GM Death Watch 163: What Doth It Profit a Man?

Robert Farago
by Robert Farago
gm death watch 163 what doth it profit a man

"Managing expectations." It's a term near and dear to the hearts of the people who pull our politicians' strings. Increasingly, it's the rhetorical weapon of choice for executives seeking to maintain their grip on America's large corporations. While there's nothing wrong with casting your company's efforts in a positive light, the danger is both simple and lethal. When a company's culture becomes based on hype, it loses its ability to react to reality– both good and bad. It becomes lost in the fog of war. One such company is GM.

Last Tuesday, GM CFO Fritz Henderson did something his boss, CEO Rick Wagoner, has refused to do throughout his entire tenure at the top. Fritz set a deadline for GM NA's return to profitability. Well, not a deadline, exactly. More like an estimate. Actually, make that a prediction– with caveats. Anyway, in the now-familiar post-bloodbath (a.k.a. financial results) conference call with industry analysts, Fritz said General Motors' North American operations should be solidly profitable by 2010. Or 2011.

Now that's saying something. GM North America is currently in complete turmoil, verging on chaos, heading towards meltdown. It's losing market share, production capacity, skilled workers, profitability (incentives are up) and, most of all, cash money. If you exclude the mother of all tax credit write-downs (which placed GM's '07 losses at $38.7b), NorAm dropped $1.5b last year. Not bad? Lest we forget, that number was propped-up by the sale of the Allison Transmission unit for $4.3b.

Speaking of fire sales and clever accounting, Fritz claims GM has $27b in cash and "cash equivalents" in the kitty. Take away $10b for life-sustaining cash flow, and GM is only $17b away from empty.

GM's cash conflagration continues unabated. Despite dramatic downsizing, the American automaker still has enormous overheads: advertising ($2.6b per year), research and development, factory modernization, pensions, health care, administration, servicing its massive debt ($2.9b per year) and, of course, executive compensation.

If we presume that these costs are holding steady– at least until the new labor agreement yields significant reductions– GM's $6.8b '07 loss (with Allison removed from the equation) indicates that they've got two-and-a-half years to turn the ship around– or go down. In other words, if Fritz isn't right, if GM isn't "solidly profitable" by 2011, they will be bankrupt.

Of course, this also assumes there won't be any "exceptional" calls on GM's cash pile. Heading into a major industry downturn, that's about as safe as assuming that the IRS will forget that you're legally obliged to file a tax return.

For one thing, bankrupt parts supplier Delphi, is looking for a billion dollar plus cash infusion. If GM's former division doesn't find the financing, well… Chrysler's unresolved Plastech debacle shows how vulnerable GM's assembly lines are to a parts disruption (a.k.a. renegotiation/extortion). A quarter of Detroit's main parts suppliers are teetering on the brink of bankruptcy. Even if GM's suppliers simply ask for their money up front, The General's liquidity would take a massive hit.

And then there's GMAC. Since GM sold 51 percent of the lender to Cerberus, The General's former cash cow has cratered. GMAC just posted a $724m fourth-quarter loss; the ResCap mortgage-lending unit bled $921m worth of red ink. If ResCap collapses, creditors may pierce the veil and sink GMAC. Meanwhile, cheap GMAC loans to high risk debtors are a thing of the past, which pulls the rug from under one of GM's main weapons in its war on excess inventory.

And that brings us to the income side of the ledger. While GM boosters view the new Cadillac CTS, Chevrolet Malibu and GMC Acadia as evidence that the automaker has got its NorAm product-related shit together, it most decidedly does not.

As nice as they are, these vehicles are not class-leading import conquerers. Sure, GM's finally woken-up to the fact that they have too many brands (eight), products (49) and dealers (6750). But their "throw the losers (Buick, Saturn, Pontiac, Saab) into a gulag and starve ‘em to death strategy" is a long-term play that will make things worse– before they get worse. No matter how you slice it, GM needs LOTS of turnover the keep the lights on.

Post corporate fire-sale, you could consider GM's brands its only remaining asset. If so, the company is already dead. Aside from Hummer, none of GM's brands has a clear remit or a coherent product line. There is overlap, cannibalization, confusion and chaos. Fleet sales aside, you can't sell products in a highly competitive environment without proper branding.

So, Fritz, how IS GM going to become solidly profitable by 2011? "We need to step on the gas on how we are performing in the market." At the moment, in terms of market share, branding and overall product desirability, GM is going backwards. Stepping on the gas will simply accelerate that process. Right until they hit something. That's the only realistic expectation.

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  • Joeaverage Joeaverage on Feb 22, 2008

    Yeah and I'd still rather have a four cylinder Accord. We've owned 5 Honda vehicles (1 was a motorcycle) and my father has owned 4 Honda motorcycles in a row. They've been excellent in every case especially my '87 Accord Hatchback that was last seen with 325K miles on the original drivetrain (not rebuilt). On the Saturn front we've had about 6 Saturns in the extended family with so-so durability. We've got friends with two Saturns. One with nearly 200K miles and one that blew an engine at 100K miles. Identical age and engines. We were recently offered a Saturn Vue that was otherwise going to be traded in on a Saturn Outlook. I was so close to buying it from my in-laws until an evening on the 'net revealed that the whirlling noise that the CVT tranny was making at 70K miles was the beginning of the end and that repairs cost the moon and part of the sky. No, I'll keep my CR-V with twice the miles (150K+) and a 5 speed with the original clutch disc even. It's been flawless. I WANT to like GM and Ford, even Chrysler but I'm a small car guy (always have been) and these three either won't make a small car worth a damn or they won't import the ones they do make in the rest of the world. Saturn is the exception and the Astra has my attention. If GM and Ford (and Chrysler) would put as much effort into their small cars as they have their SUVs and trucks they'd have something I'd feel good about buying. The way it is now however is that they are either ugly or not durable or lack features that the imported small cars commonly offer. The Astra = good, the Zafira = good, the retractable hardtops = good, the smallest of their cars like the Corsa = I'd give them a look. The Aveo - I'd look were I buying a car today. And I'd look at the used examples first. What I really want is a plug-in hybrid.

  • Joeaverage Joeaverage on Feb 22, 2008

    On second thought - the Aveo has a 1.6L engine and gets 28/34 mpg. My ten year old "heavyweight" VW Cabrio has a 2.0L engine and gets 29/34. 28/34 isn't bad until I compare it to other cars... Why does the Aveo get such miserable mileage for it's size? In other parts of the world a 1.6L would get at least 40 mpg. Heck the little Toyotas with carburetors my family had in the early 80s got better mileage than that!!! Didn't the Neon get better mileage than that?

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