General Motors Death Watch 174: Gravity Sucks

by William C Montgomery

Published: April 22nd, 2008

general motors death watch 174 gravity sucks

As a child I loved to play on swings. Leaning back and kicking my legs forward, I could propel myself into momentary weightlessness. Of course, every good swing ended with an acrobatic dismount. At the point of greatest forward momentum, I would let go of the chains and launch myself off the seat. For a brief moment I would be flying. Like an astronaut on NASA’s vomit comet, I would arc across the back yard. The sensation was thrilling. But I wasn’t a bird. Gravity’s hand never failed to pull me back to earth. And so it is with General Motors.

Today, The General defies gravity. Officially. The global automaker flies near the top of the newly released Fortune 500 list. Corporate revenues of $182b earned GM the number four spot (down one position) on Fortune Magazine’s Fortune 500, trailing only Wal-Mart Stores, Exxon Mobil, and Chevron. As Borat would say, “High five.”

What’s more, General Motors also scored on the list of The World’s 50 Most Innovative Companies. Collaboratively produced by BusinessWeek (BW) and the prestigious Boston Consulting Group (BCG), GM took eighteenth spot on this tally of cutting edge companies. Unlike the Fortune 500, which is strictly a measure of revenue, the BW-BCG list is based on the survey of 2,950 “senior executives” (weighted 80 percent), records of three-year margin growth and revenue growth (5 percent each), and three-year stock returns (10 percent).

GM, who BW dubs a “dark horse,” must have killed on the executive survey because their financials suck. (More on that later.) Fifty-five percent of survey respondents cited General Motors’ products as their most distinguishing innovation (as opposed to innovative customer experience, processes, or business model).

Clearly, the tens of millions (not to say billions) of dollars The General’s spent greenwashing its image has successfully advanced the automaker’s high tech rep within the business community’s chattering classes. One thinks specifically of GM’s highly-promoted, oft-delayed, completely unproven, Prius-chasing gas – electric Chevrolet Volt. And then of GM’s Green Car of the Year Award-winning dual-mode hybrid SUVs. But not specifically of anything actually selling in any number.

I’m at a loss to explain how GM ranks eighteenth of fifty overall behind Toyota ( Tata Group ( BMW ( and Honda ( while it is second on the top ten list of innovative automakers produced from the same data by BW-BCG. On that list, GM trail Toyota but edges-out Tata, BMW and Honda. Go figure.

Nonetheless, let us imagine GM flying through the air like a boy slung from a swing, intoxicated by the sweet air of high praise and honor. Now picture a speeding Chevy Aveo slamming into the unyielding off-set crash barrier at the Insurance Institute for Highway Safety. Let’s call that wall GM’s financial report.

During 2007, General Motors suffered $39 b-b-b-b-billion in losses. Among the Fortune 500, GM takes first place in that metric (or last place, depending on how you look at it). Earnings per share fell $68.45, revenue fell twelve percent and assets shrunk $26b.

In fact, General Motors is the only company in the Fortune top ten that lost money, save FoMoCo (who lost a paltry $2.7b). Even the two banks that cracked Forbes’ top ten– Citigroup and Bank of America– managed to turn tidy profits. This despite the ravaging impact of the well-publicized sub-prime mortgage loan losses. To top that off, from 2004 to 2007, GM stock returns slumped eleven percent.

If that number doesn’t put things in proper perspective, consider that General Motors lost nearly as much as Exxon Mobil made ($40.6b). Combine GM’s losses to those of GMAC ($2.3b)– which The General mostly and wisely unloaded during the year– and GM’s losses would have eclipsed the most profitable company in the world.

Unfortunately, conditions in 2008 are no better than ’07. Near-bankrupt suppliers continue to threaten disruption to GM’s manufacturing plants. Commodities market speculation is driving oil and gasoline prices to new highs, and GM has no credible economy car for the vital U.S. market. The American economy continues to flag and consumers are buying fewer new cars. E85, in which GM is so deeply invested, is fast emerging as an eco-fraud and the Volt’s got no batteries. The labor unions are proving that they will yield no quarter so long as the General has a dollar in the bank, no matter how fast their cash is burning up.

Couldda, shouldda, wouldda. Things would certainly be different today if corporate management had started hopping with their new found sense of urgency, say, ten years ago. Or twenty. Or thirty. Can General Motors get its feet back under itself before it hits the ground or are they going to land squarely on their head? Either way, despite this week’s headlines, the company is in a financial free fall and it’s going to hit the ground.

William C Montgomery

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Geeber on Apr 27, 2008
M1EK: From a comment I made to Marginal Revolution on this very same subject, against the same kind of fanboy: Obviously you haven't read my other posts, because I'm not a GM fanboy. You may want to do more reading before trying to pigeonhole another poster. M1EK: Again, the assumption being made is that GM’s making a profit, or at least losing less money, by making really awful small cars - but that’s ridiculous on its head, because even now when people really WANT small cars, they essentially have to be paid to take them off GM’s hands. That's not what I'm saying. If you're going to recycle your posts, it would help to make sure that said post address the point raised, as opposed to completely missing the point. I'm not saying that GM's strategy is to make money by making cheap, awful small cars. GM has historically LOST money on small cars produced in this country. The main reason it kept production of the Cobalt (and before that, the J-Cars) based here was because of CAFE. Under CAFE, if the small cars were not produced here, they could not be counted against domestically made trucks (until now, the real money makers for the Big Three) when determining corporate average fuel economy. GM's higher cost structure has prevented it from putting more money into small cars, which is partially responsible for the production of inferior small cars. M1EK: You start out with the assumption that Toyonda makes $1K profit per small car sold. Subtract $500 for GM’s health care. Another $500 for their retirement costs. So they break even, right? And they still get the CAFE benefit that allows them to sell the higher-profit vehicles (assuming people still buy those things). You're starting with the assumption that retirement costs and health care costs are the only competitive handicaps faced by GM. This is incorrect. Work rules and job classifications - ironically, originally created by management, and now defended by the union - have also placed GM at a competitive disadvantage. Over the past 18 months, the UAW has quietly agreed to competitive operating agreements (COAs) in the Big Three's plants. The union would not have agreed to these COAs if the Big Three did not need the cost relief. Mr. Gettelfinger does not care what Wall Street or union-bashers think. He has put his union behind this effort because he knows that the cost disadvantage faced by the Big Three is real, and that they must become competitive in the production of vehicles besides, trucks, SUVs, Corvettes and Cadillacs if they are to survive. Also note that the Big Three's factories have been overstaffed when compared with those of the transplant operations. On page 221 of her book, The End of Detroit, Micheline Maynard quotes a former GM executive now working for Toyota: "...because of the GM contract ith the UAW, he (the executive quoted for the book) would have to have three workers on a GM assembly line to everyone at Toyota." That sounds like a pretty serious cost handicap for GM. You've also never refuted the quote from UAW chief Ron Gettelfinger, who noted that Ford would not make money on the upcoming Fiesta if it were built in the U.S.. Ford will make money on it by producing it Mexico, given the engineering and features that the car needs to be competitive (with the Fit and Yaris), weighed against the typical transaction price in that segment. M1EK: In the current model, though, they’ve cut $2000 in production costs off the vehicle, but are only able to sell it for $3K or $4K less than the Toyonda. Given industry lead times, the current model was developed and engineered before the more competitive UAW agreement was negotiated last fall. Also note that the savings from that agreement do not take effect immediately. So all of those savings that you are attempting to apply to the current Cobalt and G5 do not yet exist.

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Golden2husky on May 03, 2008
Under CAFE, if the small cars were not produced here, they could not be counted against domestically made trucks (until now, the real money makers for the Big Three) when determining corporate average fuel economy.... Correct me if I am wrong, but until now didn't the cars get tallied separately than the trucks as far as mileage considerations? That is why PT Cruisers were modified to fit into the classification of trucks so they could game the system and get away with selling more full size trucks without mileage penalties. Subaru did the same thing with the Outback,too. More proof that business will do whatever they can to circumvent the spirit/intent of the rules to feather their own nest...

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