Expert: Cruze is crucial for GM

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Chevrolet unveiled its new Cruze to the press Wednesday, September 24, 2008 at the Paris Auto Show. Expected to get close to 40 miles-per-gallon, the Cruze hits the European market next March. Production for U.S. sales will begin in 2010.

By Don Shilling

The new model is just what GM needs to turn around sales, analysts said.

General Motors’ sudden stock price plunge won’t put the brakes on the new model coming to Lordstown, analysts said.

“GM needs the Cruze,” said Stephanie Brinley, an analyst with AutoPacific in Southfield, Mich. “They need that product, and they need it quickly.”

The Chevrolet Cruze is scheduled to go into production at GM’s Lordstown complex in 2010, replacing the Chevrolet Cobalt.

Much about GM’s operations was being questioned Friday, however, because the company’s shares plunged 31 percent the day before. On Friday, GM stock gained 13 cents, or 3 percent, to close at $4.89.

With GM’s stock price at its lowest point since the 1950s, the automaker issued a statement that said it had no plans to file for bankruptcy, and the Associated Press reported that GM is likely to cut costs by closing more factories.

GM’s stock crisis shouldn’t affect the Cruze because it is precisely the type of car that GM needs — a fuel-efficient small car with an attractive design, said Erich Merkle, an analyst with Crowe Horwath in Grand Rapids, Mich.

It also helps that it is a Chevrolet, he said. GM is committed to its Chevrolet and Cadillac brands, but some new models for Pontiac, Saturn and GMC have been canceled or delayed, he said.

GM also views the Cruze as the first in its new plan to build models for worldwide distribution. The Cruze is to be launched next year in Europe from an assembly plant in Russia. Merkle said GM also plans to build the model in China and other places.

Brinley noted that GM has spent a lot of money and effort to develop the pre-production model of the Cruze, which was shown last week at the Paris Auto Show. Those plans won’t be undone quickly, she said.

But the analysts noted that nothing is for sure in today’s automotive industry, which has been hit hard by declining sales and the nation’s credit crisis.

“There certainly is danger in the auto market,” Brinley said.

The length of the credit crisis could affect GM’s operations, she said. If credit markets remain frozen through the end of the year, GM officials could begin to review future plans to spend money, she said.

Brinley said GM has enough cash to make it through this year if it continues to lose money at its current rates. Other analysts have speculated that sometime next year GM’s cash reserves will fall to the minimum level needed to fund daily operations.

There was so much speculation about a possible bankruptcy that GM put out a statement Friday that said a filing was not in the plans. Bankruptcy would not be in the best interest of employees, stockholders, suppliers or customers, it said.

Merkle said GM’s financial future depends on “how violent the correction in the economy is and how far the recession spreads around the globe.”

If a bankruptcy filing does occur, however, the Cruze program would be in jeopardy, he said.

“All bets are off in a bankruptcy filing,” he said.

Merkle said he thinks GM’s stock took such a hit Thursday because of evidence that vehicle sales were weakening across the globe, especially in Europe. GM has been making money in foreign markets, and questions about those profits were enough to unsettle investors, he said.

Some have questioned whether GM’s stock price is so low that it is vulnerable to a takeover attempt.

Merkle and Brinley said they doubted GM would be bought out. This is a difficult environment to raise financing for a takeover, and GM’s debt level would scare off many suitors, they said.

Other automakers are either in trouble themselves or wouldn’t be interested, they said. Toyota already is competing in the same markets as GM with its own plants, and Honda has been steadfast in rejecting the idea of mergers and acquisitions, they said.

“I don’t know where the white knight would come from,” Merkle said.

shilling@vindy.com