General Motors Death Watch 178: Failure is Possible

Robert Farago
by Robert Farago
general motors death watch 178 failure is possible

“Rich people don’t care [about high gas prices].” Bob Lutz’ statement– made during the launch of GM’s new SUV’s in August 2005– encapsulates the automaker’s history of arrogance, ignorance and self-delusion. Then again, what else could GM’s Car Czar have said? Whether or not GM should have seen the gas crunch coming, the die was cast. Now, as gas prices crest $4 a gallon, as Delphi and GMAC teeter on the abyss, as GM’s stock price hits a historic low, GM’s slide into Chapter 11 is beginning to assume the mantle of inevitability. And why not? There is no Plan B.

Clearly, GM’s Plan A– make better SUVs and pickups– was a non-starter. Not to belabor the obvious, but soaring gas prices gored GM’s cash cow. Year-to-date, the General’s high-profit SUV and truck sales tumbled 22 percent. In April, GM’s truck sales fell by 27 percent. Sales of the once all-conquering Chevy TrailBlazer fell 73 percent. Despite the Chevy Silverado’s perch on America’s top ten list, despite their new CUVs, the company that made billions on high-profit light trucks is making billions no more.

A new charge of the light truck brigade is not a possibility. Even if U.S. gas prices suddenly descended to $3 a gallon, American consumers will continue to approach gas guzzlers with a ten-foot pole. It would take a good year of relatively low– or at least stable– gas prices to lure buyers back to… no. Actually not. Once backwards, twice shy. And if that doesn’t send the pickup and SUVs genres back to their original, pre-90’s market share, federal regulations and fashion will.

What GM needs right now– and for the foreseeable future– is six brands' worth of class-leading, fuel-efficient automobiles that will, at the very least, stop SUV refugees from jumping ship. That it ain’t got. Not now, and not a year from now.

Meanwhile, American new car sales in general, and The General’s share in specific, continue to crater. Cadillac, Chevrolet, Buick, GMC, Hummer, Pontiac, Saab and Saturn are ALL losing market share in an American new car market that shows no signs of recovery. Inventories are piling-up; every single GM light truck has more than 100 days supply. Despite the obvious light truck glut, GM’s outdated business model is forcing the company to restart truck and SUV production. As it does so, GM’s prospect for its unspecified “turnaround” move from bleak to non-existent.

Contrary to popular belief, foreign profits can’t staunch the arterial spray of red ink; the carmaker’s losses in the North American market are too deep and too broad. GM has assured the markets that it has adequate liquidity to weather the storm. On March 31, GM reported a $24b cash pile. That's $6b less than six months ago. No one knows how much that cash pile lives stateside. And given that GM’s accounts are [officially] unreliable, there’s no exact way of knowing what additional calls will be made on that cash. There will be many…

Delphi’s restructuring plan is, once again, in tatters. Given GM’s ongoing reliance on Delphi for parts, the chances are high that this sinkhole will claim even more of GM’s money. By the same token, an unknown number of GM suppliers have hit/are about to hit/will hit the wall. As the American Axle strike and Plastech bankruptcy prove, GM’s only as strong as its weakest supplier. When Chrysler goes down… It’s only a matter of time before other parts makers suck-up GM’s cash.

At the same time, GM’s part-owned ResCap mortgage unit needs $600m to stay afloat; co-owner Cerberus won’t be ponying-up the funds. If ResCap files, it could well take all of GMAC down with it. If GMAC files, GM won’t be far behind… The General will open its wallet to stave-off that eventuality.

In the midst of all this, the central question bedeviling RenCen has now become: what can we do to hold out until the U.S. market recovers? The obvious answer: nothing. There is nothing GM can do in the short to medium term to bank enough profits to save itself from Chapter 11. U.S. franchise laws and GM’s depleted financial reserves make it impossible for GM to do what needs doing: jettison excess dealers and dead brands (everything save Chevrolet and Cadillac) to trim itself down to a sustainable, indeed, profitable level.

Surely GM CEO Rick Wagoner knows this. Logic suggests that if Wagoner knew for certain that GM was condemned to file for Chapter 11, he would unfurl his golden parachute and float off to some exotic tax haven, leaving someone else to suffer the final ignominy. And surely presidential candidate Hillary Clinton knows that only a stroke of fate (so to speak) could propel her to the White House.

The truth is that GM’s refusal to admit the possibility of defeat doomed it from the start.

Join the conversation
2 of 94 comments
  • Geeber Geeber on Jun 05, 2008
    jurisb: Sure alcoholism was and still is the biggest health issue in Post Soviet territories. It has nothing to do with Soviet union or communism. It has to do with stupid majority of slavic people( sorry!) that consider vodka drinking as manly. And the Irish and the Germans consider drinking alcoholic beverages to be manly, too. And the French love their wine. But you don't see the rampant alcoholism in those countries that you did in the Soviet Union. Nor is life expectancy declining in those countries. Sorry, but that excuse won't wash. jurisb: And you are wrong that people didn`t have enough food to become obese. They just didn`t have so much genetically modified and synthetic food and had physically more demanding jobs. By the way people were doing much more sports because every district supported free sports clubs. Sports was in fashion, and not a way of making living. They didn't have much food, period, and what the masses did have they either grew themselves or spent time waiting in line to buy at a state-owned store (which usually had a lousy selection of poor-quality food). jurisb: Of course some people using governmental ties, used to have rich mansions( which pale in luxury compared to westerners villas), and volga cars, that were kinda luxury. Yet the difference between Simple middle class Lada and elite Volga was not so big. The ability to travel abroad, own a vacation home and a car, and shop in stores stocked with foreign goods unavailable to the masses constituted HUGE differences between the party officials (and the well-connected) and the masses. jurisb: I think you have also noticed, that rich people are never obese in USA. Why? They have enough money to overeat tenfold. THey don`t become fat, because they eat good food( plus expensive sports clubs), while underpaid workers go for the cheapest items- modified, synthetic and low value. While it is true that rich and some members of the middle class are thin because they work out regularly and watch what they eat, it is not true that the poor are more likely to be obese because they don't have access to good food. The poor are overweight because they avoid physical activity, never learned to cook and therefore spend their money on junk. This is not because they can't afford anything better, but because they don't want to spend time preparing more nutritious food. They are also more likely to drink high-calorie alcoholic beverages (i.e., beer). jurisb: Socialism at least pretends to do more beyond money….. The problem is that it only pretends... jurisb: By the way in Soviet Union GDP was irrelevant because total size of economy was measured by manufactured units- fabrics in meters, steel in tons, timber in square meters etc. It gave real indicators. Size is meaningless if what is produced has no value. Plus, the idea that services don't generate wealth, and therefore don't count when calculating GDP, has been rejected by every reputable economist. jurisb: Geeber and it doesn`t matter if products overlap, it matters if you can sell them, so don`t worry about what companies Gm would buy or not. A company isn't going to gain anything from a merger if it has to spend time consolidating overlapping dealer bodies, model lines and factories. The goal of merging two companies is to build upon their complementary strengths, not worry about two lines or models that compete with each other. This is what hindered the British Motor Corporation - it never rationalized its Austin and Morris lines, which competed in the same market segments for largely the same customers. This resulted in rampant badge engineering and corporate infighting. jurisb: You mentioned that some Chryslers products got worse after the merger. Mention ,please those cars that were better before the merger! Stratus/Cirrus (later renamed Sebring); the minivans; Neon versus Caliber. jurisb: Zeta is engineered in Australia by Holden. Did Holden start if from a scratch? Nope. They took Opel Omega and derived it. By the way Gm didnt learn from Cater enough so they took exactly the same car , sent it to Australia and they made Holdem Monaro even using 94`Opel Omega exterior parts. No. The Opel Omega was being discontinued, so Holden, with input from American and European engineers, developed the Zeta platform to replace it. The Zeta platform is all-new. Holden certainly didn't discard everything from the Opel Omega platform, but to say that it merely updated the Omega platform to create Zeta is incorrect. jurisb: And the only Caddy sedan running on pure GM platform is DTS. Also XLR is GM piece, and trucks that are based on GMt-900. ( yepp, even your Chevy HHR is opel platformed, opel engined, opel gearboxed) Again, no. First, Opel and Holden are wholly-owned GM subsidiaries, so they count as part of GM. Second, the Sigma platform that is used for the CTS, SRX and STS was developed in North America, with input from Europe. The final chassis tuning was conducted in Germany. jurisb: ANd Geeber if Gm is switching to global platforms and it is so great, how come they bleed more than wounded aliens in sci-fi thrillers? How come Toyota doesn`t steal this idea and start buying platforms according to portfolio and market paradigms.Must be blind. Wait, they posted about15bn profits last year. Must be just a coincidence. Toyota prefers to grow from within, unlike Daimler or GM. It doesn't need to buy platforms - it already has them in-house. It develops them itself. It adapts platforms to different countries, which saves money by using common components where possible, but allows the distinctions demanded by various markets. Honda does this, too. Hence, the Civics sold in Japan, Europe and North America ride on a common platform, with changes made for each market (hatchbacks for Europe, for example). jurisb: And Duratec 3liter engine is a version of 2.5 liter engine which itself debuted in German built Mondeo 96, while was not available in US at all. And it doesn`t matter that they make it in Cleveland, Mercedes is also made in Alabama, yet I don`t call it an american car. First, you specifically said that the Duratec used in the Mazda6 was built in Germany. This is incorrect. So, yes, it does matter. It also matters because you claimed that the Duratec was made in Germany to prove that Americans cannot handle the manufacture of a precision-built engine used in a Mazda. This is obviously incorrect - Mazda happily uses American-built engines for several of its vehicles, and even builds the North American Mazda6 at its Flat Rock, Michigan, factory (which also builds the Mustang). Second, Ford developed this line of engines with the goal of using them throughout the world. The Duratec has been modified for different markets (with input from local engineers) and manufactured in different markets. It is used throughout the world, which is a smart strategy for Ford. jurisb: And if Phaeton failed in US, I am sorry for the US , not for VW. You should save your sympathy for VW, which lost a bundle on that turkey. People with $70,000+ to spend on a new vehicle do not want to spend it on a VW. Unfortunately, management didn't realize this.

  • Oldyak Oldyak on Jun 05, 2008

    Businesses fail all the time....Whats the BIG deal! oh...I'm sorry about all those $40.00 an hour jobs for watching a machine do your work...thats really awful. The USA is THE country of change!!!! I hate that the auto business has lost its way but,if it was my business,who would give a sh_t? Let them fail or find a way to survive..those are the only options left. I wont let my tax dollars bail them out If I can help it ,and neither should you. Butcher the long time "cash cows" and move on...

  • Arthur Dailey So they cut the roof off the hatch area of a Dodge Journey?
  • Desertwanderer Across Australia, from Sydney to Perth, via the Nullarbor Highway. Desolate, very impressed to pass a bicycle tourist somewhere in the middle, I think he'd have a story to tell. Oh, and the Cabot Trail, Cape Breton, NS, in my S4.
  • Cprescott Please stop production of all Camry's - they are hideous and vomit inducing ugly.
  • Cprescott Excellent! Complete garbage.
  • Kos65701744 A lot of people back then didn't like the downsizing idea, which is why some didn't sell better than before. Which is why in final gen sales were record high in sales. My own father wouldn't buy a downsized GM car, he switched to a Ford LTD, a nice car but he hated it but wanted a big car