General Motors Death Watch 182: He Who Owns the Gold
Earlier today, General Motors announced a "temporary" return to zero percent financing. It’s a clear, unavoidable sign that the automaker’s June sales slump is, as predicted, cataclysmic. Staring down the black hole begun on Black Tuesday, GM had to do something, anything to move the metal. And yet, at the same time, GM also revealed it’s raising its prices by 3.5 percent across the board. This second piece of news is equal parts bizarre and revealing. In essence, in the final hand of the poker game for its existence, GM has just doubled down. And now it’s Toyota’s bet. Here’s the thinking…
GM NA is desperate for cash. It simply doesn’t have enough liquidity to stave off bankruptcy. The automaker’s cash cow– high margin pickup trucks and SUVs– has become an endless supply of mad bovine burgers. So what can they do? They can discount the moribund metal, sacrificing profits to generate some cash flow. This GM's done, via zero percent financing.
GM knows it’s not going to work. GM dealers know it’s not gong to work. Hell, even the stock market knows its not going to work (the share price reacted by falling to a 33-year low). The fact that some GM stores point blank refuse to accept SUVs and pickups in trade is only one of several unavoidable signs that light trucks– GM’s life sustaining market– is dead. There’s only one other way GM can raise some money fast: up the prices on those vehicles they ARE selling.
With GM’s U.S. market share past the point of sustainability, below 20 percent, all Toyota has to do is hold the line on their prices, amp-up production of its hot selling fuel sippers and wait for GM to die. Even by GM CEO Rick “We have enough cash for ’08" Wagoner’s own admission, it won’t be long. Especially not for Toyota— a company that’s taken the long view of its business prospects since they had a view to take.
Keep in mind that ToMoCo makes more profit it one year than GM’s entire market capitalization. Toyota could afford to give their cars away for the rest of the year and shrug off the loss. Literally. BUT… why would Toyota want GM to go out of business? Answer: they don’t.
GM still sets the floor for vehicle prices in the U.S.; a floor that allows low-cost, no-legacy Toyota to make a healthy margin on their North American products. If GM files for Chapter 11, car prices will crater. Even worse, a post- or even intra-bankruptcy GM– OK, Chevrolet– could emerge a lean, mean competitor, forcing Toyota to engage in some serious trench warfare. For a change. Yes it’s a far-fetched scenario. But don’t think it hasn’t occurred to Toyota, because it has.
You may recall that the last time GM was generally recognized to be headed for extinction, Toyota’s Chairman offered to raise vehicle prices in North America to help the beleaguered automaker. At the time, Wagoner (for it was he) dismissed ToMoCo’s proposal with the kind of arrogance you’d expect for a man who's led GM to where it is today. But times have changed. Wagoner is up a river of excrement without a rowing implement. So he’s taking-up that offer.
Wagoner’s calculating that Toyota will also raise its prices, either to save GM or, at the very least, add to its mountainous profits. After all, the transplant’s raw commodity prices have risen by a similar amount, and their cars are flying off the lots. Surely they’ll take the path of least resistance– and maximum profits.
I reckon Rick’s right. Toyota is not GM. It will act in its long-term interests by taking a short term profit. (Oh, go on then.) GM will get its 3.5 percent extra margin on those products that are, somehow, making their way into customers’ driveways. If needs be, they can kick back that 3.5 percent to the customer and, hopefully, tread water— as opposed to watching their margins slip even further into the briny deep.
Of course, even that won’t be enough. The inherent, fundamental, inescapable problem is that Toyondissan, and soon Ford, makes more popular products than GM in those vehicle genres that a U.S. automaker now needs to survive. The General’s general trend towards a declining share of the American pie is not about costs. It’s about a decades-long lack of competitive vehicles and loyalty-inducing customer service. Is there anyone left who genuinely believes that the Cobalt replacement or the Prius-fighter will kick Toyondissan’s ass? That a Buick-Pontiac-GMC dealership's a nice place to visit?
In truth, there are plenty of consumers who wouldn’t buy a GM product at any price. And won’t. This is the sad legacy of GM’s broken branding, dealer bloat and safe-fail engineering. One way of another, it’s only a matter of time before all bets are off.
Martin Albright on Jun 27, 2008
Hmmm...these are the kinds of discussions that keep me coming back to TTAC! Here's something else to consider: Assuming that GM goes Ch 11, which then gives them the opportunity to stiff (or at least strong-arm) their creditors, who gets the worst screwing? Seems to me the warranty holders (the GM car owners) have to be protected at all costs. Going into bankruptcy is going to create huge "trust" issues anyway, so any backing down on warranty claims would create the automotive equivalent of a run on the bank - people would be doing anything they could to ditch their GM vehicles before they started breaking down and needless to say, nobody with half a brain would buy a new GM vehicle with the warranty coverage a questionable thing. So GM would have to shout from the rooftops that warranty claims would continue to be honored, regardless of the fallout. But then comes the question of who takes the fall? My guess is the unions. And if that happens, then what happens to GMs union-friendly reputation? Do they hire a non-union workforce? If so, then they'd likely become automota-non-grata at any union shop in the country. Parking lots that now only admit US made vehicles might start adding GM vehicles to their "not welcome here" list. I saw what our hometown brewer Coors did to the unions back in the 80's (I think it was) and staunch union supporters to this day refer to Coors as "That Scab beer." Does the newly-streamlined GM get the same rep? And assuming arguendo that GM is able to escape being forced into Chapter 7 and emerges a leaner, meaner company with lower prices to match, what then? Does once-proud GM start over again at the bottom of the automotive heap (somewhere below even Hyundai and Kia) offering vehicles whose primary attraction is their low price? Do Corvette and Caddy remain the flagships of the GM fleet or does reorganization mean the death knell of such extravagant rides? As for whether an automotive company can survive bankruptcy, it's not a perfect analogy, but International Harvester was once one of the most prominent truck and farm machinery builders in the US, and even had a line of light trucks and SUVs that were quite well respected in their time. By the late 70's they were in bad shape and they finally went under in the early 80's, only to emerge some years later as Navistar. After a few years of the Navistar brand, they slowly started switching back to the "international" name (though apparently "Harvester" was dropped, more's the pity.) I wonder if something similar could happen with GM: Bankruptcy, dissolution (I think IH went ch. 7 but I'm not certain,) reemergence under a different name, and then, after years, rehabilitation. Any thoughts? I'm really enjoying this discussion.
BKW on Jun 27, 2008
I see menno beat me to the punch inre to Studebaker going bankrupt, then recovering. My bad...I should read all the posts first before posting. Dynamic88: While the 1953/60 Studebaker Coupe/Hardtops can be tight for tall drivers, the 1961/64 Hawks with bucket seats have more leg room than most cars of the time frame. My 1963 Studebaker R2 Super Hawk has more leg room than my 1968 Olds Delta 88 2dr HT has, and I'm not short or light of weight: 6-5 335.
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