Earlier this morning, GM CEO Rick Wagoner announced a cost-cutting package designed to "better align the business to the current market condition." He's cutting bonuses, pushing salarymen out the door, disappearing the dividend, postponing the union's health care payment, putting truck development on ice, yada yada yada. While the media focuses on the scope and scale of Rick's "right-sizing," the money shot arrives in the last six words of the official press release. Apparently, GM has "an ever stronger and competitive product line-up." Nonsense. And until that's true, GM's doomed. Which means GM's doomed.
Those of you who've been following this sad saga of missed opportunity, bungled branding, disconnected development and arrogant administration will know that the markets normally react to GM's slicing and dicing with some enthusiasm. And why wouldn't they? Rick's regular rescue remedy is offered by an accountant, for accountants. But this time it's different. The dividend cut is a tacit admission of failure. And Rick tenuous statement that The General's willing to kinda maybe sorta if they have to oh what the Hell hock their last meaningful asset– GM's foreign ops– is a fire sale too far.
By now it's clear that GM's burning down the house. The automaker is already paying $3b in interest; the last thing they need is billions of additional debt. Especially as GM [still] has no coherent plan for building profitable products for the U.S. new car market. A market which is contracting violently, which has yet to hit bottom. By now, even the money men understand that one.
Wagoner says his new new new new turnaround plan will raise (raise?) some $10b and save another $5b. That should be enough to see GM through, well, until it burns through the money. In fact, this move only makes sense if GM is stocking-up its war chest in anticipation of bankruptcy. No matter how much cash GM stuffs in its coffers, the automaker has too many unkillable dealers, unattractive brands, untenable products and expensive obligations. C11 is the only way out.
The ur-problem is that Rick Wagoner doesn't have the stones for the job. Wagoner simply refuses to do what must be done, and done soon.
Yes there is that. While a GM bankruptcy may be unthinkable for the GM lifer in charge of its fortunes (or lack thereof), there is only a small window of opportunity for a court-protected, dealer-dumping GM restructuring.
In case GM hadn't noticed, the U.S. is in the midst of a major mortgage meltdown. "Solving" the banking problem will require trillions of dollars of federal "assistance." There could well be a political backlash, or, of you prefer "bailout fatigue."
At the same time, it's entirely possible Chrysler will file for Chapter 11 in the next few weeks/months. When the world doesn't stop spinning, the psychological non-impact of a Chrysler C11 could make GM's inevitable bleating at the pre-C11 begging bowl seem less… credible. And let's not forget Ford. Same deal, only on a much larger scale.
If Ford goes C11 first and receives federal loan guarantees, wouldn't GM be more likely to be able to do the same? Maybe. Maybe not. Again, bailout fatigue. And what of the competitive threat posed by a dealer and brand-liberated FoMoCo? Maybe Motown's game of last man standing actually means the first one into bankruptcy wins?
It has been said many times by many people, including Mr. Wagoner, that a GM Chapter 11 would eliminate the American automaker. Bankruptcy's opponents always trot-out the argument that a bankrupt airline (the most common example) is not the same as a bankrupt car company. A plane ticket is not as great an investment as a car. No one would buy a car from a bankrupt carmaker.
This is patently untrue. Everything sells at a price. How about a new Buick LaCrosse for under ten grand? Seven? Six? And a GM C11 would NOT prevent GM (or some third party) from honoring its existing or future vehicle warrantees. And it's important to see this from the other side of the equation. American Airlines is generally considered to be in worse shape than its competitors because it didn't file for Chapter 11.
While bankruptcy would be an enormous shock to GM's system, that's exactly what they need. GM NEEDS Chapter 11 to get their house in order, to perform the root and branch reform upon which their future– if they are to have one– depends. And the longer they deny, dismiss and delay the inevitable, the less chance they have of emerging from the process. Ever.
Or, the Volt could be successful in a few years time. GM’s new small cars could take off. The dollar could strengthen, oil prices could fall. $3/gallon gas could mean a boost for trucks. The housing market collapse could subside, meaning easier credit and more construction (again helping trucks). GM could turn a profit in 2010 and beyond. It could actually increase market share. The US auto industry could see 17 million sales again in 2-3 years. If, possibly, maybe, could, perhaps, etc, etc.
Its all speculation, Chap 11 isnt coming this year or next. Certainly if GM cannot turn its operations around in the next few years, its debt will be so burdonsome, that Chap 11 becomes necessity rather than a desirable quick fix.
Hmmm… if Keonig can only relieve Berlin….
1. GM doesn’t have a “few years time”.
2. GM needs successful products like a Civic or Accord, not a money losing Prius which is successful only from a PR standpoint.
I got a solution, let’s just have Fannie Mae buy up all the bonds GM wants to issue at special super-low interest rates! FNMA is pre-bailed out so that’s a win-win situation.
Sorry, RF. I can’t totally agree with your thoughts this time. While today’s announcement was all words, they’ve finally started to do what they needed. Cutting the dividend out is HUGE. Yes, it’s an admission of failure, but it’s better to admit failure than ignore flaws. Isn’t this one of the things that TTAC and its commenters have been calling for?
I will agree that sale of foreign ops is not smart. GM should build on the growing foreign market.
As for the bankruptcy issue, you have to consider that the average person has no idea what Chapter 11 is. To them, bankruptcy means bankruptcy. Out of business. kaput. They won’t be able to sell many vehicles.
RF, your prediction of GM’s demise back when the Death Watch series began seemed, well, over the top. The idea that one of the world’s great corporations would fail after 100 years of mostly brilliant success was just too hard to swallow.
Now the idea has gained enough currency that GM feels pressed to deny imminent bankruptcy with every new statement. Even so, all indicators seem to be pointing in that direction, and finally the automotive and financial press are starting to internalize the idea that GM is truly going down.
It’s an ugly thing to watch, but it has been well-earned as a textbook example of the principle that determined, relentless mismanagement can bring down even the greatest of companies. (Rick Wagoner’s portrait will surely have a place of honor in GM’s pantheon of CEOs, if the company survives.)
You’re to be congratulated on seeing the handwriting on the wall while everyone else was lapping up the happy talk that Wagoner and Lutz were able to dispense without challenge for so long.
By the way, happy 100th birthday, GM.
seoultrain:
…they’ve finally started to do what they needed. Cutting the dividend out is HUGE. Yes, it’s an admission of failure, but it’s better to admit failure than ignore flaws. Isn’t this one of the things that TTAC and its commenters have been calling for?
Too late. Or not?
[first comment on Autoblog story, from beat-it-nerd]
“I do really like how the plan is worded to employees as not a “survival plan” but a plan to WIN. I think GM has been beaten down by the press in excess of the real conditions. GM is far and away a better company with much better product than both Ford and Chrysler. The thing that boggles my mind is that Fords Market Capitalization is almost double that of GM. This tells me that GM is a great stock pick at the current price!”
“Cutting the dividend out is HUGE.”
Not really. It only saves $0.8B through 2009 at a time when GM admits it is going to burn through ALL of it’s cash on hand plus another $15B. The question is why it didn’t get cut ages ago. Dividends are a way or returning the portion of a business’ profit to shareholders which the business doesn’t have a profitable way to invest on their behalf. No profits should ALWAYS mean no dividends in a well run business.
http://online.wsj.com/article/SB121612399864154295.html?mod=hps_us_whats_news
“Among other steps to shore up liquidity, GM said it will defer about $1.7 billion of payments that were scheduled to be made to a temporary asset account in 2008 and 2009 to establish a health-care trust.”
So, the VEBA raid is on.
“The company will also trim executive compensation, eliminating annual discretionary bonuses for 2008.”
Oh, poor executives will have to do without a portion of their bonuses. Meanwhile:
“health-care coverage for U.S. white-collar retirees over the age of 65 will be eliminated as of January”
Grim days indeed.
If so much as one hostile shell gets fired out of or into Iran, the oil price spike will make today’s pump prices instantly seem like the good old days. Anyone who isn’t either rich or who desperately needs one will run away from trucks and SUVs (they certainly won’t be driving away…they won’t be able to afford to). The ones who haven’t run already that is. There’s plenty of room for the sales of those vehicles to implode more. If that happens…oy.
I found it interesting in the US that the most recent GM products all have a little, square GM badge on the front wing which is exactly the same way that British Leyland used to put a little square badge on all their branded models (including Jaguar and MG) during the 70s.
Leyland Badge : http://upload.wikimedia.org/wikipedia/commons/thumb/c/c8/British_Leyland_Badge_2.jpg/517px-British_Leyland_Badge_2.jpg
GM Badge
http://reviews.cnet.com/sc/31861530-2-300-DT4.gif
The comparisons between the two get closer and closer, they will be asking for taxpayer’s money next. Oh wait…
I also noticed the US Hertz pricing policy that puts a basic Camry LE (furry seats, 2 litre 4 banger, no ‘puter) as an upgrade from a Buick LaCrosse (dead cow seats, V6 and fully informative ‘puter – 19 MPG ? WTF).
Having driven both back to back I paid for the upgrade happily.
And all those SUVS ? Well Hertz offered everyone in the queue a free upgrade to take one and nobody accepted.
Robert Farago Says:
Too late.
Perhaps. But no one knows for sure. If GM were to crawl out of their hole, this is the first step. They have a long way to go, but I’ll give them credit on this one.
Along the lines of yesterday’s silver lining post, maybe start a GM Rebirth Watch? You have to admit that if they can execute this plan well and the economy recovers, GM’s future would look a lot better. Besides, you guys have started Death Watches on less. Why not the opposite?
And John, while the actual monetary amount of the dividend is not significant, it shows that GM is serious about cutting costs.
We’ll know bankruptcy is on the table in the minds of mgt and BOD when they float a public offering of their international ops. Then, GMNA goes belly up and GM “international” buys up what’s left of GMNA for pennies on the dollar in C11. Chevy and Cadillac survive and GM gets run out of Zurich — no longer an American company.
BTW, all this media talk about buyers needing to move to “crossovers” is misguided. If by crossovers they mean 16 mpg Enclaves and Edges they’re mistaken. More 4-cylinder family wagons are what buyers really want now and into the $5-6 gallon future.
C11 does not always work. The airline industry has used it many times to get out of union contracts, dump pension obligations and screw creditors. When your business model is fatally flawed, you still cant make money.
And what of the competitive threat posed by a dealer and brand-liberated FoMoCo?
If they sell Volvo then the only brand they need to liberate is Mercury. Pry the Mercury badges off the models that don’t already have a Lincoln twin and slap a Lincoln badge on them. The dealer bloat is a much bigger problem for Ford than excessive brands.
GM’s new small cars could take off. As in? The Chevrolet Beat that they put on the back burner until gas hit $4/gal?
Everything sells at a price. How about a new Silverado for under ten grand? I’d take a Cobalt/HHR for five.
“18 of next 19 launches are cars or crossovers”: Here are some of them that have been announced:
– CTS Coupe
– CTS Wagon
– Camaro
– Camaro Convertible
– Solstice hardtop
Yep, sure responding the the fuel economy-minded consumer!
“And John, while the actual monetary amount of the dividend is not significant, it shows that GM is serious about cutting costs.”
Surely you jest. If Rick were serious about cutting costs he would drop his own salary to a “measly” $100k per year until he turns things around.
I’ve just realised something.
GM haven’t actually learnt anything.
Let me explain.
GM’s business model never worked* and the last 30 years has just been a dearth. Now, any normal management would see that something is wrong and needs fixing, but GM CEO’s have had the same attitude (i.e “Hopefully, GM will last long enough whilst I’m CEO, then it’ll be someone else’s problem”); Roger Smith did try with “Saturn” but didn’t try hard enough. So, they all carried on with the same business plan.
Now, GM could use this crisis (Yes, that what it is) to fundamentally change GM for the better. But all they keep doing is cutting and cutting and cutting without changing anything. This round of job cuts will keep GM afloat….until the next round of cuts are needed.
I thought GM were heading in the right direction when they tried to globalise “Chevrolet”, but that’s fallen flat on its face, with the report that the Chevrolet Volt (if it comes to market) will be re-branded as a Vauxhall/Opel Volt for the European market.
Mr Farago said “Wagoner doesn’t have the stones to do this job”. I’d go one step further and say “Wagoner doesn’t have vision to do this job.”
* = Don’t start telling me that it worked up until the 60’s, because that’s not true either. When the transplants came over with their business model of reliable products and organic growth, GM fell apart like a Chevrolet Vega. GM only existed because the competition was lame.
John Horner Says:
Surely you jest. If Rick were serious about cutting costs he would drop his own salary to a “measly” $100k per year until he turns things around.
No joking here. But I said GM is serious about cutting costs. I think the only thing Rick is serious about is cashing that paycheck. I wonder how opposed he was to his bonus cut.
The Big 2.8 is just the canary in the coal mine. They are just as competitive as the rest of what is left of American industry. Housing market upside down, stock market is a bear, banks going belly up and the government is trying to buy it’s way out of this mess. Economic conditions unseen in the recent past. If the Big 2.8 go under likely a big economic mess will coincide. The economy is now way beyond the Big 2.8’s bankruptcy being the main problem. Hard to see how the US economy is going to pull itself out of this tailspin.
Ronald Reagan
“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
Now at the subsidize it stage.
After GM delivered to me a Pontiac Phoenix with no second gear in the transmission, they sent me a card asking how I liked my new car! After giving the dealer first class marks for effort, I added: “When the wind is from the West, you can hear them laughing in Tokyo”. Took a lot longer than I expected, but the chickens are home to roost. Couldn’t happen to a nicer bunch of guys.
I think that – given the current economy – that bankruptcy is almost inevitable.
1. Gas prices will stay up.
2. Inflation is going to soar because of the impact of petroleum costs on food, and, well, everything.
3. Interest rates are going to climb, making it harder to finance cars even for those who feel secure enough in their jobs to buy one.
4. GM’s Unions will be clamoring for inflation-adjustments adding to costs or strike potential.
5. People will be tightening belts in the tight economy and buying less cars – even Toyota has been hit already.
It’s going to be very interesting. It’s been fashionable with some of us (me included, and perhaps especially) to complain about the costs with which labor has saddled GM.
However, now that it’s crunch time, it’s quite apparent that the problem really comes down to product, and GM hasn’t got much to offer that’s attractive, even at fire-sale prices.
@mellvar: Lutz says no Beat for US as it doesn’t meet safety/crash regulations and there isn’t enough money to get it ready in the next 2 years.
KatiePuckrik: * = Don’t start telling me that it worked up until the 60’s, because that’s not true either. When the transplants came over with their business model of reliable products and organic growth, GM fell apart like a Chevrolet Vega. GM only existed because the competition was lame.
Well, sorry, but it DID work until the early 1960s. And what did it in was not the transplants, but the strategy of the homegrown competition – specifically Ford and AMC – which drove the fragmentation of the domestic market. GM was in trouble before the transplants hit their full stride.
Ford never had strong medium-price brands. Ford matched Chevrolet sales a few times throughout the 1950s, but Mercury was no real competition for the formidable Pontiac-Oldsmobile-Buick trio. The Edsel was an attempt by Ford to invade this territory, and it failed miserably.
The same year Ford introduced the Edsel (1958), it also introduced the four-seat Thunderbird. That car was a big success. Suddenly, a FORD – the original mass-market brand – was selling to people who would have previously only considered Buicks or even Cadillacs, because it was so unique for the time.
GM didn’t know quite how to respond, so it took five years for the Buick Riviera to hit the market. Now a BUICK was competing directly with a Ford. Sloan’s stairstep approach to brand indentity was becoming blurred because of actions GM took in response to Ford’s moves on the chessboard.
Then, in 1962, Ford unveiled the intermediate Fairlane, which capitalized on the market niche uncovered by the standard Rambler. GM responded with four models, from Chevrolet, Pontiac, Buick and Oldsmobile, all of which largely competed with each other as much as with the Ford, Chrysler and AMC offerings.
The Rambler American, meanwhile, forced the Big Three to introduce compacts in 1960 – the Ford Falcon, Chevrolet Corvair and Valiant (badged as the Plymouth Valiant for 1961). The Corvair was left in the dust by the Falcon, so GM rushed the conventional Chevy II into production for 1962, which meant that GM had to offer another model to stay abreast of the competition.
The sporty version of the Corvair (Monza and Spyder) did sell well, so Ford responded with the Mustang, which was THE success of the 1960s. GM had to tool up for the Camaro and Firebird to address this new market segment uncovered by Ford.
As Ford unveiled new models, they revealed new market segments. Not everyone wanted a variation of a full-size car. GM, in turn, was forced to respond with competitive models, which increased costs, so this increased the pressure on GM’s divisions to share bodies and other components in the same size class. This led to the blurring of division indentities.
All of this happened well before the transplants became a serious presence in the late 1980s and early 1990s. GM was well off its stride by the time the Honda Accord claimed the number-one sales spot among all passenger cars sold in the U.S. in 1989.
And saying GM only thrived because the competition was lame is not accurate. Buyers of 1959 Chevrolets were comparing it to 1959 Fords, Plymouths and Ramblers (and, to a lesser extent, 1959 VWs and Renaults). They were not comparing it to 1989 Accords or 1994 Camrys.
The 1959 Chevrolet was, along with the 1959 Ford, the best buy for most people at that time. They were not, in the context of their time, “lame,” and it’s unfair to denigrate them based on what came later from the competition.
For that matter, Toyota and Nissan initially flopped in the U.S. market because their initial offerings were terrible, even by the standards of the day.
As for a GM bankruptcy – it looks increasingly inevitable, unless the economy miraculously turns around in the coming months. Which is highly doubtful, as I don’t believe that the housing bust is over by a long shot.
## Richard Chen Says:
July 15th, 2008 at 12:41 pm
@mellvar: Lutz says no Beat for US as it doesn’t meet safety/crash regulations and there isn’t enough money to get it ready in the next 2 years.##
That and the Cobalt and Cruze will be sold side by side. Its “too many products/too many brands” run amuck. Now they’re selling competing products under one brand.
In case GM hadn’t noticed, the U.S. is in the midst of a major mortgage meltdown. “Solving” the banking problem will require trillions of dollars of federal “assistance.” There could well be a political backlash, or, of you prefer “bailout fatigue.”
Another cloud joins the “perfect” storm. That bailout fatigue seems very likely, but none of us has a crystal ball to see if it will actually be trillions. It might very well be trillions, but if that is the case, GM will be the furthest thing from anyone’s mind anyway, bailout fatigue or no.
It’s interesting how talking about potential GM NA Bankruptcy causes some of us to take a more critical look at our economy as a whole… I’m going up to the attic to inventory how many Bell/Mason jars are left over from when my mom used to can veggies.
An independent Chevy brand (maybe with Cadillac along for the ride) would be quite competitive with their current car mix. Let’s take a look:
-Impala: Ruler of the value-oriented, large FWD universe. That Malibu sales haven’t cannibalized Impala says a lot. The new Accord is potentially bad news, but I’d say the Accord still constitutes a completely different audience.
-Malibu: A class leader by any measure.
-Cobalt XFE: Look at the numbers. EPA matches the Civic, but more horsepower and a lower sticker. Most people are too stupid to understand how much better the Civic is. After all, these are the people who bought SUVs as single-passenger daily commuters. The planned replacement will be a quantum leap better if they can keep the price below the Civic.
-Aveo: The mission of a $12,000 car is simple: don’t fall apart. Mission accomplished. Aveos are flying (waddling?) off the lot. The planned replacement will yadda yadda…
If I’m GM, I C11, dump all other brands and associated liabilities, come out with Chevy/Cadillac. Throw a Malibu wagon into the mix. With all marketing resources going into an independent Chevy, they really could be something. Like, profitable.
I doubt Rick will be around in Sept. And I don’t think GM can wait for a Democratic administration to take office in January (yes I am calling the election), to be bailed out. The Bush administration is in a “giving mood” in any event, although seemingly indifferent to Detroit.
Perhaps GM could employ Andy Card as a lobbyist….?…..
Interesting post geeber, thanks. My view has generally been that GM’s branding mess dates back to the mid-sixties – virtually exactly forty years ago in fact – but I might have to reconsider that to extend back another decade.
Unless and until GM kills off brands, dealers, and real costs, this is all just rearranging the deck chairs on the Titanic.
When you’re in a hole, the First Rule is, QUIT DIGGING.
GM just went out and showed the world their new Nuclear Shovel.
More SAAB’s?
More GMC’s?
More Pontiacs?
More Buicks?
Cadillac CTS WAGONS???
Cadillac BRX?
Wow, did GM stock recover or what? Opened at 9.43, dropped under 9 in no time after the announcement, but is now flirting with 10. Every time it gets over 10, people sell and it drops a little below. I guess people are seeing this announcement as a good thing.
HPE,
GM’s brand structure worked in a relatively simple market, where 99 percent of the customers bought largely the same kind of car. Once the market began fragmenting, as it did in the late 1950s, GM’s approach was doomed.
But geeber, wasn’t the Sloan model flawed from the get-go? If you stuck with Pontiac and didn’t go up to Olds and Buick, didn’t the system break down then? Isn’t that what led to the more expensive brands dipping their toe lower and lower?
@carshark and geeber
Also, (as I pointed out yesterday) let’s look at two models:
Toyota’s brand encompasses small cars (Aygos and Yarises) to pick up trucks (Tundra and Hilux). Now in this downturn of gaz guzzlers, Toyota can simply shift production around to increase production of small cars whilst contracting the pick ups and SUV’s. The brand doesn’t get damaged whilst allowing it to still grow.
Now compare that to GM’s model. If GMC was their “pick up” brand, then it would receiving a right royal battering in this climate. Such a battering that the brand could cease due to poor sales. Now, if and when the market picks up, GMC might not be around to grab those increased sales.
Just a thought…..sorry, Bunter! ^_^
CarShark,
If I recall correctly, Sloan did allow for very modest overlap, because he wanted there to be some pull among the various brands. A lower priced Oldsmobile would attract some strivers who wanted to move up from a Pontiac.
But those lower priced models weren’t allowed to become what the brand represented. By the mid-1970s, for example, Oldsmobile’s mainstay was the Cutlass, which was selling in what should have been Chevrolet’s territory. It was a nice-enough car, but it really wasn’t all that prestigious (if you could afford a brand-new car, you could afford a Cutlass). Meanwhile, the Supreme variant, along with the Grand Prix and Buick Regal, was competing with the Monte Carlo.
Katie,
No argument from me that Toyota has the better brand structure and approach to managing its brands for today.
Why you can’t keep kicking the can down the road. The billion a month GM loses (that’s a thousand million) is not to be cauterized, no just refinanced. If you say get all your sub-compact cars to sell better than the competition, how many do you need at $100.00 profit per copy to offset the billion a month, I think it’s 100,000.
This cannot happen, nor will they be able to raise the prices on small iron significantly because the competion won’t allow it. Bad as the US is now, it’s curious that VW today announced they are ready to build a new plant in Tenn. With all of these transplants here stateside, will there be any domestic market left at all? Or will it be, the last one out at the big three turn out the light, no one will notice if you forget.
I am rather skeptical of the concept of bailout fatigue. The amount of money that is likely to go to the banks for the subprime/mortgage fiasco is so large that the few billions that Detroit requires is chump change.
I also think that people will be more sympathetic to giving money to an american manufacturer–even one that makes shoddy products–than they will be to paper pushers who are deemed largely responsible for the housing bubble.
jerry weber said: “If you say get all your sub-compact cars to sell better than the competition, how many do you need at $100.00 profit per copy to offset the billion [present cash drain] a month, I think it’s 100,000.”
Actually, it’s worse than that: you’d need to sell 10 million cars at $100 profit per car to make a billion. But your point still holds, and indeed becomes much clearer: GM is in a fix! It seems that one solution–sell 100,000 Escalades at $10,000 profit per vehicle–is steadily getting more implausible.
“GM NEEDS Chapter 11 to get their house in order, to perform the root and branch reform upon which their future– if they are to have one– depends. And the longer they deny, dismiss and delay the inevitable, the less chance they have of emerging from the process. Ever.”
Necessary but not sufficient C11 can be used to solve balance sheet and contract problems. Unfortunately, it does not raise the IQ of management.
Ronald Reagan
“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
Now at the subsidize it stage.
That’s a great quote. Let me know when Zombie Reagan or any one of his progeny learns how to balance the federal budget. (Slick Willie managed it, and with an extremely hostile congress. Can’t be that hard.)
gamper:
Or, the Volt could be successful in a few years time. GM’s new small cars could take off. The dollar could strengthen, oil prices could fall. $3/gallon gas could mean a boost for trucks. The housing market collapse could subside, meaning easier credit and more construction (again helping trucks). GM could turn a profit in 2010 and beyond. It could actually increase market share. The US auto industry could see 17 million sales again in 2-3 years. If, possibly, maybe, could, perhaps, etc, etc.
Or, one day pigs could fly. A man can dream, can’t he?
Lets get all this wishful thinking and daydreaming out of the way so we can cut to the chase.
The fact is all of these things are VERY unlikely to happen. While the US market will eventually rebound, gas prices will NOT go down. The other problem is, once the market rebounds, exactly WHAT high-margin vehicles will GM have for sale that consumers will be willing to buy?
It has been said many times by many people, including Mr. Wagoner, that a GM Chapter 11 would eliminate the American automaker. Bankruptcy’s opponents always trot-out the argument that a bankrupt airline (the most common example) is not the same as a bankrupt car company. A plane ticket is not as great an investment as a car. No one would buy a car from a bankrupt carmaker.
This is patently untrue. Everything sells at a price. How about a new Silverado for under ten grand? Seven? Six? And a GM C11 would NOT prevent GM (or some third party) from honoring its existing or future vehicle warrantees.
I have a significant difference of opinion here. First, the goal of a Chapter 11 bankruptcy would be to regain profitability. They can’t do that if they can only charge six to ten grand for a Silverado. Second, my complaint about warranties is not whether or not GM would honor them, it’s about whether or not consumers would believe that they would honor them. If customers don’t believe the warranties will be honored, even if they actually will be, those customers will look elsewhere. It’s like a bank run-if everybody believes that a bank is in trouble, everybody takes their money out of the bank and the bank is actually in trouble-even if the bank wasn’t isn’t in trouble originally, it is now.
I personally believe if a vehicle manufacturer goes into Chapter 11 they will never come out of it because the act of entering bankruptcy will cause sales to fall even further. No vehicle manufacturer has ever entered Chapter 11 to my knowledge, so there’s no history to show whether my theory or Mr. Farago’s is more likely to be correct. But that may change soon.
Geotpf:
I have a significant difference of opinion here. First, the goal of a Chapter 11 bankruptcy would be to regain profitability. They can’t do that if they can only charge six to ten grand for a Silverado.
Right you are. I left you with the wrong impression here. I’ve changed the example to a Buick LaCrosse to better illustrate my point.
Which was/is that GM would be able to sell vehicles in C11. The main reason to do so would be to generate some cash flow and get rid of all the brands/inventory it doesn’t need. And if you want to talk about seriously chopping overheads, C11 is the only way to go. The only way GM can go.
Axel Says:
July 15th, 2008 at 1:30 pm
Cobalt XFE: Look at the numbers. EPA matches the Civic, but more horsepower and a lower sticker. Most people are too stupid to understand how much better the Civic is. After all, these are the people who bought SUVs as single-passenger daily commuters. The planned replacement will be a quantum leap better if they can keep the price below the Civic.
The Cobalt XFE is a paper vehicle. That is, it’s a vehicle that exists so GM can have bragging rights for something on paper (in this case, fuel economy), not one they actually intend to sell. It has a bunch of tweaks that make the car handle and ride worse (low resistance tires, etc.) but that give it better fuel economy. But the biggest tweak is the fact that it only comes with a manual transmission.
This is America, where 80%+ of all vehicles sold come with automatics. That’s what consumers want, and Toyota and Honda show that they can make vehicles with autos that get the same (or in some cases, better) fuel economy than ones with a manual. The fact that the XFE only comes with a manual shows that it is a paper vehicle.
Robert Farago Says:
July 16th, 2008 at 7:17 am
Geotpf:
I have a significant difference of opinion here. First, the goal of a Chapter 11 bankruptcy would be to regain profitability. They can’t do that if they can only charge six to ten grand for a Silverado.
Right you are. I left you with the wrong impression here. I’ve changed the example to a Buick LaCrosse to better illustrate my point.
Which was/is that GM would be able to sell vehicles in C11. The main reason to do so would be to generate some cash flow and get rid of all the brands/inventory it doesn’t need. And if you want to talk about seriously chopping overheads, C11 is the only way to go. The only way GM can go.
They still will lose a lot of money if they charge six to ten grand for a Buick LaCrosse. Heck, the costs to make a LaCrosse might be higher than to make a bare bones Silverado.
My point is that if sales drop by an additional 30-50% or so due to their filing bankruptcy (or prices drop by that much in an attempt to compensate, like you are suggesting), that loss of income from those sales will be more than any savings the bankruptcy will give them. So, they will never regain profitability, which means they will never exit Chapter 11.
Now, I could be wrong. I suppose it is possible for sales to not drop significantly once they enter bankruptcy. If that actually happened, then it might be a very good thing, allowing them to dump contracts that they otherwise couldn’t.
50 merc makes my point of amount of cars needed to make a profit with skinny margins. Owe to be corrected by several zeros. It would be in the millions monthly. GM has no hot models in any segement that if production was possible would sell even millions per year. The only way GM sells stuff is the fire sale (which they invented) you can fire sale a truck or SUV by cutting say $3000 off of 10,000 profit. If you cut $50.00 off of $100.00 profit on a sub-compact Nobody would notice. If you retail the stuff against say Camrys and Civics, you lose. So where is the plan with or without bankrupcy to make the money to end the 1 billion a month in losses which by the way takes you to break even?
Once I got it through my head that Wagoner and the board are in it for themselves and thus just want to drag it out, the question became what’s up with the stockholders. This latest ‘plan’ is useless other than a last long shot at waking up those who have lost and stand to lose more unless this thing is really turned around – the stock holders. The majors are shown at the link. It’s not their money; some guy/gal sitting at a desk who doubtless is uninvolved personally. And, given the puny market cap of GM at this point, they’re probably more concerned with bigger fish in their area of concern.
So the only people who are really personally involved are the employees, and they can’t do anything they haven’t already done.
http://moneycentral.msn.com/ownership?symbol=gm
faster_than_rabbit: That’s a great quote. Let me know when Zombie Reagan or any one of his progeny learns how to balance the federal budget. (Slick Willie managed it, and with an extremely hostile congress. Can’t be that hard.)
Congress was “extremely hostile” to President Clinton because it wanted to spend LESS money than he did. Under those circumstances, it isn’t too hard to balance the federal budget. The tech boom, which set off a gusher of capital gains tax revenues, didn’t hurt, either.
In the 1980s, I don’t recall Congressional Democrats pushing for more spending cuts.
That press conference was the most honest and obvious vindication of Robert and the Death Watch series. Considering the source, that press conference was amazingly candid, especially if you hung around afterwards on the radio or online and listened to the Detroit and Auto press ask the obvious questions…” So Rick, a 20% cut in Salaried Expenses…aren’t you really saying Involuntary Separations of 20%, Hmmm?!?!?”
Heck,Rick and Fritz practically answered (out the side of their MBA mouths)every criticism that the Death Watch series ever raised.
Face it, they’re done.
They will cut the creative staff-which means less creativity and innovative solutions-and after a press conference like that, you could almost hear all the smart people in the background polishing their resume’s…
They have cut the bonuses and pay raises-which means the smart folks with a few years salary in the bank will leave to go where they’re appreciated-why stay and get the shaft?
They have killed the health care benefits for 65 and older retirees-which will certainly affect the long-counted-on sale of GM cars to retirees who will now need an extra $300-$500 a month for their health care-say goodbye to retiree sales!
They can’t import their good European car designs and expect to make any money, the exchange rate is just NOT in their favor…why do you think Audi, BMW, Mercedes, Fiat, Alfa and others are looking to build more plants here?!?!? So they will have to rely on domestic small cars or Daewoo products, and NO GMNA or GM-Korea small car can compete with the Fit, Civic, Corolla, Yaris, Mazda 3-they’re not even close (OK, maybe the Vibe, but that’s really a Toyota anyway-GM didn’t engineer much of that line) . The only things they have that make money are FS-Trucks and SUVs in NA….and they ain’t doing so well…
As for the Volt? uh-huh…if it’s over $40K, all bets are off as to it’s sales success and they keep hinting it will be over $40K…Not good.
As much as I do not want to see GM slip into Chapter 11, I really don’t think these actions are drastic enough and they will have to get tougher and smarter quick- and it’s RARE when the people who got you into trouble are the same people who can get you out-unless they make drastic changes with 3-6 months at the top, face it they’re done-if you listened closely to the press conference, they almost told you as much that they’re done- they listed for us all to hear and see the litany of issues that Robert et al have been telling us for years, and they finally seemed to own up to it-they’re down and now, even they know it.