Source: MSN Money
Posted on 04/20/2005 8:21:13 PM PDT by WildPlum
The speculation on Wall Street last week was how long it would be before General Motors declared bankruptcy. The share price fell more than 15% last week ahead of today's first quarter results as the scale of GM's problems became clearer.
The adjustments that the company has made to its production schedule in the first two quarters of 2005, and the warnings from credit rating agencies that the company’s huge debt faces downgrading to junk bond status has focused America's financial markets on the problems of the world's largest carmaker.
GM's share price in the past 12 months
Source: MSN Money
Wall Street can over-react both on the upside and on the downside, and the crisis of General Motors is probably not as imminent as investors seem to fear. Two years ago the investment community saw General Motors as an example of how an aggressive price and volume led strategy could solve some of the carmaker's problems. That was too optimistic but GM is after all still the market leader in the world's largest vehicle market, and it has a product renewal program that gives it at least one more shot at stabilising its market share in its core market.
There will be a rebound and the company will claw back perhaps a couple of points of market share as its new models arrive in the next two years.
GM’s falling share price is a reflection of the anticipation of bad news, and when the bad news actually arrives people may start to look again at some of the upside potential of the company.
Small chances of long-term turnaround
But it is difficult to see a long-term turnaround path for the group. The problems of General Motors have been widely known and recognised for at least a decade, but the company seems incapable of taking effective action.
Almost no one outside the company expects GM to reverse its steady long-term secular decline in market share in North America.
The company's products are widely panned as uninspiring. The discounting and incentivisation of the last three years has flooded the market with nearly new GM products.
Fully a third of GM's new vehicle sales are to employees, their relatives or fleet rental buyers, while private new-car buyers are staying away from GM's profile in droves.
The company is suffering from the liabilities and attitudes that entrenched themselves decades ago when the company dominated the North American market. GM has studied Toyota but not taken any effective action to adapt its own culture to complete.
The company carries a heavy burden of health care costs and pension liabilities that represent a structural disadvantage on every car produced that the company seems powerless to address. The company persists in a confrontational approach to negotiations with suppliers that may have made sense when the company was the leader of an oligopoly and was seeking to extract monopoly rent from suppliers that had nowhere else to go, but which is perverse as a strategy when new domestic assemblers already represent a much more attractive prospect as a customer.
The latest round of negative talk about the company’s future will add to the self-inflicted wounds of poor purchasing and product development strategies and ensure that it sinks further down the list of preferred customers of the more innovative and capable suppliers.
Prospects of LBO (leveraged buyout) seem slight
Although General Motors is not in any imminent danger of collapse, investors in New York that we talked to were uniformly pessimistic about the company.
There seems to be no mechanism for a renewal of the company short of bankruptcy.
In the past it would have been thought that GM's size meant that it was practically impossible to envisage an LBO of the company -- but the revelation in last Friday's Financial Times that Deutsche Bank had been approached about an LBO of DaimlerChrysler suggest that size alone is no longer an obstacle, and a few years ago Carl Icahn looked at putting together a buyout of GM. But although some such dramatic change appears to be the only way that GM can achieve the culture change that is necessary - short of bankruptcy - it looks a remote contingency.
Unless GM’s pension and health care liabilities can be addressed the company’s intractable cost position is practically a poison pill to would-be acquirers. And turning the company around would be a lot harder than at DaimlerChrysler, which has shed some of its over-ambitious commitments over the last year such as Mitsubishi, and could probably quite easily shed others such as its smart brand operations. DaimlerChrysler has created product and productivity momentum in its Chrysler operations in North America, and Mercedes-Benz remains an immensely valuable and only slightly tarnished brand. In addition there is a depth of management talent within the company obviously available to do the job. General Motors has none of those advantages - only marginal businesses such as Cadillac have made any progress in their product positioning of the last years. The company's overseas operations remain a drag on the group's performance, and the prospect of a radical cultural change in management approaches or UAW strategies appears very distant.
Despite the severity of General Motors’ situation, last week's management reshuffle appears to be doing little more than rearranging the deckchairs on the Titanic.
In the meantime, supplier and consumer confidence in the company will ebb further.
That would be FUN. I've got the experienced LBO lawyers and investment bankers (both pre- and post-bankruptcy) - all we need is a buyer.
Isn't negotiating fun?
The decline of GM is merely the extension of their leviathan type attitude - and that exists from the top of management all the way down to the newest hire (new hires? Yeah.). Just like the machine tool operators at Boeing out here, GM's workforce has outpriced itself, their management has shown ZERO forward thinking skills or true innovation for decades, and their quality control isn't exactly legendary. Plus, when you've got several excess divisions trying to compete against each other with essentially the same crap with mere trim levels to differentiate product lines, you might as well get out the popcorn to watch the circular firing squad.
The fact that GM has lasted this long is testimony to the loyalty of many of their customers. (Which doesn't speak highly of the intelligence of those customers. The fleet customers should have been screaming at GM years ago.)
The real kicker is Toyota studied Henry Ford's production line and manufacturing processes.
Just a correction - the new Mustang is on the DEW-lite platform, which was derived from the all-new DEW98 platform of the Lincoln LS and Jaguar S-Type. It's not an ancient floorpan. The only problem with it is that Ford decided to be cheap and make it with a live rear axle instead of an IRS. Most of the technology in the Stang is now pretty recent, too. It's no G35C, but it's not all that far off, either.
No, the real kicker is that Ford, GM, and Chrysler all told Deming to p*** off. He then went over to Japan, where his methods and ideas were taken up as a new corporate religion. And then the Japanese came back and started kicking Detroit butt.
Detroit *still* resists Deming's TQM philosophy.
The unfortunate difficulty in shorting a stock, well, I discussed that in my recent book (hint: NOT a commercial -- do NOT even think about buying the book unless you happen to be interested in trading options, ok?).
Trading stock shares in the US is an almost entirely asymmetric process; the system will support your **purchase** of shares in numerous ways, but will -- and does, every day -- attempt quite effectively to prevent your sale of shares, bar those you own outright.
I suppose I'm lucky in some sense...never bought a single share of a dot.com outfit. OTOH, Elan Pharma bought out my shares of Liposome some years ago, and those ELN shares have been up to 40-odd, down to 5, up again to 28, and now (grrr!) back down to 3.5. It's not quite as bad as it sounds, though. I've written almost $18.00 of calls against them, so, on this trade, I'm underwater with some decent little possibility of getting back into the profit column. Nonetheless, still a kwappy trade.
Candidly, gents (I assume you're both gents, apols if this assumption is in error), just now I'm doing 3 things.
1) Establishing ratio-spreads (buy 1 call, say w/a striking price of $11.50, and simultaneously writing (selling) 3 calls with a striking price of $15.00) in January 06 Natural Gas, at a net credit on entry of $1100 or better,
2) buying mineral royalty trust shares, Canadian or American, on sharp dips (PBT (NYSE), for instance, recently dropped intraday to $10.75 -- I wasn't clever enough to get anything near that price, of course, but did buy a bit at $11.48; the dividends are exceptional, and it seems rather unlikely that the price of the underlying minerals/resources will crash before year-end, so I can cheerfully anticipate the 0.8/1.2% per month -- not a typo, btw, per month dividend), and
3) shorting FNM and FRD, and possibly other quasi-government ''lending'' outfits (read: organised subsidy outfits -- gov't always pushes this sort of thing far too far, and it'll get ugly when the chickens come home to roost) on any good bounce in their respective share prices. Feel quite free not to accept my word on this, but Fannie, especially, right this very minute, is even MORE highly leveraged than was LTCM when that group of traders collapsed in 1998.
The bailout for Fannie will beggar description. Come on down, Mr. and Mrs. Taxpayer.
It will be sort of ruefully amusing to watch the process...assuming (very reasonably) that the Regress will NOT rein in Fannie and Freddie from doing the derivatives version of ''Disco Inferno''.
Well, I suppose that's why we all get out of bed in the morning; to see what'll happen, right?
Good trading and FReegards to you both!
Deming went overseas at the FedGov's request. Lean thinking, lean manufacturing, agile manufacturing, six sigma can be linked, in some fashion, back to some of Ford's early work. Toyota sent a rep to come to America and study Ford's procedures. They took back all the knowledge and steadily tweaked their model and created TPS (Toyota Production System). Corporate America is head over heels for TPS and "kaizan" - the new buzzword - they think it's all new concepts
More like "at the Feds' behest after they were pressured by both the unions and big industry on the out of sight out of mind principle."
But they still have to give give big incentives to make them leave the lots before the end of the model year. When will they learn?
Around here, the GT versions don't need incentives. The V6 versions do, though. The gas crunch isn't helping, though.
They're actually good cars with a good interior, easily the best with a Ford, Lincoln, or Mercury badge at the current time.
We are Third World bound.
NUMMI (New United Motor Manufacturing, Inc) didn't make trucks until after Toyota took over the place from GM, IIRC.
The first NUMMI truck was the 4x2 Toyota Hilux (or Pickup, as we know it) in 1991. They've since expanded, and are making almost all the US market Tacomas there. GM's response: More S-10s built by drunk union Cajuns in Shreveport LA.
NUMMI was building a car exclusively for export back to Japan, the Voltz. It was a crossover. GM's response: The Pontiac Aztek.
NUMMI builds Toyota Corollas and Pontiac Vibes (also known as the Toyota Matrix). The Vibe/Matrix is the first true joint venture for NUMMI production - Toyota provided the platform and drivetrains, GM donated styling and interior design. Toyota can't sell any of the Matrixes, because they have too many GM idiot features in it (acres of cheap looking plastic), and it completely kludges up an otherwise perfectly good Corolla. Pontiac can't sell Vibes, either, because it's a hopeless kludge and looks just like the rest of GM's recent styling disasters.
Corollas do have incentives, and they are losing some sales - to the Scion brand, which is also Toyota. They don't fly off the showroom floors like they used to, but neither are they selling like Malibu sedans, i.e., not at all except to fleet buyers looking for cheap wheels to fill quotas.
NUMMI produced the Corolla as the Chevy Nova from 1984-1988, and then as the Prizm until 2001. GM's response: More Cavaliers.
Ford is actually doing far better - they're using platforms from the companies they've taken over. There are Ford products on Mazda and Volvo platforms now. The Ford 500 chassis was built with input from Mazda, Volvo, and (reportedly) Jaguar.
Ford appears to have a plan for rebuilding itself. It's still confused, but it knows where it wants to go. GM has no plan, no clue, and is still trying to figure out what the word "plan" means outside of a beancounter's spreadsheet.
This sums it up nicely. Meanwhile, execs loot the ship before she sinks!
The only downside is that the US taxpayer will probably also get the shaft as a side-effect. Oh well. Another day in paradise.
The UAW janitors at the GM Arlington plant make $33.50 an hour for sweeping floors, last I checked.
Too timid. GM's board should replace the current management with managers from Toyota.
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