Posted on 11/20/2008 8:24:37 AM PST by Fred
The Big Three automakers’ chief executives testified before Congress today, blaming the credit crisis for their downfall.
But Richard Wagoner, CEO of General Motors (GM: 2.11, -0.68, -24.37%) did not use the credit crisis as an excuse for the company’s poor profits when he wrote an editorial for the Wall Street Journal in December 2005.
In his opinion piece, which came amidst record sales, he blamed not the credit crisis, but a kaleidoscope of other reasons, including “intense” foreign competition, soaring gas prices in the aftermath of Hurricane Katrina, and high benefit costs for the automakers’ downfall.
And in his 2005 editorial Wagoner makes this stunning admission.
Wagoner confesses in his opinion piece that GM has “a weaker sales mix–essentially, we’ve sold fewer high-profit SUVs and more lower-profit cars.” You can click on this link to read it here.
There you have it. The automakers can’t blame the credit crisis for their problems, their problems didn’t just arise this year, despite what the CEOs will tell you.
Detroit pumped out way too many gas-hog pickup trucks and SUVs – meaning, Escalades, Excursions, Suburbans — and did little to retool their plants toward what consumers wanted. That’s because Detroit earns much, much more money off of these cars versus smaller cars such as hybrids and fuel-efficient vehicles.
It’s been estimated that US car makers can earn profit margins of $10,000 for SUVs, depending on the model, while they just break even on smaller cars unless the consumer buys options, due to the automakers’ huge cost overhang.
Oil prices rocketing to $147 a barrel this summer took its toll, causing sales to plunge. Nearly 90 cents out of every dollar in gas consumers put in cars, particularly SUVS, goes towards moving the car, not the passengers, according to a recent analysis. When consumers started turning up their noses at the gas guzzlers, the automakers dumped them on rental fleets, slamming their resale values.
Notably, resale values on SUVs, too, plummeted and Chrysler, overly dependent on SUVS (as GM is on pickups), saw its leasing operations dry up, causing it to pull the plug on this business.
The carmakers’ problems have been decades in the making, they’ve had problems even during strong economic times and when consumers were buying cars at record rates.
Just like Wall Street, there was zero risk management at the car companies, given their powerful friends in Congress. It’s not news that only about 8% to 10% of the entire US fleet now on the country’s roads turn over every year, as consumers tend to hold onto their cars for long periods of time. Never mind that inconvenient fact, the automakers pounded out gas guzzlers because they can make more money off of them.
But what the heck, sotto voce, the US taxpayer is a compliant capital cushion for any shoddily run business these days. Keep this in mind as Congress moves to give the automakers a blank check with no strings attached.
Wagoner does point out in his piece that foreign auto makers don’t carry the abalone around their necks of health costs, because foreign governments “fund a much greater portion of employee and retiree health-care costs.” Duly noted.
So where do we go from here.
For the quarter ended September, GM had a negative net worth (assets minus liabilities) of $59.9 bn. It had assets of $110 bn, but those assets backstop a whopping $169.4 bn in debt owed to suppliers, for payroll, to banks, bondholders, to retirees, you name it.
That’s a huge $59 bn swing just to right size GM’s damaged balance sheet. GM spilled $9.7 bn in negative operating cash flow for the first nine months. It only has $15.9 bn in cash and equivalents right now. It is bleeding at least $1 bn in cash per month.
GM is effectively insolvent. It needs more than its slug of the potential $50 bn bailout.
Can taxpayers trust the car makers to make a profit on any bailout money the government gives them, which could amount to a total of $50 bn? Should taxpayers be asked to bail out a privately owned automaker, Chysler, run by the private equity fund Cerberus, headed by former Bush Treasury secretary John Snow?
Should Congress put at least this contingency on any bailout money–that in exchange for getting tax funds, the top executives who drove these companies into a ditch should step down?
Hey! SPEND LESS, just like your customers have to when things are tight.
I heard something about older workers getting paid to come in and sit at a desk reading a paper. There was a term that was used for it (as I guess its SOP for union contracts)-anyone know what I’m talking about?
Why can’t GM make money on small cars ?
You’re referring to a “Job Bank” where they “park” workers while they “re-tool” factories. Some guys have been “parked”, at full pay and bennies, for over a decade. . .
Okay, this statement:
“Wagoner confesses in his opinion piece that GM has “a weaker sales mix–essentially, we’ve sold fewer high-profit SUVs and more lower-profit cars.”
doesn’t match this statement:
“Detroit pumped out way too many gas-hog pickup trucks and SUVs – meaning, Escalades, Excursions, Suburbans — and did little to retool their plants toward what consumers wanted. That’s because Detroit earns much, much more money off of these cars versus smaller cars such as hybrids and fuel-efficient vehicles.”
Or am I misreading?
It is called the “Jobs Bank” and it goes back to the 1990’s.
Union line workers who would be otherwise unemployed when their model car or their plant closes down are given an opportunity to sit at the “Jobs Bank” collecting pay, and they’re supposed to be hired onto a new line/plant when it is opened.
http://www.usatoday.com/money/autos/2007-07-23-uaw-talks-jobs-bank_N.htm
The can’t compete on price. Economy cars have low profit margins. Assuming that GM can achieve parity on options, build quality and reliability, what’s left for consumers to base buying decisions on? Styling maybe. Price, definately.
My read is that either the market for high margin vehicles (trucks) evaporated, or GM specifically targeted low margin vehicles for sales growth. Perhaps she's dinging them for not seeing a market shift to econoboxes five years ago, and retooling themselves. Hindsight is 20/10 in the blame fixing game.
LET THEM EAT CAKE!!!
Curious, but if GM files chapter 11 what happens to their stock? Does it get wiped out and they effectively do another IPO? Does it survive?
Their stock becomes worthless. Folks that are owed money will come before the stockholders in bankruptcy.
Note to self: AVOID GM.
they weigh so much due to federal regulated standards. take the Dodge Neon, fairly light weight, it was replaced with the dodge caliber heavy hog. I am told for the neon to meet the new standards it would weigh as much as a caliber. here is another case of the fed gov screwing over car makers.
I'm suprised they haven't moved into the trike market. Gets classed as a motorcycle and immune to CAFE regulations.
A group of U.S. senators has reached a bipartisan agreement on aiding U.S. automakers, said an aide to Democratic Senator Carl Levin of Michigan.
No details are available, Levin aide Tara Andringa said in an e-mail. Levin and colleagues Debbie Stabenow, a Michigan Democrat; George Voinovich, an Ohio Republican, and Kit Bond, a Missouri Republican, scheduled a 2:30 p.m. news conference in Washington.
Congressional leaders haven’t said whether they support the plan, and both houses could run out of time to enact legislation with a lame-duck session due to wrap up tomorrow.
Senate Majority Leader Harry Reid yesterday refused to schedule floor time to debate a possible Bond compromise plan, though he said today Congress might return in December to finish its work.
``The desire is we complete all of our actions until we come back on Jan. 6, but that may not be possible,’’ the Nevada Democrat said. ``It may be necessary that we come back after Thanksgiving.’’
To contact the reporters on this story: John Hughes in Washington at Jhughes5@bloomberg.net; Jeff Green in Washington at o
Bond’s fingerprints.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.