Arithmetic and General Motors; Just Too Many Zeros

General Motors just doesn’t get the fact that they’re in the wrong century for a rebound.

It’s nice to have a nest-egg of course and it’s a comfort no doubt
for GM’s pensioners and health care dependents that the end isn’t
imminent.
Gmheadquarters
Having said that, the piper must be paid and the most General thing
that can be said about the Motors company is that it’s operating in the
wrong decade; product, engine and consumer-wise. Across brands, product
is redundant, the lines of difference between marques so blurred as to
be non-existent. Chevrolet and GMC, both marketing the same SUV? Oh,
come now.
Engine-wise the GM bread and butter is big V-8s, even as Toyota
takes over as American #2 carmaker from Ford by building small and
elegant. Consumer-wise, the numbers are less clear, but lead times are
overlong in the auto business and GM looks to be on the wrong side of
that equation as well.
The company lost a bundle in its second quarter even as it became
profitable for the first time in a long string of reporting periods. In
round numbers, they made a billion, lost three and a half and ended up
posting a negative three. Somewhere a half billion got lost in the
shuffle, but ‘profitable while losing money’ is one of those things
that happen within organizations like the Pentagon and GM.
Company sales equaled $54 billion. Profit, sliced and diced down to
½ of 1% and squeezed out the end of the tube, is too lean to lean on.
The truly frightening news is that this narrowest of profit margins
was, according to the company,

“powered mainly
by cost-cutting initiatives and the success of the automaker’s latest
crop of large sport-utility vehicles, the GMC Yukon and the Cadillac
Escalade.”

Holy Toledo (or in this case,
Detroit). The Jurassic period at GM is in full swing. If these
dinosaurs are the only oar they have in the water, then worse times are
a coming.
The corporate cash-account has $19 billion in hand for rainy days,
but it’s been pretty wet in Detroit for a number of years now. The
primary GM strategy has been to close down plants and lay off workers
in the same market within which the Japanese are expanding. The closer
to the bone (and the bone-yard) cost-cutting takes them, the higher
their fixed retirement and health costs become as a percentage of
product price.
Rickwagoner_1
CEO Waggoner eagerly tells anyone who will listen (because that’s where
he wants relief) that the health-care obligation comes to about $1,550
per vehicle. The pension and retirement benefit numbers are not so
easily found, but if they’re similar (and recent employee-buyouts would
push them in that direction) it doesn’t take a wizard to see that
$3,000 or so in non-manufacturing costs per vehicle are damned hard to
hide in small-car prices.
In 2005, which is not exactly ancient history, GM lost $10.5
billion. Two years back-to-back like that and it’s Katie-bar-the-door
for the $19 bil. The future is probably less grim than that, but
inexorable.
What can possibly be done with a company that has got itself in the
position of begging its entire workforce to quit and then paying them
$35,000 to $140,000 each to leave the company?

“Hello out there, all 113,000 of you, please go home.”

Then GM can fold the company and offload the pension and health benefits to the federal government.
Hummer
Others can make money in small, innovative and efficient cars, but GM
needs behemoths in which to hide all that pork the unions ran off with
in the good old days. The very cars that would bring them into this
century, competitively, are a prescription for going broke all the more
quickly. Catch-22, the choice GM dares not make.
Outside America, GM’s results are scraps here and there from the
bone pile. $124 million in Europe, $156 mil in Latin America, $167 mil
from Africa and the Pacific rim combined. Numbers that wouldn’t satisfy
Google.
According to Business Week,

More cuts are now
in the cards. Wagoner has told Wall Street that he intends to have
manufacturing capacity reduced so that it matches demand by 2008 “if
not sooner.” The cuts could come with Wagoner starting to ax capacity
by at least 600,000 vehicles next year. Three assembly facilities that
are already idled — an SUV plant in Linden, N.J.; a van plant in
Baltimore; and a midsize-car plant in Lansing, Mich. — could be first.
Other assembly facilities may also go — possibly a truck plant in
either Janesville, Wis., or Pontiac, Mich. Another SUV factory in
Oklahoma City and a minivan plant in Doraville, Ga., are at risk, too.
GM may also discontinue a couple others that make engines or steel body
panels. If Wagoner closes five factories, GM would have the capacity to
make only around 4.7 million vehicles a year. Should sales continue to
fall, more factories could be shuttered later, says one company source.

That
doesn’t sound like a plan to regain market-share and achieve
profitability. That sounds like trying to shoo the horses out of a
burning barn.
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What they’re saying about GM;

1 thought on “Arithmetic and General Motors; Just Too Many Zeros

  1. Hi Jim,
    As a UAW member (that is, as a member of the National Writers Union, which is a local of the UAW), I feel a need to rise to my union brother's and sister's in response to your otherwise excellent column. This regards the need for GM to make "behemoths in which to hide all that pork the unions ran off with in the good old days." Obviously the UAW in the good old days negotiated a very good pension plan, but it was the squandering of the payments into the pension plan by GM (and many other companies) in recent decades, as was recently highlighted in an article in Harper's, that have made it look like "pork" in today's world. Not, mind you, that there's anything wrong with a trade union negotiating a little bit of pork…
    Greg

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