be no assurance that these legal challenges to the AB 1493 Rules will succeed.

 

Shortages and increases in the price of fuel can result in diminished profitability due to shifts in consumer vehicle demand.

 

Continued high gasoline prices in 2007 contributed to weaker demand for some of our higher margin vehicles, especially our fullsize sport utility vehicles, as consumer demand shifted to smaller, more fuel-efficient vehicles, which provide lower profit margins and in recent years represent 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% of our North American sales in 2007, compared to a total industry average of 14% of sales. Demand for traditional sport utility vehicles and vans also declined in 2007. Any future increases in the price of gasoline in the United States or in our other markets or any sustained shortage of fuel could further weaken the demand for such vehicles, which could lower 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 turnaround 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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 postretirement health care and life insurance benefits (OPEB), depend more on external factors, and there can be no assurance that such external factors will not adversely affect our ability to reduce our structural costs.

 

Delphi may not be able to obtain sufficient financing to finalize its Plan of Reorganization for approval by the Bankruptcy Court.

 

In January 2008, the U.S. Bankruptcy Court entered an order confirming Delphi’s filed plan of reorganization (Delphi POR) and related agreements including a master restructuring agreement, as amended (MRA) and a global settlement agreement, as amended (GSA) with us. Delphi is pursuing exit financing in support of the Delphi POR, which may be particularly difficult in light of the

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weakness and decline in capacity in the credit markets. If Delphi cannot secure the financing it needs, the Delphi POR would not be consummated on the terms negotiated with us and with other interested parties. We believe that Delphi would likely seek alternative arrangements, but there can be no assurance that Delphi would be successful in obtaining any alternative arrangements. The resulting uncertainty could disrupt our ability to plan future production and realize our cost reduction goals, and could result in our providing additional financial support to Delphi, receiving less than the distributions that we expect from the resolution of Delphi’s bankruptcy proceedings or assuming some of Delphi’s obligations to its workforce and retirees.

 

Financial difficulties, labor stoppages or work slowdowns at key suppliers 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. Financial difficulties or solvency problems at these or other suppliers could materially adversely affect their ability to supply us with the systems, components and parts that we need, which could disrupt our operations including production of certain of our higher margin vehicles. Similarly, a substantial portion of many of these suppliers’ workforces are represented by labor unions. Workforce disputes that result in work stoppages or slowdowns at these suppliers could also have a material adverse effect on their ability to continue meeting our needs.

 

Economic and industry conditions constantly change, and the anticipated near-term negative economic outlook in the United States and elsewhere will create challenges for us that could have a material adverse effect on our business and results of operations.

 

Our business and results of operations are tied to general economic and industry conditions. The number of cars and trucks sold industry-wide varies from year to year, and sales in the United States declined in 2007 from 2006. Overall vehicle sales, including demand for our vehicles, depend largely on general economic conditions, including the strength of the global and local economies, unemployment levels, consumer confidence levels, the availability of credit and the availability and cost of fuel. Cars and trucks are durable items, and consumers can choose to defer their acquisition or replacement. Difficult economic conditions may also cause consumers to shift to new models that are less expensive and yield lower margins, or to used vehicles. The significant decline in the housing market and the related weakness in the availability and affordability of consumer credit during 2007 affected customers’ ability to purchase new vehicles. The decline in housing construction further reduced demand for our vehicles, particularly fullsize pickups, which are among our most popular and profitable models. We believe that the slowdown in the housing market and the constriction of consumer credit are likely to continue into 2008. Moreover, leading economic indicators such as employment levels and income growth predict a downward trend in the United States economy during 2008, and some commentators have predicted a recession. Reflecting these factors, the overall market for new vehicle sales in the United States is expected to decline in 2008, possibly significantly. As a result, we have reduced our projected vehicle production in North America for the first quarter of 2008. If U.S. vehicle sales do not met our expectations, we may choose to reduce our production further. We anticipate that this will have a negative impact on our revenues and profits, at least early in 2008.

 

These trends can have a material adverse effect on our business. Because our business is characterized by relatively high fixed costs and high unit contribution margins, relatively small changes in the number of vehicles sold can have a significant effect on our business regardless of marketing measures such as price adjustments. Consequently, if declines in industry demand continue to decrease our business, results of operations and financial condition may be materially adversely affected. There can be no assurance that current levels of vehicle sales by the industry or us will continue.

 

We operate in a highly competitive industry that has excess manufacturing capacity.

 

The automotive industry is highly competitive, and despite historically high global demand overall, manufacturing capacity in the automotive industry exceeds demand. We expect 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 like China and India. 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. Our competitors may respond to these relatively high fixed costs 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. Manufacturers in lower cost countries such as China and India have

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announced their intention of exporting their products to established markets as a bargain alternative to entry-level automobiles. These actions have had, and are expected to continue to have, a significant negative impact 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.

 

Our long term growth and success is dependent upon our ability to grow and operate profitably in emerging markets.

 

We are committed to an aggressive global growth strategy focusing on emerging markets such as China, India and the Southeast Asia region (ASEAN), as well as Russia, Brazil, the Middle East and the Andean region, where in recent years we have experienced significant growth in revenue and profits. In recent years our market share in more mature markets such as North America and Western Europe has been flat or declining. Our long-term growth and success depends on our ability to develop market share and operate profitably in these key emerging markets. In many cases, these countries have a more volatile political and economic landscape, greater vulnerability to infrastructure disruptions from natural causes or terrorism and/or a less robust legal, accounting or regulatory environment. At the same time, these emerging markets are becoming more competitive as other international automobile companies enter these markets and local low cost producers expand their capacities. We are taking steps to integrate our operations around the world and manage our business increasingly on a global basis. If due to greater competition or negative economic conditions, we are unable to profitably operate in these key emerging markets, our long-term growth and success may be materially adversely affected.

 

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 joint ventures 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 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 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 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 that 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 impact our net revenues and profits.

 

A decline in consumer demand for our higher margin vehicles could result in diminished profitability.

 

Our results of operations depend not only on the number of vehicles we sell, but also the product mix of our vehicle sales. For example, in the United States sales of luxury and fullsize vehicles are generally more profitable for us than sales of our smaller and lower-priced vehicles. Our sales tend to be concentrated in a relatively small number of models. If customer preferences shift to product segments in which our competitors offer strong portfolios, our sales could be disproportionately affected. Moreover, shifts in demand away from higher margin sales could materially adversely affect our business.

 

The pace of introduction and market acceptance of new vehicles is important to our success.

 

Customers have come to expect new and improved vehicle models to be introduced frequently. In order to meet these expectations, we must introduce on a regular basis new vehicle models as well as enhanced versions of existing vehicle models. Our competitors have

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introduced, and likely will continue to introduce, new and improved vehicle models designed to meet consumer expectations. Because product lifecycles do not all coincide, some competitors’ vehicles are newer than some of our existing models in the same market segments. This puts pricing and vehicle enhancement pressure on our vehicles and, in some vehicle segments, results in market share declines. In addition, consumer preferences for vehicles in certain market segments change over time. Vehicles in less popular segments may have to be discounted in order to be sold in similar volumes. 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. Our profit margins, sales volumes and market shares may decrease if we are unable to produce models that compare favorably to competing models, particularly in our higher margin vehicle lines such as fullsize pick-up trucks and sport utility vehicles. In 2008 and 2009 we expect to introduce fewer new models than in 2007 and to focus instead on variations on recently launched models, which may not attract the same degree of consumer attention or premium pricing.

 

Our significant investment in new technology may not result in successful vehicle applications.

 

We intend to invest up to $9 billion per year in the next few years to support our products and to develop new technology. In some cases, such as hydrogen fuel cells, the technologies 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 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.

 

We have agreed to fund a trust pursuant to the Settlement Agreement that will require us to contribute significant assets in a relatively short time period.

 

If the arrangements contemplated by the Settlement Agreement are approved and implemented, we will be required to contribute more than $25 billion in assets to the New VEBA in a relatively short time period, plus $5.6 billion immediately or in payments through 2020 and up to 19 annual payments of $165 million as necessary to support the New VEBA’s future solvency. There can be no assurance that we will be able to obtain all of the necessary funding that has not been set aside in existing VEBA trusts on terms that will be acceptable. If we are unable to obtain funding on terms that are consistent with our business plans, we may have to delay or reduce other planned expenditures.

 

If we are not be able to implement the terms of the Settlement Agreement, including the terms of the New VEBA, our extensive OPEB obligations will remain a competitive disadvantage to us.

 

We are relying on the implementation of the Settlement Agreement to make a significant reduction in our OPEB liability. Under certain circumstances, however, it may not be possible to implement the Settlement Agreement. The implementation of the Settlement Agreement is contingent on our securing satisfactory accounting treatment for our obligations to the covered group for retiree medical benefits, which we plan to discuss with the staff of the SEC. If, based on those discussions, we believe that the accounting may be some treatment other than settlement or a substantive negative plan amendment that would be reasonably satisfactory to us, we will attempt to restructure the Settlement Agreement with the UAW to obtain such accounting treatment, but if we cannot accomplish such a restructuring the Settlement Agreement will terminate. Moreover, there can be no assurance that the terms of the Settlement Agreement will not be changed through negotiations with the UAW or UAW retiree class counsel in order to secure court approval or that the Settlement Agreement will be approved by the court.

 

Our OPEB obligations for employees and retirees are $60 billion at December 31, 2007, and could grow even larger on a global basis. In recent years, we have paid our OPEB obligations from operating cash flow, which reduces our liquidity and cash flow from operations. Our U.S. healthcare cash spending was $4.6 billion in 2007 (before the effect of amounts incurred or paid on certain benefit guarantees related to Delphi and contributions to a VEBA Trust for paying healthcare costs established in 2005 (Mitigation VEBA). Failure to adequately control our healthcare costs is likely to result in materially higher expenses and have a material adverse effect on our results of operations and financial condition. This is a competitive disadvantage to us since we have a greater number of retirees for whom we have OPEB obligations than our competitors. Trend rates for healthcare costs are expected to continue to increase, due to a number of factors

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not within our control, such as an aging population, greater ability to manage serious chronic illness at an increasingly high cost and new procedures and technologies to prevent illness and disease that extend life expectancies.

 

Even if we are able to successfully implement the terms of the Settlement Agreement by establishing and making the required contributions to the New VEBA, the earliest we will be able to benefit from associated cash savings would be 2010.

 

Because the arrangements contemplated by the Settlement Agreement require court approval, we will not be able to implement the Settlement Agreement until at least 2010, and implementation may be delayed further or even denied by the court. Until the Settlement Agreement is implemented we will continue to incur substantial costs for OPEB obligations related to retired UAW employees, and delays in implementation or changes in the terms could adversely affect the benefits that we anticipate receiving from the Settlement Agreement.

 

Our pension and OPEB expenses are affected by factors outside our control, including the performance of plan assets, interest rates, actuarial data and experience and changes in laws and regulations.

 

Our future funding obligations for our U.S. defined benefit pension plans qualified with the Internal Revenue Service and our estimated liability related to OPEB plans depend upon changes in healthcare inflation trend rates, the level of benefits provided for by the plans, the future performance of assets set aside in trusts for these plans, the level of interest rates used to determine funding levels, actuarial data and experience and any changes in government laws and regulations. In addition, our employee benefit plans hold a significant amount of equity securities. If the market values of these securities decline, our pension and OPEB expenses would 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. We may be legally required to make contributions to our U.S. pension plans in the future, and those contributions could be material. 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.

 

Our extensive pension obligations to retirees are a competitive disadvantage for us.

 

We believe that we are competitively disadvantaged because we provide pension benefits to more than 400,000 retirees and surviving spouses in the United States. As a result, we believe our pension payments as a percentage of revenues are significantly greater than our competitors, particularly those operating outside the United States. In addition to our large number of U.S. retirees, we have mature manufacturing operations in Canada and Western Europe including Germany and the United Kingdom, and as result have pension and similar obligations to significant numbers of current retirees and employees who will retire in the near future. Although our U.S. pension plans are now fully funded, certain of our pension plans outside the United States are partially or fully unfunded. As a result of funding our worldwide pension obligations, we have relatively less available cash to invest in product development and capital projects than some of our competitors.

 

We could be materially adversely affected by changes or imbalances in 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. Specifically, the weakness of the Japanese Yen 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 impacted our business. For example, the relative strength of the currencies of Western Europe, where we manufacture vehicles, compared to the currencies of Eastern Europe, where we import vehicles made in Western Europe, has had an adverse effect on our results of operations in Europe. Similarly, parts or products manufactured in Canada and sold in the United States no longer enjoy the advantage of a Canadian Dollar that is substantially weaker than the U.S. Dollar. In addition, in preparing our 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 exchange rate at the balance sheet date. As a result, currency fluctuations and the associated currency translations could have a material adverse effect on our results of operation.

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Our liquidity position could be negatively affected by a variety of factors, which in turn could have a material adverse effect on our business.

 

Our ability to meet our capital requirements over the long-term (as opposed to the short and medium-term) will require substantial liquidity and will depend on the continued successful execution of our turnaround plan to return our North American operations to profitability and positive cash flow. We are subject to numerous risks and uncertainties that could negatively affect our cash flow and liquidity position in the future. These include, among other things, the high capital costs relating to new technology research and implementation, the effects of proposed and new legislation regarding increased fuel economy requirements and greenhouse gas emissions and pressure from suppliers to agree to changed payment or other contract terms. The occurrence of one or more of these events could weaken our liquidity position and materially adversely affect our business, for example by curtailing our ability to make important capital expenditures. The current weakness of the credit markets and the general economic downturn could have a significant negative effect on our ability to borrow funds to meet our anticipated cash needs.

 

Further reduction of our credit ratings, or failure to restore our credit ratings to higher levels, could have a material adverse effect on our business.

 

Our credit ratings have been downgraded to historically low levels. Our unsecured debt is currently assigned a non-investment grade rating by each of the four nationally recognized statistical rating organizations. The decline in our credit ratings reflects the agencies’ concerns over our competitive and financial strength. Our current credit ratings have substantially reduced our access to the unsecured debt markets and have unfavorably impacted our overall cost of borrowing. Certain of the financing arrangements we entered into in 2007 included collateral.

 

Further downgrades of our current credit ratings or significant worsening of our financial condition could also result in increased demands by our suppliers for accelerated payment terms or other more onerous supply terms.

 

The U.S. federal government is currently investigating certain of our accounting practices. The final outcome of these investigations could require us to restate prior financial results or result in other adverse consequences.

 

We have received subpoenas from the SEC in connection with some of its investigations related to various matters including our financial reporting concerning pension and OPEB, certain transactions between us and Delphi, supplier price reductions or credits, any obligation we may have to fund pension and OPEB costs in connection with Delphi’s Chapter 11 proceedings and certain transactions in precious metal raw materials used in our automotive manufacturing operations. The SEC is also investigating our accounting for certain foreign exchange derivative transactions and commodities contracts under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” We have produced documents and provided testimony in response to the subpoenas and we are continuing to cooperate in connection with all these investigations. A negative outcome of one or more of these investigations could require us to restate prior financial results and could result in fines, penalties or other remedies being imposed on us, which under certain circumstances could have a material adverse effect on our business.

 

We have determined that our internal controls over financial reporting are currently not effective. The lack of effective internal controls could 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 chief financial officer, conducted an evaluation of the effectiveness of the design and operation of our internal controls. As of December 31, 2007, 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 weaknesses in our internal control over financial reporting, they may adversely impact our ability to report accurately our financial condition and results of operations in the future in a timely manner.

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Our indebtedness and other obligations of our automotive operations are significant and could have a material adverse effect on our business.

 

We have a significant amount of indebtedness. As of December 31, 2007, we had $39.4 billion in loans payable and long-term debt outstanding for our automotive operations, in addition to funding requirements of more than $30 billion under the Settlement Agreement. Our significant indebtedness may have several important consequences. For example, it could:

 

 

Any one or more of these consequences could have a material adverse effect on our business.

 

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

 

Approximately 59% of our automotive unit sales in 2007 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 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 and tax laws and planning. 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 impact 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.

 

We are subject to significant risks of litigation.

 

We are currently subject to numerous matters in litigation, including a number of stockholder and bondholder class actions and derivative lawsuits. We cannot provide assurance that we will be successful in defending any of these matters, and adverse judgments could materially adversely affect our business or financial condition. We are also routinely named a defendant in purported class actions alleging a variety of vehicle defects, in product liability cases seeking damages for personal injury and in suits alleging our responsibility for claims of asbestos related illnesses. Some of these matters are described in greater detail in our Legal Proceedings section below. Since the outcomes of such pending or future litigation are not predictable, we cannot provide assurance that such litigation will not materially adversely affect our business, results of operations or cash flows.

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Risks related to our 49% ownership interest in GMAC

 

General business, economic and market conditions as well as continuing weakness in the residential mortgage market may significantly affect the operating results of GMAC’s business and earnings and may require us to record an impairment of our equity investment in GMAC.

 

In recent years, GMAC contributed consistently and substantially to our revenues and profits. Following the GMAC Transaction in November 2006, we hold a 49% ownership interest in GMAC, which is accounted for in our consolidated financial statements using the equity method. GMAC’s business and earnings are sensitive to general business and economic conditions in the United States. These conditions include short-term and long-term interest rates, inflation, fluctuations in both debt and equity capital markets and the strength of the U.S. economy, as well as the local economies in which they conduct business. If any of these conditions worsens, GMAC’s business and earnings could be adversely affected and significantly affect our equity investment. For example, a rising interest rate environment could decrease the demand for loans or business, and economic conditions that negatively impact household incomes could decrease the demand for loans and increase the number of customers who become delinquent or default on their loans. GMAC’s portfolio of loans held for investment grew in 2007, which increases the risk to GMAC of borrower defaults. At December 31, 2007 we had an equity investment of $8.1 billion in GMAC based on our Common Membership Interests and Preferred Membership Interests. We are required by generally accepted accounting principles to review the carrying value of our assets periodically, including our equity investments. If economic conditions decline in 2008 and GMAC’s earnings continue to be negatively affected, we may be required to record an impairment of our equity investment in GMAC.

 

A significant proportion of GMAC’s revenues and profits in recent years came from originating, servicing and securitizing residential mortgages, including subprime loans. In 2007 the real estate market in the United States declined significantly, with falling residential sales, decreased housing construction and rising rates of defaults and foreclosures. GMAC’s revenues and profits have been adversely affected by this decline, particularly at its residential mortgage subsidiary Residential Capital LLC (ResCap). GMAC had a net loss of $2.3 billion in 2007, compared to net income of $2.1 billion in 2006. ResCap’s 2006 net income of $705 million decreased in 2007 to a net loss of $4.3 billion, and in the third quarter of 2007, GMAC recognized an impairment loss of $455 million. Our consolidated financial results have been adversely affected by this decline in GMAC’s revenues and profits. Moreover, GMAC may request GM and its other equity holder to provide financial support for its operations and strategic planning during this period of stress. While we do not have any legal obligation to provide additional capital to GMAC, we may determine that such an investment is necessary or advisable to maintain the value of our current interest in GMAC. For example, effective November 1, 2007, we converted 533,236 shares of Preferred Membership Interests in GMAC into Common Membership Interests, in the interest of strengthening GMAC’s capital position.

 

If GMAC’s equity capital decreases, it may not be able to pay dividends or may pay partial dividends on the Preferred Membership Interests that we hold.

 

GMAC’s Operating Agreement provides that the Preferred Membership Interests are entitled to receive a quarterly distribution equal to 10% per annum of the related capital account. GMAC’s Board of Managers, and under certain circumstances the Independent Managers, may reduce this distribution, however, to the extent necessary to maintain the contractually required level of minimum book equity. GMAC’s revenues and profits declined significantly during 2007, and we believe that the weakness in its Mortgage business unit is likely to continue for the foreseeable future. If GMAC’s financial results continue to be significantly adversely affected by challenges in the mortgage market, GMAC’s equity capital may decrease to the point that its Board of Managers or its Independent Managers determine that distributions on the Preferred Membership Interests should be reduced or cancelled. Since distributions on the Preferred Membership Interests are not cumulative under the Operating Agreement, such a reduction in distributions would not be reimbursed if and when GMAC’s financial results improve. Moreover, we have not received dividends on our Common Membership Interests in GMAC.

 

GMAC’s automotive finance business is critical to our operations and provides financing support to a significant share of our global sales; if GMAC is unable to provide financial support in its current form our business will be materially adversely affected.

 

GMAC’s automotive finance business for North American Operations and International Operations supports a significant share of our global sales through lending, leasing and financing arrangements with dealers and retail and fleet customers. If GMAC is unable to provide this financial support to our dealers and customers at the current level we may need to seek a replacement issuer or originator for

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our automotive financing operations. This process would be complicated by the existing contractual arrangements that GM and GMAC entered into in connection with the GMAC Transaction, such as the exclusive use of GMAC to provide leasing and financing incentives to U.S. customers (other than Saturn buyers). We may not be able to find a replacement in a timely and cost efficient manner and the ensuing interruption to our sales process could materially affect our business.

 

Rating agencies have recently downgraded their ratings for GMAC and ResCap, and there could be further downgrades in the future. Future downgrades would further adversely affect GMAC’s ability to raise capital in the debt markets at attractive rates and increase the interest that GMAC pays on new borrowings, which could have a material adverse effect on GMAC’s results of operations and financial condition.

 

Each of Standard & Poor’s Rating Services; Moody’s Investors Service, Inc.; Fitch, Inc.; and Dominion Bond Rating Service rate GMAC’s debt. There have been a series of recent negative credit rating actions, and all of these agencies currently maintain a negative outlook with respect to GMAC’s ratings. Ratings reflect the rating agencies’ opinions of GMAC’s financial strength, operating performance, strategic position, and ability to meet its obligations. 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.

 

Future 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 GMAC’s 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 impact elements of certain existing secured borrowing arrangements.

 

GMAC’s business requires substantial capital, and if GMAC is unable to maintain adequate financing sources, GMAC’s profitability and financial condition will suffer and jeopardize GMAC’s ability to continue operations.

 

GMAC’s liquidity and ongoing profitability are, in large part, dependent upon GMAC’s timely access to capital and the costs associated with raising funds in different segments of the capital markets. Currently, GMAC’s primary sources of financing include public and private securitizations and whole-loan sales. To a lesser extent, GMAC also uses institutional unsecured term debt, commercial paper, and retail debt offerings. Reliance on any one source can change going forward.

 

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. Negative credit events specific to us or GMAC or other events affecting the overall debt markets have adversely impacted GMAC’s funding sources, and continued or additional negative events could further adversely impact GMAC’s funding sources, especially over the long term. As an example, an insolvency event for us would curtail GMAC’s ability to utilize certain of GMAC’s automotive wholesale loan securitization structures as a source of funding in the future. Furthermore, ResCap’s access to capital can be impacted by changes in the market value of its mortgage products and the willingness of market participants to provide liquidity for such products.

 

ResCap’s liquidity may also be adversely affected by margin calls under certain of its secured credit facilities that are dependent in part on the lenders’ valuation of the collateral securing the 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.

 

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 will continue to be negatively impacted by margin calls and changes to advance rates on its secured facilities. One consequence of this funding reduction is

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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 impact ResCap’s business. In addition, a number of ResCap’s financing facilities have relatively short terms, typically one year or less, and a number of facilities are scheduled to mature during 2008. Though ResCap has generally been able to renew maturing facilities when needed to fund its operations, in recent months counterparties have often negotiated more conservative terms. Such terms have included, among other things, shorter maturities upon renewal, lower overall borrowing limits, lower ratios of funding to collateral value for secured facilities, and higher borrowing costs. If ResCap is unable to maintain adequate financing or if other sources of capital are not available, it could be forced to suspend, curtail, or reduce certain aspects of its operations, which could harm ResCap’s revenues, profitability, financial condition, and business prospects.

 

Furthermore, GMAC utilizes asset and mortgage securitizations and sales as a critical component of its diversified funding strategy. Several factors could affect GMAC’s ability to complete securitizations and sales, including conditions in the securities markets generally, conditions in the asset- or mortgage-backed securities markets, the credit quality and performance of GMAC’s contracts and loans, GMAC’s ability to service its contracts and loans, and a decline in the ratings given to securities previously issued in GMAC’s securitizations. Any of these factors could negatively affect GMAC’s ability to fund in these markets and the pricing of GMAC’s securitizations and sales, resulting in lower proceeds from these activities.

 

Recent developments in the residential mortgage market may continue to adversely affect GMAC’s revenues, profitability, and financial condition.

 

Recently, the residential mortgage markets in the United States and Europe have experienced a variety of difficulties and changed economic conditions that adversely affected GMAC’s earnings and financial condition in the fourth quarter of 2006 and through 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 and the United Kingdom 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 declines may continue. Similar trends are emerging beyond the nonprime sector, especially at the lower end of the prime credit quality scale, and may have a similar effect on ResCap’s related liquidity needs and businesses in the United States and Europe. These trends have resulted in significant write-downs to ResCap’s mortgage loans held for sale portfolio and additions to allowance for loan losses for its mortgage loans held for investment and warehouse lending receivables portfolios. A continuation of these trends may continue to adversely affect our financial condition and results of operations.

 

Another factor that may result in higher delinquency rates on mortgage loans held for sale and investment and on mortgage loans that underlie interests from securitizations is the scheduled increase in monthly payments on adjustable rate mortgage loans. Borrowers with adjustable rate mortgage loans are being exposed to increased monthly payments when the related mortgage interest rate adjusts upward under the terms of the mortgage loan from the initial fixed rate or a low introductory rate, as applicable, to the rate computed in accordance with the applicable index and margin. This increase in borrowers’ monthly payments, together with any increase in prevailing market interest rates, may result in significantly increased monthly payments for borrowers with adjustable rate mortgage loans.

 

Borrowers seeking to avoid these increased monthly payments by refinancing their mortgage loans may no longer be able to find available replacement loans at comparably low interest rates. A decline in housing prices may also leave borrowers with insufficient equity in their homes to permit them to refinance. In addition, these mortgage loans may have prepayment premiums that inhibit refinancing. Furthermore, borrowers who intend to sell their homes on or before the expiration of the fixed-rate periods on their mortgage loans may find that they cannot sell their properties for an amount equal to or greater than the unpaid principal balance of their loans. These events, alone or in combination, may contribute to higher delinquency rates.

 

Certain government regulators have observed these issues involving nonprime mortgages and have indicated an intention to review the mortgage loan programs. To the extent that regulators restrict the volume, terms and/or type of nonprime mortgage loans, the liquidity of GMAC’s nonprime mortgage loan production and GMAC’s profitability from nonprime mortgage loans could be negatively impacted. Such activity could also negatively impact GMAC’s warehouse lending volumes and profitability. The events surrounding the nonprime

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segment have forced certain originators to exit the market. Such activities may limit the volume of nonprime mortgage loans available for GMAC to acquire and/or GMAC’s warehouse lending volumes, which could negatively impact GMAC’s profitability.

 

These events, alone or in combination, may contribute to higher delinquency rates, reduce origination volumes or reduce warehouse lending volumes at ResCap. These events could adversely affect GMAC’s revenues, profitability and financial condition.

 

Recent negative developments in the secondary mortgage markets have led credit rating agencies to make requirements for rating mortgage securities more stringent, and market participants are still evaluating the impact.

 

The credit rating agencies that rate most classes of ResCap’s mortgage securitization transactions establish criteria for both security terms and the underlying mortgage loans. Recent deterioration in the residential mortgage market in the United States and internationally, especially in the nonprime sector, has led the rating agencies to increase their required credit enhancement for certain loan features and security structures. These changes, and any similar changes in the future, may reduce the volume of securitizable loans ResCap is able to produce in a competitive market. Similarly, increased credit enhancement to support ratings on new securities may reduce the profitability of ResCap’s mortgage securitization operations and, accordingly, its overall profitability and financial condition.

 

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

 

GMAC has a significant amount of indebtedness. As of December 31, 2007, GMAC had approximately $193 billion in principal amount of indebtedness outstanding. Interest expense on GMAC’s indebtedness constitutes approximately 70% of its total financing revenues. In addition, under the terms of GMAC’s 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.

 

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

 

GMAC’s profitability is directly affected by changes in interest rates. The following are some of the risks GMAC faces relating to an increase in interest rates:

 

 

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 it to write down the value of its retained interests. Moreover, if prepayments are greater than expected, the cash GMAC receives over the life of its mortgage loans held for investment, and its 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.

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

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 its 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 impact of changes in interest rates or prepayment speeds, GMAC may experience volatility in its earnings that could adversely affect its profitability and financial condition.

 

In addition, hedge accounting in accordance with SFAS 133 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. On GMAC’s 2006 Annual Report on 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.

 

GMAC’s residential mortgage subsidiary’s ability to pay dividends to GMAC is restricted by contractual arrangements.

 

On June 24, 2005, GMAC entered into an operating agreement with ResCap, the holding company for GMAC’s residential mortgage business, and us to create separation between ResCap on one hand and GMAC and us on the other hand. 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 the previous sentence, 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 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, 2007, ResCap had consolidated total equity of approximately $6.0 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 GMAC’s 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 GMAC’s allowance for credit losses, in determining lease residual values and in determining GMAC’s 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 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 its 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

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material difference between GMAC’s estimates and assumptions and its actual experience may adversely affect its cash flow, profitability, financial condition and business prospects.

 

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

 

GMAC conducts a significant portion of its business outside the United States. GMAC intends to continue to pursue growth opportunities for its businesses outside the United States, which could expose it to greater risks. The risks associated with GMAC’s operations outside the United States include:

 

 

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 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 impact on GMAC’s earnings from international operations. While GMAC carefully watches and attempts to manage GMAC’s exposure to fluctuation in currency exchange rates, these types of changes can have material adverse effects on GMAC’s 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 it 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 caused by higher energy prices and the continued deterioration of the housing market could exert pressure on our 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 impacts 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.

 

General business and economic conditions of the industries and geographic areas in which GMAC operates affect its revenues, profitability and financial condition.

 

GMAC’s revenues, profitability and financial condition 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

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unemployment rates, increased consumer and commercial bankruptcy filings or other factors that negatively impact household incomes could decrease demand for GMAC’s financing and mortgage products and increase delinquency and loss. In addition, because GMAC’s credit exposures are generally collateralized, the severity of its losses is particularly sensitive to a decline in used vehicle and residential home prices.

 

Some further examples of these risks include the following:

 

 

GMAC’s profitability and financial condition may be materially adversely affected by decreases in the residual value of off-lease vehicles.

 

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, 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. 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 impacts 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 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 have a negative impact on its profitability and financial condition.

 

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 significantly differ from the reported market value that could negatively affect GMAC’s revenues. 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.

 

Changes in existing U.S. government-sponsored mortgage programs, or disruptions in the secondary markets in the United States or in other countries in which GMAC’s mortgage subsidiaries operate, could adversely affect the profitability and financial condition of GMAC’s mortgage business.

 

The ability of ResCap to generate revenue through mortgage loan sales to institutional investors in the United States depends to a significant degree on programs administered by government-sponsored enterprises such as Fannie Mae, Freddie Mac, Ginnie Mae and others that facilitate the issuance of mortgage-backed securities in the secondary market. These government-sponsored enterprises play a powerful role in the residential mortgage industry, and GMAC’s mortgage subsidiaries have significant business relationships with them. Proposals are being considered in Congress and by various regulatory authorities that would affect the manner in which these government-sponsored enterprises conduct their business, including proposals to establish a new independent agency to regulate the

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government-sponsored enterprises, to require them to register their stock with the SEC, to reduce or limit certain business benefits they receive from the U.S. government and to limit the size of the mortgage loan portfolios they may hold. Any discontinuation of, or significant reduction in, the operation of these government-sponsored enterprises could adversely affect GMAC’s revenues and profitability. Also, any significant adverse change in the level of activity in the secondary market, including declines in institutional investors’ desire to invest in GMAC’s mortgage products, could adversely affect GMAC’s business.

 

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 customary 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, leases or loans and may be required to provide indemnification if it 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 customary 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 it 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, GMAC may not be able to enforce the remedies GMAC 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 servicers in securitizations and whole-loan sales. If a servicer breaches a representation, warranty or servicing covenant with respect to an automotive receivable or mortgage loan, the servicer 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 GMAC’s mortgage subsidiaries. For the year ended December 31, 2007, GMAC’s consolidated mortgage servicing fee income was approximately $2.2 billion.

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

 

GMAC’s U.S. 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 its insurance operations are subject to various 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.

 

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 its business, financial condition or results of operations.

 

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 GMAC’s competitors have lower cost structures or 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. 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 securitizations and whole-loan sales at attractive rates. The result would be lower proceeds from these activities and lower profits for GMAC.

 

Certain of GMAC’s owners are subject to a regulatory agreement that may affect GMAC’s control of GMAC Bank.

 

On February 1, 2007, Cerberus FIM, LLC, Cerberus FIM Investors LLC and FIM Holdings LLC (collectively, “FIM Entities”), submitted a letter to the Federal Deposit Insurance Corporation (FDIC) requesting that the FDIC waive certain of the requirements contained in a two year disposition agreement between each of the FIM Entities and the FDIC. The agreement was entered into in connection with the GMAC Transaction. The GMAC Transaction resulted in a change of control of GMAC Bank, an industrial loan corporation, which required the approval of the FDIC. At the time of the sale, the FDIC had imposed a moratorium on the approval of any

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applications for deposit insurance or change of control notices. As a condition to granting the application in connection with the change of control of GMAC Bank during the moratorium, the FDIC required each of the FIM Entities to enter into a two-year disposition agreement. As previously disclosed by the FDIC, that agreement requires, among other things, that by no later than November 30, 2008, the FIM Entities complete one of the following actions: (1) become registered with the appropriate federal banking agency as a depository institution holding company pursuant to the Bank Holding Company Act or the Home Owners’ Loan Act, (2) divest control of GMAC Bank to one or more persons or entities other than prohibited transferees, (3) terminate GMAC Bank’s status as an FDIC-insured depository institution or (4) obtain from the FDIC a waiver of the requirements set forth in this sentence on the grounds that applicable law and FDIC policy permit similarly situated companies to acquire control of FDIC-insured industrial banks; provided that no waiver request could be filed prior to January 31, 2008, unless, prior to that date, Congress enacted legislation permitting, or the FDIC by regulation or order authorizes, similarly situated companies to acquire control of FDIC-insured industrial banks after January 31, 2007. GMAC cannot give any assurance that the FDIC will approve the FIM Entities’ waiver request, or if it is approved, that it will impose no conditions on GMAC’s retention of GMAC Bank or on its operations. If the FDIC does not approve the waiver or if certain pending legislation is not approved, GMAC could be required to sell GMAC Bank or cause it to cease to be insured by the FDIC, or GMAC could be subject to conditions on GMAC’s retention of the bank or on its operations in return for the waiver. Requiring GMAC to dispose of GMAC Bank or relinquish deposit insurance would, and the imposition of such conditions might, materially adversely affect GMAC’s access to low cost liquidity and GMAC’s business and operating results.

 

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We have received comments regarding our 2007 third quarter Form 10-Q and our 2006 Form 10-K from the Staff of the Securities and Exchange Commission. We have responded to those comments and have updated our disclosures in this Form 10-K to reflect those comments.

 

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We have 228 locations in 36 states and 151 cities or towns in the United States. Of these locations, 21 are engaged in the final assembly of our cars and trucks, 27 are service parts operations responsible for distribution or warehousing and the remainder are facilities involved primarily in testing vehicles or manufacturing automotive components and power products. In addition, we have 22 locations in Canada, and assembly, manufacturing, distribution, office or warehousing operations in 50 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:

 

 

We, or our subsidiaries, 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 the opinion of management, are suitable and adequate for the manufacture, assembly and distribution of our products.

 

The following section summarizes material pending legal proceedings to which the Corporation became, or was, a party during the year ended December 31, 2007, or after that date but before the filing of this report, 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, Chrysler, Toyota Corporation (Toyota), Honda, Nissan, and BMW 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.

 

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 failed to state a claim for damages 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.

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On September 25, 2007, a claim was filed in Ontario Superior Court of Justice on behalf of a purported class of actual and intended purchasers of vehicles in Canada claming 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.

 

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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.

 

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General Motors Securities Litigation

 

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. 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 (Securities Act), 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 GM’s 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.

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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.

 

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.

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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.

 

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GMAC Bondholder Class Actions

 

On November 29, 2005, Stanley Zielezienski filed a purported class action, Zielezienski, et al. v. General Motors Corporation, et al. The action was filed in the Circuit Court for Palm Beach County, Florida, against GM, GMAC, our Chairman and Chief Executive Officer G. Richard Wagoner, Jr., GMAC’s Chairman Eric A. Feldstein and certain GM and GMAC officers, namely, William F. Muir, Linda K. Zukauckas, Richard J.S. Clout, John E. Gibson, W. Allen Reed, Walter G. Borst, John M. Devine and Gary L. Cowger. The action also named certain underwriters of GMAC debt securities as defendants. The complaint alleged that all defendants violated Section 11 of the Securities Act, that we violated Section 15 and that all defendants except us violated Section 12(a)(2) of the Securities Act. In particular, the complaint alleged material misrepresentations in certain GMAC financial statements incorporated by reference with GMAC’s Registration Statement on Form S-3 and Prospectus filed in 2003. More specifically, the complaint alleged material misrepresentations in connection with the offering for sale of GMAC SmartNotes in certain GMAC financial statements contained in GMAC’s Forms 10-Q for the quarterly periods ended March 31, 2004 and June 30, 2004 and in the Form 8-K which disclosed financial results for the quarterly period ended September 30, 2004, which were materially false and misleading as evidenced by GMAC’s 2005 restatement of these quarterly results. In December 2005, plaintiff filed an amended complaint making substantially the same allegations as were in the previous filing with respect to additional debt securities issued by GMAC during the period from April 23, 2004 to March 14, 2005 and adding approximately 60 additional underwriters as defendants. 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 January 6, 2006, the defendants named in the original complaint removed this case to the U.S. District Court for the Southern District of Florida, and on April 3, 2006, that court transferred the case to the U.S. District Court for the Eastern District of Michigan.

 

On December 28, 2005, J&R Marketing, SEP, filed a purported class action, J&R Marketing, et al. v. General Motors Corporation, et al. The action was filed in the Circuit Court for Wayne County, Michigan, against GM, GMAC, Eric Feldstein, William F. Muir, Linda K. Zukauckas, Richard J.S. Clout, John E. Gibson, W. Allen Reed, Walter G. Borst, John M. Devine, Gary L. Cowger, G. Richard Wagoner, Jr. and several underwriters of GMAC debt securities. Similar to the original complaint filed in the Zielezienski case described above, the complaint alleged claims under Sections 11, 12(a), and 15 of the Securities Act based on alleged material misrepresentations or omissions in the registration statements for GMAC SmartNotes purchased between September 30, 2003 and March 16, 2005. The complaint alleged inadequate disclosure of our financial condition and performance as well as issues arising from GMAC’s 2005 restatement of quarterly results for the three quarters ended September 30, 2005. 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 January 13, 2006, defendants removed this case to the U.S. District Court for the Eastern District of Michigan.

 

On February 17, 2006, Alex Mager filed a purported class action, Mager v. General Motors Corporation, et al. The action was filed in the U.S. District Court for the Eastern District of Michigan and was substantively identical to the J&R Marketing case described above. On February 24, 2006, J&R Marketing filed a motion to consolidate the Mager case with its case (discussed above) and for appointment

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as lead plaintiff and the appointment of lead counsel. On March 8, 2006, the court entered an order consolidating the two cases and subsequently consolidated those cases with the Zielezienski case described above. Lead plaintiffs’ counsel has been appointed, and on July 28, 2006, plaintiffs filed a Consolidated Amended Complaint, differing mainly from the initial complaints by asserting claims for GMAC debt securities purchased during a different time period, of July 28, 2003 through November 9, 2005, and adding additional underwriter defendants. On August 28, 2006, the underwriter defendants were dismissed without prejudice. On September 25, 2006, the GM and GMAC defendants filed a motion to dismiss the amended complaint, and on February 27, 2007, the District Court issued an opinion granting defendants’ motion to dismiss, and dismissing plaintiffs’ complaint. Plaintiffs have appealed this order, and oral argument on plaintiffs’ appeal was held on February 7, 2008.

 

Under the terms of the GMAC Transaction, we are indemnifying GMAC in connection with these cases.

 

The securities and shareholder derivative cases described above are in preliminary phases. No determination has been made that the securities cases can be maintained as class actions or that the shareholder derivative actions can proceed without making a demand in accordance with Delaware law that our board bring the actions. As a result, the scope of the actions and whether they will be permitted to proceed is uncertain.

 

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ERISA Class Actions

 

In May 2005, the U.S. District Court for the Eastern District of Michigan consolidated three related purported class actions brought under ERISA against us and other named defendants who are alleged to be fiduciaries of the stock purchase programs and personal savings plans for our salaried and hourly employees, under the case caption In re General Motors ERISA Litigation. In June 2007, plaintiffs filed a consolidated class action complaint against us, the Investment Funds Committee of our Board of Directors, its individual members, our Chairman and Chief Executive Officer, members of our Employee Benefits Committee during the putative class period, General Motors Investment Management Co. (GMIMCo) and State Street Bank (State Street). The complaint alleged that the GM defendants breached their fiduciary duties to plan participants by, among other things, investing their assets, or offering them the option of investing, in GM stock on the ground that it was not a prudent investment. Plaintiffs purport to bring these claims on behalf of all persons who were participants in or beneficiaries of the plans from March 18, 1999 to the present, and seek to recover losses allegedly suffered by the plans. The complaint did not specify the amount of damages sought, and we have no means at this time to estimate damages that the plaintiffs will seek. On July 17, 2006, plaintiffs amended their complaint principally to add allegations about our restatement of a previously issued income statement and the reclassification of certain cash flows. The amended complaint did not name any additional defendants or assert any new claims. In August 2006, the GM defendants filed a motion to dismiss the amended complaint, which was granted in part and denied in part in August 2007. In February 2007, plaintiffs filed a motion for class certification, which is pending. In October 2007, the parties reached a tentative settlement, which received preliminary court approval on January 30, 2008. The district court has set a fairness hearing on the tentative settlement for June 5, 2008. The tentative settlement provides, among other key terms, that we will pay $37.5 million in cash, which includes attorney fees and costs for the plaintiffs. In addition, we will agree to maintain various existing structural changes to ERISA plans for our salaried and hourly employees for at least four years.

 

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

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

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.

 

Motions to dismiss both Young and Brewer are pending, and there has been no other activity on these cases. 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.

 

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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.

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

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.

 

While we have resolved many of our asbestos claims and continue to do so for strategic litigation reasons, such as avoiding defense costs and possible exposure to excessive verdicts, management believes that only a small portion of these claimants have or will develop an asbestos-related impairment.

 

The amount expended in defense of asbestos claims in any year depends on the number of claims filed, the amount of pretrial proceedings, and the number of trials and settlements during the period. Our expenditures related to asbestos claims, including both defense costs and payments to claimants, have declined over the past several years.

 

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Patent and Trade Secrets Litigation

 

In January 1994, plaintiffs commenced John Evans and Evans Cooling Systems, Inc. v. General Motors Corporation in Connecticut state court by filing separate suits for patent infringement and trade secret misappropriation. In the patent case, summary judgment in our favor was affirmed on appeal. In the trade secret case, the 2003 ruling of the presiding judge in our favor was reversed on appeal by the Connecticut Supreme Court on March 15, 2006 and remanded for jury trial. The plaintiffs expanded their claims for the new trial to include a subsequent generation of engines, used in a wide variety of our vehicles and sought relief in excess of $12 billion. On September 13, 2007, the trial court granted partial summary judgment in our favor, dismissing plaintiff’s attempt to expand their claims to the subsequent generation of engines. Plaintiffs are expected to appeal this ruling, which substantially restricts the scope of damages available under their current theory, following the trial.

 

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Coolant System Class Action Litigation

 

We have been named as the defendant in 22 putative class actions in various federal and state courts in the United States alleging defects in the engine cooling systems in our vehicles; 14 cases are still pending in U.S. courts including six cases that have been consolidated, either finally or conditionally, for pre-trial proceedings in a multi-district proceeding in the U.S. District Court for the Southern District of Illinois. State courts in California and Michigan have denied motions to certify cases for class treatment. In an opinion dated February 16, 2007, certification of a multi-state class was denied in the federal multi-district proceeding on the grounds that individual issues predominate over common questions. However, in Gutzler v. General Motors Corporation, the Circuit Court of Jackson County, Missouri in January 2006 certified an “issues” class in January 2006 comprised of “all consumers who purchased or leased a GM vehicle in Missouri that was factory-equipped with “Dex Cool” coolant, which was included as original equipment in vehicles we manufactured since 1995. The Court also certified two sub-classes comprised of 1) class members who purchased or leased a vehicle with a 4.3-liter engine, and 2) class members who purchased or leased a vehicle with a 3.1, 3.4, or 3.8-liter engine. The Gutzler court’s order provided for addressing specific issues on a class basis, including the extent of our warranty on coolant and whether our coolant is incompatible with other vehicle components. In Sanute v. General Motors Corporation, the state court in California on September 30, 2007 certified a class of claims related to certain vehicles with 3.1 and 3.4 liter engines to consider claims that the intake manifold gaskets were defective. In Amico v. General Motors Corporation, the state Court in Maricopa County, Arizona on September 17, 2007 certified a class of all vehicles (regardless of model year) with 3.1, 3.4, 3.8, 4.3, 5.7 and 7.4 liter engines containing intake manifold gaskets with a nylon carrier and silicon sealing bead.

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

Kenneth Stewart v. General Motors of Canada Limited and General Motors Corporation, a complaint filed in the Superior Court of Ontario on April 24, 2006, alleged a class action covering Canadian residents, except residents of British Columbia and Quebec, who purchased 1995 to 2003 GM vehicles with 3.1, 3.4, 3.8 and 4.3 liter engines. Plaintiff alleged that defects in the engine cooling systems allow coolant to leak into the engine and cause engine damage. The complaint alleged violation of the Business Practices and Competition Acts and sought alleged benefits received as a result of failure to warn and negligence, compensatory damages, punitive damages, fees and costs. Similar complaints (some involving 2004 vehicles as well) have been filed in 17 putative class actions against GM Canada and us, in ten provinces. Class certification has not been approved in any of these cases, and all have been stayed on the agreement of counsel pending the outcome of the class certification hearing in Stewart, which was scheduled for December 2007 and subsequently adjourned. 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.

 

In October 2007, the parties reached a tentative settlement that would resolve certain claims in the putative class actions related to alleged defects in the engine cooling systems in our vehicles. The settlement as negotiated would apply to claims related to vehicles sold in the U.S. with a 3.1, 3.4 or 3.8-liter engine or to the use of Dex Cool engine coolant in sport utility vehicles and pickup trucks with a 4.3-liter engine from 1996 through 2000, subject to the negotiation and execution of definitive binding agreements. If and when definitive settlement agreements are executed, they must be submitted for approval to the appropriate court or courts. The tentative settlement does not include claims asserted in several different alleged class actions related to alleged gasket failures in certain other engines, including 4.3, 5.0 and 5.7-liter engines (without model year restrictions), or claims relating to alleged coolant related failures in vehicles other than those covered by the tentative settlement.

 

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GM/OnStar Analog Equipment Litigation

 

We or our wholly owned subsidiary OnStar Corporation (OnStar) 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, class certification motions have been fully briefed and the parties have not completed any formal discovery. It is not possible at this time to determine the likelihood of our liability of GM or OnStar or both of us or of class certification, or to reasonably ascertain the amount of any damages.

 

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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 the Court has set a schedule for submission of briefs.

 

Carbon Dioxide Emission Standard Litigation

 

In a number of cases, the Alliance of Automobile Manufacturers, the Association of International Automobile Manufacturers, Chrysler, various automobile dealers and GM 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

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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.

 

U.S. Environmental Protection Agency Region III Administrative Complaint

 

On September 27, 2007, EPA Region III brought a nine-count Administrative Complaint against our manufacturing facility in Wilmington, Delaware seeking undisclosed penalties. The Complaint is substantially similar to the previously disclosed 2003 EPA Region V matter now on appeal before the EPA Environmental Appeal Board. Both cases center around whether purge solvent used in cleaning paint applicators is a solid waste, and whether its continued use in keeping pipes from clogging is part of the solvent’s “original intended purpose.” We intend to file an Answer and to seek a stay in enforcement until all appeals have been exhausted. EPA Region III may seek penalties in excess of $100,000.

 

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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 Resource Conservation Recovery Act’s annual financial assurance requirements. We anticipate that the EPA will seek penalties exceeding $100,000.

 

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None

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PART II

 

 

We list our $1 2/3 par value common stock (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 345,296 and 364,408 holders of record of our Common Stock as of December 31, 2007 and 2006, 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.

 

 

 

 

On February 5, 2008, our Board of Directors declared a cash dividend of $0.25 per share for the first quarter of 2008. Our dividend policy is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.

 

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.

 

 

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

 

Purchases of Equity Securities

 

We made no purchases of our Common Stock during the three months ended December 31, 2007.

 

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Item 6. Selected Financial Data

 

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

 

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

 

Overview

 

We are engaged primarily in the worldwide development, production and marketing of automobiles. We develop, manufacture and market vehicles worldwide through four automotive regions: GM North America (GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM) and GM Asia Pacific (GMAP) (collectively, the Automotive business). Also, our finance and insurance operations are primarily conducted through GMAC, the successor to General Motors Acceptance Corporation, a wholly owned subsidiary until November 2006 when we sold a 51% controlling ownership interest in GMAC to a consortium of investors (the GMAC Transaction). Since the GMAC Transaction, we have accounted for our 49% ownership interest in GMAC using 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.

 

 

In 2007, the global automotive industry continued to show strong sales and revenue growth. Global industry vehicle sales to retail and fleet customers were 70.6 million units in 2007, representing a 4.8% increase over 2006. We expect industry sales to be approximately 73 million units in 2008. Over the past five years, the global automotive industry has experienced consistent year-to-year increases, growing 19.4% from 2003 to 2007. Overall revenue growth for the industry has averaged 7.0% per year over the last decade. Much of this growth is attributable to demand in emerging markets, such as China, where industry vehicle unit sales increased 20.4% to 8.6 million units in 2007, from 7.1 million units in 2006.

 

Our worldwide vehicle sales for 2007 were 9.4 million units compared to 9.1 million units in 2006. Vehicle unit sales increased for GME, GMLAAM and GMAP and declined for GMNA. Our global market share in 2007 was 13.3% compared to 13.5% in 2006. Market share increased in 2007 compared to 2006 from 9.2% to 9.5% for GME, from 17.0% to 17.2% for GMLAAM and from 6.5% to 6.9% for GMAP, and declined over the same period from 23.8% to 23.0% for GMNA.

 

Competition and factors such as commodity and energy prices and currency exchange imbalances continued to exert pricing pressure in the global automotive market in 2007. 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 contributed to substantial cost pressures in the industry for vehicle manufacturers as well as suppliers. 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.

 

 

As more fully described in this Management’s Discussion and Analysis, the following items are noted regarding 2007:

 

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As in 2007, our top priorities continue to be improving our business in North America and Europe and achieving competitiveness in an increasingly global environment, thus positioning us for sustained profitability and growth in the long term, while at the same time maintaining liquidity.

 

Our growth and profitability priorities for 2008 are straightforward:

 

 

 

Our first priority for 2008 is continuing to focus on product excellence by fully leveraging our global design, engineering and powertrain expertise to produce vehicles for a wide variety of regions and market segments. In North America, we plan to introduce several new vehicles in 2008 including the Pontiac G8 and Chevrolet Traverse to complement our successful 2007 introductions of the GMC Acadia, Saturn Outlook, Buick Enclave, Cadillac CTS and the Chevrolet Malibu. In emerging markets, we plan to expand and enhance our portfolio of lower cost vehicles, with special attention to fuel economy.

 

 

Our second priority for 2008 is building strong brands and distribution channels. We plan to integrate our product and marketing strategies and believe that if we achieve product excellence, stronger brands will result. In addition, we plan to build brand equity with a special focus on key car segments. Programs in 2008 are intended to enhance the effectiveness of our marketing, particularly using digital marketing. Finally, we propose to leverage competitive advantages like the OnStar telematics systems, which is available in more than 50 GM vehicles throughout the world. We also plan to accelerate our channel strategy of combining certain brands in a single dealership, which we believe will differentiate products and brands more clearly, enhance dealer profitability and provide us with greater flexibility in product portfolio and technology planning.

 

 

Our third priority for 2008 is addressing costs by executing additional cost reduction initiatives. As discussed below under “Key Factors Affecting Future and Current Results,” we have taken action in a number of areas to reduce legacy and structural costs. In 2007, we achieved our announced target of reducing certain annual structural costs in GMNA and Corporate and Other primarily related to labor, pension and other post-retirement costs by $9 billion, on average, less than those costs in 2005. We have also reduced structural costs as a percentage of global automotive revenue to below 30% for 2007 from 34% in 2005, and have announced global targets of 25% by 2010 and 23% by 2012. We also plan to reduce structural costs as a percentage of global automotive revenue by pursuing manufacturing capacity utilization of 100% or more in higher cost countries, and will continue to assess what specific actions may be required based on trends in industry volumes and product mix.

 

In October 2007, we entered into a new collective bargaining agreement with the International Union, United Automobile, Aerospace and Agricultural Workers of America (UAW), including the Settlement Agreement, which we anticipate will significantly support our structural cost reduction plans when it is put into effect after January 1, 2010. Additionally, we plan to execute a collective bargaining

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

agreement with the National Automobile, Aerospace, Transportation and General Workers Union of Canada (CAW) that will support our cost reduction goals. We have announced a special attrition program available to all of our 74,000 hourly workers represented by the UAW, and we expect that participating employees will begin exiting in April 2008. We remain focused on repositioning our business for long-term competitiveness, including achieving a successful resolution to the issues related to the bankruptcy proceedings of Delphi, a major supplier and former subsidiary. We recognize, however, that near-term continuing weakness in the U.S. automotive market, and its impact on our Canadian operations that are linked to the U.S. market, will provide a significant challenge to improving earnings and cash flow, and could constrain our ability to achieve future revenue goals.

 

 

Our fourth 2008 priority is to focus on emerging markets and capitalize on the growth in areas such as China, India and the ASEAN region, as well as Russia, Brazil, the Middle East and the Andean region. Vehicle sales and revenues continue to grow globally, with the strongest growth in these emerging markets. In 2007, 38% of all vehicle sales took place in emerging markets; we project that in 2012, 45% of vehicles will be sold in emerging markets. In response, we are planning to expand capacity in these emerging markets, and to pursue additional growth opportunities through our relationships with Shanghai GM, GM Daewoo and other potential strategic partners, such as recently announced joint ventures in Malaysia and Uzbekistan. During 2007, key metrics such as net margin, operating income and market share showed continued growth across key emerging markets. In addition to the product and brand strategies discussed above, we plan to expand our manufacturing capacity in emerging markets in a cost effective way and to pursue new market opportunities. We believe that growth in these emerging markets will help to offset challenging near-term market conditions in mature markets, such as the U.S. and Germany.

 

 

Our fifth priority for 2008 is to continue to develop and advance our alternative propulsion strategy, focused on fuel and other technologies, making energy diversity and environmental leadership a critical element of our ongoing strategy. In addition to continuing to improve the efficiency of our internal combustion engines, we are focused on the introduction of propulsion technologies which utilize alternative fuels and have intensified our efforts to displace traditional petroleum-based fuels. For example, we have entered into arrangements with battery and biofuel companies to support development of commercially viable applications of these technologies. In September 2007, we launched Project Driveway, making more than 100 Chevrolet Equinox fuel cell electric vehicles available for driving by the public in the vicinity of Los Angeles, New York City and Washington, D.C. During the fourth quarter of 2007 we introduced new hybrid models of the Chevrolet Tahoe and the GMC Yukon. We anticipate that this strategy will require a major commitment of technical and financial resources. Like others in the automotive industry, we recognize that the key challenge to our advanced propulsion strategy will be our ability to price our products to cover cost increases driven by new technology.

 

 

Our final priority for 2008 is to continue to integrate our operations around the world to manage our business on a global basis. We have been focusing on restructuring our operations and have already taken a number of steps to globalize our principal business functions such as product development, manufacturing, powertrain and purchasing to improve our performance in an increasingly competitive environment. As we build functional and technical excellence, we plan to leverage our products, powertrains, supplier base and technical expertise globally so that we can flow our existing resources to support opportunities for highest returns at the lowest cost.

 

Basis of Presentation

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the accompanying consolidated financial statements.

 

We operate in two businesses, consisting of Automotive (GM Automotive or GMA) and Financing and Insurance Operations (FIO).

 

Our Auto business consists of our four regional segments; GMNA, GME, GMLAAM and GMAP, which collectively constitute GMA.

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

 

 

Our FIO business consists of the operating results of GMAC for 2005 and 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 year of 2007 on an equity method basis. FIO also includes Other Financing, which includes financing entities that are not consolidated by GMAC and two special purpose entities holding automotive leases previously owned by GMAC and its affiliates that we retained having a net book value of $3.3 billion, as well as the elimination of intercompany transactions with GM Automotive and Corporate and Other.

 

In 2007, we changed our measure of segment operating performance from segment net income to segment pre-tax income plus equity income, net of tax and minority interest, net of tax. All prior periods have been adjusted to reflect this change. Income taxes are now evaluated on a consolidated basis only.

 

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.

 

Consolidated Results of Operations