Ron Tadross. Say it softly and it’s almost like crying. If you’re GM that is. The Banc of America Securities analyst isn’t exactly what you’d call bullish on GM. Unlike his evil twin, analyst John Murphy, Tadross sees GM heading for a cash burn flame-out. "We believe GM management is glossing over the current and future cost of rightsizing the business," Tadross declared. More to the point, he recommended that investors sell their GM stock, with a target that’s literally half of its current price. In other words, when Merrill Lynch talks, nobody should listen.
Although the media types persist in calling GM plant closures and worker buyouts “rightsizing,” there is nothing “right” about the amount of debt GM is piling onto its bottom line. GM reported today that 35k workers are heading for the exits. The severance checks for these soon-to-be ex-employees will cost The General a net, after-tax charge of $3.8b. At the same time, 12,600 Delphi workers are heading for the hills. GM’s down for half, so that’ll add another $1b or so to the tab. Remember: many of these workers will continue to receive pensions, only 4600 lose their health care benefits, and shuttering factories incurs some pretty heavy additional expenses.
Clearly, GM CEO Rabid Rick Wagoner has decided that he can pay off tomorrow the costs of trimming production today. Tadross doesn't share Rick's belief that GM's tomorrow never dies. The analyst points to GM’s newly arranged $4.5b secured credit line as a sure sign that the company is cash-strapped– at a time when the demands on GM’s hoard are mounting like a tsunami nearing land. Tadross predicts "serious cash burn" at the end of the year, as GM’s production drops an estimated eight percent and its “product pipeline peaks.” In other words, GM can’t make money now, won’t make money later, and its bills are about to come due.
Rick Wagoner insists that the cuts have put GM on the right track. In a statement issued today, The General’s General declared "These moves have given us a fast start toward achieving our stated objective of reducing GM's global structural cost from approximately 34 percent of revenue in 2005, to 25 percent of revenue by 2010, and setting us up to be successful for years to come." That’s great news for people who forgot the old maxim that the secret to business is to take in more than you spend. GM may end-up spending less, but it won’t mean anything unless it starts making more money.
GM’s earnings situation is both dire and deadly. In a note to his clients, Deutsche Bank analyst Rod Lache estimated that every point of market share GM surrenders to its competitors equals roughly $1.3 billion in lost [pretax] earnings. In May, the world’s largest automaker’s US market share fell three percentage points to 22.5%. Using Lache’s calculations, if GM’s market share doesn’t recover, the world’s largest automaker is looking at $3.9b in lost income AND $3.8b for its worker buyouts. No wonder they’ve announced a fire sale.
Wait; it’s worse than that. It isn’t a fire sale. Instead of launching an employee discount program to match Chrysler’s, instead of slapping cash on the hood, GM has decided to offer potential customers zero percent financing for 60 months. The deal reflects GM’s desire to maintain its “value pricing," GM's attempt to bring its vehicles' manufacturer’s suggested retail price (MSRP) closer to the dealer’s invoice. (Translation: the advertised price is closer to the actual sale price, and no funny business.) But here’s the problem: because of falling demand for trucks and SUV’s, the vast majority of GM’s (and everyone else’s) truck and SUV buyers are thousands of dollars backwards on their loan. They owe more on their vehicle than it’s worth.
Traditionally, GM dealers have used rebates to pay off the difference between what their potential customer owes on their old vehicle and what it’s worth in trade. Now that there’s no cash on offer, now that there’s a smaller difference between MSRP and invoice, dealers won’t be able to bail out customers who are “underwater.” Zero percent financing is wonderful (for those who qualify), but it maxes-out at 100% of a new car’s price. So anyone who’s backwards on their current vehicle is going to have to reach into their own pocket to pay off most of their old debt. No doubt dealers will call it a “deposit,” but the fact remains: a lot of customers will drive away in the same truck they drove in.
But zero percent allows Rabid Rick’s mob to maintain appearances. See? We stayed the course. Once these ‘06’s are clear, once our new vehicles hit the dealer lots, once we’re right-sized, we’ll be back in the black. Yes, well, there are an increasing number of well-informed GM watchers who believe that the black in question will be funeral attire.
Perhaps it’s just a different sort of “fire sale”…
http://www.politicalgateway.com/news/read/18508
I originally saw an article about this in the on-line _Detroit Free Press_, but
can’t find either that article or the original Edmunds article now.
“…they just get pushed into a financial corner and they make poor decisions.”
That’s how an arson investigator talks about people who torch their SUV’s to collect the insurance money– in California.
It’s true: you learn something new every day.
In the early 1980s, Ford Motor Company’s North American operations ran 7 quarters “in the red.” Moody’s rated their stock as junk. But Ford somehow came back, largely because of new product: the 1985 Taurus. We might look at that car now and think “why did this car save them?” or simply “how?” because the now defunct Taurus was simply derivative of the Audi 5000 (when that was a good thing), just as the 1984 Ford Thunderbird’s lines copied the BMW 635 CSi. But for Ford, it was a product turn-around.
I’m not saying that you don’t make some interesting – and frightening for UAW workers – points. But I still think The General could perhaps make it; if only they would make a committment to quit building the large – 1/2 ton platform and more – SUVs and trucks they stake their operation upon. It has to be about sedans. They need to take a bead on the Toyota Camry and do their damnest to beat it. (Once the Camry starts winning in NASCAR, it’s going to awfully hard to do that in the showroom.) I know, I know, it’s impossible you say. But as Robert Browning once said, “A man’s reach must exceed his grasp, or what’s a heaven for?”
What if… it’s all not about stupidity/arrogance/lack od communication/bad luck/bad timing/gas prices/foreign competition/UAW/etc/etc…?
What if it’s all about good old-fashioned greed. You know, let’s burn the company down, we’ll buy it off later almost for nothing. Or we’ll sell it to our foreign competition for a small price, and everybody (in the topmost office floor only) will make a nice small fee on the side.
No? It wouldn’t be the first time. Enron, Anyone?
Read about the history of the Packard Motor Car Company, and its ill fated purchase of (not merger with) Studebaker in 1954, and you’ll get the idea that once the toilet starts to really swirl, the results are pretty inevitable.
Yes, good point about Ford coming back from the brink of death on the back of the Taurus, Terry. So, where’s GM’s “Taurus”?
Exactly. They haven’t got one. Plus, this is not the 1980’s any more, where the “big 3” made up a huge segment of the car market in this country (plus, Ford could rely upon profits from Europe and even the UK to balance the big book – even with near continuous US operations losses).
GM doesn’t seem to be able to make money except in South Korea, at what once was Daewoo. But then, when you buy something valuable for pennies on the dollar (after stringing the bankers along for several years in order to get the price lower, and lower, and lower) you’d better be able to make money on it or else…. what? Answer: you’re too incompetent to exist!
GM can make money in China (but they cannot own more than 50% of the operations). They can make money in South Korea (by exporting low wage manufactured Daewoos with Chevrolet badges all over the world).
It does not seem as if GM can make money in North America or much of the rest of the world, and yes, it seems entirely clear that the swirling is nearly finished.
The only “big” question left is – will it be a Chapter 11 bankruptcy, with Chapter 7 to follow later (because only 1 in 4 customers will apparently NOT take a risk on buying a car from a auto company in Chapter 11), or will they go straight to Chapter 7 and close the doors?
The ironic part is, the Chinese and South Korean operations would likely survive since they are not wholly GM owned.
I wonder if SAIC (Shanghai Auto, a partner to GM and also VW in China, and part-owner of GMDaewoo in South Korea) will attempt to sell Chinese built Buicks and Chinese and South Korean built Chevrolets in the US once GM gasps its last?
Will the dealers beg for such cars, or shun them? Will Chapter 7 for GM mean that SAIC cannot use the brands outside China? They obviously have the right to use the brands in China. Would it be wise to use the brands or let them die? I dunno….
GMAC has also loosened its credit standards for the 72 hour firesale.This 0% offer will be available to sub-prime credit customers.The General is desparate to move the metal.
Glenn is right: it isn’t the 1980s anymore. That is, Ford survived (mostly) because of the Taurus and because foreign competition hadn’t fully penetrated the market. Back then a Japanese car looked Japanese in style, performance and size. Compare an ’85 Camry to the first Taurus…there’s big difference. Those distinctions are blurred today.
The new Camry is as American as supersized combo meals, and one revolutionary new Detroit whip can’t save GM (or Ford) today.
GM is definately CTD (circling the drain). The sad part is that when GM does go under, the average citizen will blame it on those who bought “foreign” cars instead of putting the blame where it belongs – decades of incompetent management in GM.
I can’t believe that GM will prove the old phrase ” Nobody ever went bancrupt underestimating peoples taste” wrong.
While the buzzards are definitely circling, I do think it’s silly to think that GM is just going to fold and go straight to Chapter 7. It would be the biggest downfall since Rome. The effects on the US economy would be astonishing.
Only a fool would think that GM wouldn’t try to dig out by starting a Chapter 11, and then going from there. And even if they get to a point where they would be thinking about 7, someone would purchase them, just for assets.
A few years back, I was discussing the impending collapse of the US auto industry with an autohound friend (who has since succumbed to cancer at 29…RIP Ian…). I said I thought Ford would be the first to drop, and he disagreed – he said GM would, and Toyota would buy them. This was 2 years ago…and it’s eerie the foresight that he had to make a comment like that.
Could you see Toyota purchasing GM out of Bankrupcy? The thought makes me shudder and smile at the same time.
Since my earlier post I have dug out 12 dead deals none above a 596 credit score that had been put in the dead file.The sub-prime banks would not touch these deals they were so rough.In a little over 2 hours 10 of them are approved on 0% for 72 months on new GM vehicles which will probably never be payed for based on past credit history.If this is going on nationwide
GMAC is booking some very risky loans
Whats worse, GM and Ford have to fight the perception of people like me. Who will never buy American no matter what I read about a new product because of the ingrained stigma of poor quality and unreliability I’ve attached to those names.
The sad part is that when GM does go under, the average citizen will blame it on those who bought ???foreign??? cars
That would’ve been true 25 years ago (remember the war cry back then that for every foreign car you buy, you put 5 American autoworkers out of work? That math sounded pretty fishy even when I was a kid.)
But nowadays the “average citizen” owns a Toyota or a Honda. I think people outside of Michigan have wised up by now — hence the lack of interest in bailing out the Big 3.
Financeguy, let’s all remember what happened when Mitsubishi tried the same gig with subprime loans. It came within a whisker of being their end.
I predict, after reading your posts here, that GM won’t last through 2007. I live in Michigan, already one of two states in recession (the other being Katrina-ized Louisiana) and well, we’ve been through disasters before here in Michigan (huge lay-offs in the early 1970’s, 1979-1981, plus GM nearly went under in 1990), but it isn’t going to be a pretty sight here for about a decade.
Ronin317, I’m sorry your car buddy passed away, 29 is way too young. I still miss a buddy of mine who passed 13 years ago, so I’m fully aware of how you’re feeling. I do wonder if his prediction will come true – but I have to think that Toyota have no good or rational reason to buy the disaster that is General Motors, or especially the pieces of a totally broken GM.
However, it might just be likely that SAIC (i.e. the GM partner in China, also the VW partner in China) could buy up the remains of GM. It’s not like SAIC didn’t watch what GM did to Daewoo after the Asian financial crisis – strung the bankers along in order to get better concessions.
Lets say GM did Chapter 11. After recovery (assuming it did), and about 8% of the US market rather than say 23%, and being about 20% the size that it is now in production capacity (smaller than Chrysler USA), with a far smaller dealership network, and probably only Chevrolet and Cadillac brands, what would make any other automobile company on earth want to buy GM then?
Lets say GM did Chapter 7. What companies would want to pick the bones and buy up plants which are too big, to inflexible with a workforce which is used to being spoiled big-time with deals such as “work banks”?
Of course, our world is not rational. So, maybe “some company” (such as SAIC) would be willing to buy up GM’s remnants one way or the other. SAIC are on the prowl for “brands” to build upon worldwide, you see….
Ironically SAIC tried doing the “string them along” deal when it was going to buy MG-Rover, which did the equivalent of Chapter 7 bankruptcy about 15 months ago and after the closure, SAIC missed out on buying up the plant machinery for pennies on the pound (they were beat to the punch by another Chinese company, Nanking).
The funny thing about GMs broadcast about the new incentive program was the way they danced around the issue of emplyee pricing.There was no outright denial they would not do it again.The 2007 Yukon/Tahoe will have to have cash on the hood or cut rate financing because the the guy making $40 to $50k who was a big purchaser of these vehicles in the past has been priced out .When the affluent buyers run out it will be big trouble
The lads at the REN centre are putting a brave face on it but GM is showing signs of desperation. I have always believed that as a Corporation, GM is insufferably arrogant, always believing that they and only they, know how to build cars in spite of the mountain of evidence to the contrary. The degree to which this is taken is staggering. They are saying that the quality is there and that the American consumer merely percieves that off-shore car companies build superior quality vehicles to GM’s. Do they think the American and Canadian consummers are all idiots? Do they ever wonder how the perception got there? Could it be the unreliable, poor quality vehicles that were produced (some still are) for decades? Could it be that too many people have found that their warranty is not worth the paper it’s written on? Could it be the attitude of some of their dealers? GM may be closing plants, discontinuing models, buying out workers but they have not even started to do what could really save their bacon. It has been said on TTAC countless times, they need “gotta have it cars”, lots of them, built to perfection and an attitude towards it’s customers greatly different from their present attitude of “we know what you need”. I can’t see it happening, they are too far gone now. GM will die. It really is so sad when you think of all the people who depend on GM for their livelyhoods (I am one of them). When it happens, Canada and The U.S. will be hit hard.
Rant over, thanks for listening!
I’m only on GM Death Watch VI –
http://qualityg.blogspot.com/2006/06/quality-fools-gm-death-watch-part-vi.html
qg
I see the Detoit News headline: “Wow! 47,600 buyouts”
Nearly 50,000 people fleeing the GM/Delphi production effort — and yet there will be no shortage of cars for the American people, no government rationing of SUVs, no breadlines snaking out the dealership, no price increases, no people stranded without transportation. Despite the fact that 50,000 producers will cease producing.
Man, that says a LOT.
Glenn,
Good points all around. I’ve learned a bit by checking out the companies you mentioned there…
But I still say this – I watched the demise of Westinghouse while my father worked for them…the behemoth that it was. It’s not just going to disappear.
I just can’t see GM disappearing off the map without a fight of sorts. I do see Chevy and Caddy as the only surviving brands of a meltdown though…good point there.
If GM were to be sold (and I think that is unlikely at this point), I don’t see Toyota buying them. Toyota has traditionally been very cautious and swayed by potential public opinion, just look at their CEO saying Toyota may raise prices to help GM and Ford. I think they will not want to be on the bad side of any potential backlash from Americans for buying GM. Granted, this hasn’t really come to fruition when Mercedes merged with Chrysler, but they may think it could happen in this situation (remember, I’m writing this from their perspective, not what I think will actually happen). Plus, they may think Chevy and Caddy would be too expensive to fix.
Other than SAIC, the one company who might purchase a dead GM is Hyundai. Hyundai has made no secret about it’s desire to eventually overtake Toyota. What faster way than buying Chevy and Caddy on the cheap? I don’t know South Korean monopoly laws, so they may have to divest Daewoo to satisfy any of those questions (perhaps Toyota would purchase Daewoo).
On the issue raised about no one willing to buy a car from a bankrupt auto company, could GM obviate this problem if it paid a premium to a trusted insurance company (ie AIG or Met Life etc) to provide a warranty insurance policy with each new car purchase? It would likely be expensive and would have to be comprehensive but if GM were freed from its legacy cost structure, it should be affordable. Or would it be impossible to find any insurance company of repute to believe that GM could ever emerge from Chapter 11?
Glenn,
Indeed, Lenovo purchased IBM, and I must say, they are doing quite a good job. I own an IBM Thinkpad that was under warranty to Lenovo during the switch, and they have been great so far. The updates for software and hardware have not stopped, the communication has even gotten better.
Perhaps it’s my age bracket…but to see GM taking a knee at this point, it hurts. Not that I have an allegiance to them, but they’re almost like that tough uncle that everyone has that is reliable – the man’s man – the guy that when your driveway wall crumbled in the rain would come help you put it back up. To see that man vulnerable from something like a heart attack is like seeing GM “swirling” as it was put above. Perhaps it goes back to the Patriotism discussion from before where I pondered how a car purchase can be patriotic. It’s just not, anymore. And I don’t know when it stopped being so. Mid 80’s? 70’s? I was a mere toddler in the 80’s…so when you guys are bringing up the near collapse of Ford and the advent of the Taurus, I have to go and hit google and look at this.
Are we repeating the 80’s as a society? music is eerily similar, same with fashion, we’re playing with Iran again, there’s a looming oil problem, apple is bursting back on the scene, and Detroit is in trouble again, among other things.
You’ve been a proponent of GM closing brands, models, plants, and everything else that can be shut down. How do you propose GM do that without spending a dime? Short of going Stalin’s route and lining up workers in front of a firing squad, what cost-efficient ways to eliminate unionized workers from payroll are there? I myself am not a fan of down/rightsizing in the US while at the same time the Big 3 build/invest in/consolidate/retool plants in Canada and Mexico. Obviously these buyouts are going to lead GM to another year of billion dollar losses but, in principle at least, it should make for less red ink being spilled by Rick down the road.
As a lifetime GM driver, I have to say that this perception of low GM quality is way off mark. In the past 20 years I have owned every make of GM, some new, some used. They have been driven in all types of climates, across the country (3 times). None have ever let me down, other than the occassional wearable item. In order I have owned the following: 1987 GMC pickup (new), 1986 Chevy Caprice Classic (used), 1993 Chevy Camaro (new), 1994 Chevy Impala SS (new), 1973 Olds Delta 88 (used), 1999 Pontiac Firehawk (new), 1976 Buick Lesabre (used), and currently a 2006 Chevy Monte Carlo SS. To start with, the GMC was my first vehicle and as such I hardly babied it, it was taken off road constantly, it ran beautifully and on more than one occasion I had to rescue smalller Toyotas that were stuck in the mud. The Caprice had around 20K when I bought it, when I sold it, it had over 100K on it and was still running strong. The Camaro and Impala also ran flawlessly. The Delta 88 was a convertible that I took across the country Boston-San Francisco and then back in 1998. Through mountains, deserts, all kinds of temperature extremes, she never let me down. I returned from the west coast in 3 days, at one point driving 24 hrs continously. I’d love to see a 1973 Toyota or Honda do that. The Firehawk was also driven coast to coast without fail when I moved to LA. I bought a 1976 Buick from the original owner in Los Angeles and drove that back to the East Coast. Other than occasionally overheating (only with the AC on, in the desert (rte 10) she made it no problem. I just bought a 2006 Chevy Monte Carlo, absolutely love it , no problems after 2 mos and 2500 miles. After all this time and owning all these different vehicles, my question is how can anyone honestly say that GM doesn’t build a reliable, economical vehicle? As a footnote, I also own a 1978 Cadillac Eldorado. It was my grandfather’s car, it currently has 50K miles and everything still works, even the original 8 track. Most of it is still original although I have put new tires on it and new CV joints in the past year. I thought the 70’s were GM’s worst years? In summary, these cars did have some problems, but the majority were convered under warranty and were fixed by the dealer at no cost. I was able to fix the older, used cars myself for the most part and the parts were relatively cheap ( again try to find a cheap alternator or starter for a 20 year old toyota). None of these cars were close to being lemons, in fact they were all reliable, solid transportation. So there it is, that’s my story and I’m sticking to it.
oboylepr hits the nail on the head in his last two sentences. GM’s looming demise is going to have adverse effects on the region (Southeast Michigan), the State and the Country! Detroiters are atrophied with apprehension. The restaurants are less full, as are the stores. The local economy seems to be slowing as people are hovering in a ???wait and see??? mode. The impact of the GM implosion could be immeasurable. The odd thing about that is the GM folks seem to be oblivious. And the band played on???.
Hell, the only good news out of Detroit these days are the Tigers. . . .sadly, they don???t have an openings.
Montess, it’s good that you have had so much good luck. But having spoken to literally thousands of people over the past decade, and read literally thousands of comments from people online over the past few years, I’d have to say that your luck has been just that. You should go buy a lotto.
That being the whole point. GM, Ford (as well as Chrysler and Volkswagen) “quality” is so spotty and inconsistent from model to model and year to year (unless you want to talk “BAD quality” in many cases) that a majority of the public no longer wish to “go there.”
Look at it like this. At one point about 40 years ago, GM alone had over 50% of the entire automobile market in the United States.
Now, just over 1 in 5 people shopping for new cars buys a GM product and that is literally dropping overnight.
There must be “SOME” reason(s) for this absolutely catastrophic (from GM’s perspective) decline, mustn’t there?
Those reasons are many, and well documented. No point wasting time reiterating them.
Should the buying public be “blamed” for GMs impending demise? Hang on, hasn’t GM pushed the idea of a free market and pushed the idea that people should buy the best product (they’ve claimed it was their stuff) over the past 9 decades? Yes, they have. So, when it turns against them, what? Suddenly we’re to accept that we should make an exception for them? I don’t think so….
How could GM “fix” themselves? Frankly, given the size of, and arteriosclerosis of the organization – it probably cannot, which is going to be potentially (albiet temporarily – maybe a decade) disasterous for Michigan in particular, and the midwest in general.
It may be a bad comparison, but South Bend Indiana employment levels gradually “wound down” over the decades as Studebaker did same, and when the end came, it did take a decade for the city to recover. But as one pundit said very late in 1963 “This is NOT “Studebaker, Indiana” but “South Bend, Indiana” – in other words, get a grip, stand up, dust off, get back on one’s feet, chin up, move on, deal with it. It’s called “life”.
Oh yes, before I forget to mention it, I live in Michigan myself. We’re in the “winding down” stage now – we have the highest unemployment in the US at 7% now.
Glenn, I wouldn’t call it luck. Like I said, these cars were really DRIVEN, in all climates, conditions, etc. and I have never “babied” any of them. They haven’t been the most fuel efficient cars, that might be the only thing the foreign cars have on them. However, I don’t think that’s much of an issue since the oil crises of the 70’s. Bottom line- GM cars may not be the most fuel efficient, but the other costs of ownership for me have been very reasonable. It’s all about image, and nowadays American cars have been stereotyped as being low quality when in reality most people never give them a chance.
One more thing, I do really wish GM made a viable hybrid or electric because I’d trade the Monte towards one in a heartbeat. I think the really sinister corporations are the oil companies who are trying to suppress any really new fuel efficient technologies, i.e. hydrogen
Montess:
You say you bought a brand new Monte Carlo and have had no problems with it. I believe you. Unfortunately you couldn’t pay me to drive that car. It has one of the ugliest ass-ends ever to be rendered in sheet metal, and one of the most hideous profiles my poor eyes have ever had the misfortune of witnessing. It looks like it should come with a mullet wig as standard equipment.
I’m happy for you that you like it, however. To each his own. But I would suggest that if GM offered compelling vehicles more people would give their quality a chance.
Regarding your sinister oil company/hydrogen comment: don’t confuse “emission-free” with “efficient.”
Glenn-
So what’s the problem then, quality or looks? We should stick to the facts here, looks are a subjective trait. Quality, however, is objective and to me a car that has no major mechanical problems is a far cry from a “lemon” or a “dud”. Just because you don’t like the looks of the car doesn’t mean that other people won’t like it, and to think otherwise is to be guilty of the same arrogance that you and others accuse GM of. Hmmm
p.s. Everyone that has seen my car loves it, even those people who have sworn off GM.