Detroit Free Press writers Katie Merx and Tim Higgns have reached new heights of hyperbole. After boldly proclaiming "A new U.S. auto industry emerges" because of the new UAW contract with GM, they tone down their rhetoric a bit– but not much. They speculate that the new agreement will make "GM more competitive against its foreign rivals." They also claim the contract has the "potential to shape a new Detroit auto industry that can compete on a more-level playing field with … foreign rivals not burdened by huge retiree legacy costs." But then they temper their enthusiasm by admitting "GM, Ford and Chrysler still face challenges to consistently develop vehicles that resonate with Americans, to slim down their dealer networks and to improve their image on quality." So what's it gonna be– a "more competitive" GM because they now have a "level playing field," or a return to business as usual before the ink is even dry on the contract? Watch this space (General Motors Death Watch 148 later today).
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Whether the ant-Big 2.8 want to admit it or not, this will help immeasurably. We’re talking about improving the balance sheet a net $15 billion for GM. That alone will lower borrowing cost as its credit rating improves and cut around $3 billion per year in costs related to RHC. All that money is now free to flow into vehicle programs, and GM and Ford, at least, will be be able to take more risks, invest more in their infrastrcuture and R&D and develop cars that don’t generate as great of profits.
Look, part of the Big 2.8’s obsession with large vehicles is that they generate more profit per unit than small cars. They generated massively more per vehicle until probably two years ago. When your costs are STRUCTURALLY billions more than your rivals, you are forced to do exactly what we saw: develop SUVs and trucks with little regards for cars, and further, allow the bean counters to get their hands on the cars to reduce their costs as much as possible. That combined with the “need” to maintain sales images by selling to rental fleets got them into this mess.
However, even now that GM and Ford are transforming their operations into much more efficient and global entities that have much better strategies overall, in the long run, they would still die off with structurally higher fixed costs and massive liabilities.
Yes, this deal, if approved, will save the U.S. auto industry. It was the last peg to get put in place now that the management at both GM and Ford have overhauled their operations and product pipelines. Now we sit and wait. The operational benefits and financial savings of this deal will be in full swing by the end of 2008, and at that point, a whole slew of new products will have emerged from GM and Ford and both comapany’s long-term product strategy will be much clearer.
It’s true that they have to capitalize on this, but with initiatives coming out of the companies like GM’s Volt project, the new CUVs, Ford’s twin-force engines, both companies small-block diesels, etc. etc., I am optimistic that they get it, and this deal by freeing up cash will allow them to realize it.
RobertSD: You state “(the new contract with the UAW) is the last peg to get in place..” apparently you feel this alone will save GM et.al. What does the proposed contract do to resolve the bloated dealer structure? Hos much cash is left after funding the VEBA? The perception gap that exists? Which new GM product is going to turn the ship around? The Volt? When does that hit the streets? When do the small block diesels hit the street? What are they going to do with the rental car company aka Buick? Pontiac? etc.etc.
Of course it will help with sales in certain circles if it develops the way you say.
15b to put on the hood is significant.
What they need is $40 a barrel oil.
If Gettelfinger wants to save all his guys jobs, he needs to get the government to open up all the protected lands to drilling.
Maybe he can talk to Katie about knocking off a all the environmentalists :)
hltguy : Did you ignore half my post? I said that this is the last major peg while everything else is in motion from product development to operational efficiencies. They may not be completed as of now is what I should have stated more clearly, but that doesn’t mean things aren’t happening. The contract has nothing to do with those workings, it just gives GM and Ford less uncertainty and better operational cash flow as they overhaul. It makes otherwise skittish investors more likely to invest with billions in uncertainty and cost erased.
I’ll admit that GM has a daunting task raising the $35 billion needed to fund the VEBA. But Ford doesn’t. If Ford gets the 70% deal, they will owe just about $16 billion, probably an amount they can cover without borrowing any money if they don’t want to and without disrupting their R&D work. And, given GM’s recent internal changes and focus on balance sheet – showing somewhat adept finance skills after all – I would doubt they would have proposed something they didn’t think they could fund.