General Motors Death Watch 81: GM For Sale

GM swears up, down and sideways that they will not stage a repeat of last summer’s Fire Sale for Everyone discount program. And yet inventories are up, sales are down and if they look sideways they can see their competitors printing up blowout banners. “Value Pricing” be damned. The General knows that every sale surrendered to Ford, Chrysler and Toyota eats into its already dwindling market share, rendering GM’s production cuts less and less effective. Besides, the cuts are expensive. GM needs dealer cash now. So it’s not a question of “if.” It’s a question of “what then?”

This is the GM death spiral: larger and larger production cuts in response to a smaller and smaller market share. When GM CEO Rabid Rick Wagoner stepped-up to the microphone a little over a year ago and announced he was going to cut 25k jobs, the media was aghast. American manufacturing is under attack! Our industrial base is shrinking! These days car hacks and Wall Street celebrate the fact that GM and Delphi workers are rushing for the exits by the tens of thousands. I guess someone stashed that old saw about “not being able to cut your way to profitability” in the wood shed and forgot about it. Well, at least until the next financial quarter’s [delayed] results prove that a corner turned can lead straight to a dead end.

Meanwhile and still, stabilizing the patient is Rabid Rick’s first priority; otherwise the amputations will be a success and the patient will die. A great deal of attention has been lavished on the financial details of GM’s union buyout plan. Little has been said of the timing. While GM’s 113k union members are busy weighing up the pros and cons of trading “secure” employment for cash money and [somewhat] reduced benefits, their factories are busy churning-out vehicles no one wants to buy. Rick’s mob can’t shut off the spigot. All The General can do is whatever it takes to keep the pipeline open.

And that means discounts. Of course, GM will not call the next big US incentive campaign an Employee Discount. For one thing, it won’t be long before they don’t have any employees left. But seriously folks, Rabid Rick has once again given himself enough wiggle room to accommodate Greg, Jeff, Murray, Anthony and their entire international fan base. In a recent interview, Wagoner said GM would stick to its policy of “simpler pricing.” In case you missed it, those are the new code words for what was previously called “value pricing.” It’s the difference between “here’s what you pay” and “here’s what you pay and we’re not offering any discounts.”

Because, of course, they already are. GM’s $1000 “free gas” promotion is already out there, attempting to lure Californians into gas-guzzling SUV’s. And it’s spread to Florida. How long before the gas cash come-on gets a national rollout? Free gas, 0% financing, rebates– whatever you call it, however you dole it out, the money comes off GM’s bottom line. But it’s Hobson’s choice: lose more market share or lose more money. Of course, GM could tell its dealers to hold the line on price, watch inventories swell, and do both. That’s not only the worst case scenario, it’s the least likely. And speaking of timing…

GM has just convinced its banks to lend it additional money to pay for its union buyouts, plant closures, Fire Sales, etc. The loan is fully secured. Hence, S&P has lowered its rating on GM’s unsecured debt to B- . That puts GM perilously close to the point where Cerberus can walk away from the GMAC deal, denying The General the long-awaited cash infusion. Equally important, GM now admits it will draw on this line of credit to meet liquidity needs. The good news for camp followers: GM won’t go bust today. The bad news: the noose is drawing tighter.

And make no mistake, the UAW hasn't stepped off the scaffold. While last week’s UAW convention in Las Vegas had analysts betting that the union bosses are in a conciliatory (a.k.a. “realistic”) mood, when was the last time the UAW made any concessions to the automobile industry? The recent “health care giveback” was actually a $3b union-administered fund. Buyouts are not a concession. If we believe that Delphi is serious about reducing its workers’ pay, if we believe GM can’t fund the difference, the union will have to make concessions. Past history says it ain’t gonna happen dot bomb.

That’s because past history is the only reliable guide to future behavior. When GM launched its Employee Discount for Everyone program last year, the company pronounced it a tremendous success– and waltzed straight into a sales drought and catastrophic financial losses. What’s changed since then? The levels of unsold inventory are higher.