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.
<< .... the GTO is the best car I've ever seen with a Pontiac badge, and easily the best interior in any GM product ever sold in the US. >>
[Bill] Lear Jet and Ford have both done that -- and it worked for them both, too.
Until the corporate crabs in both firms reached up and pulled the Aussies down.
"Might have helped if they redesigned rather than axed the F-body to compete with the Mustang"
Your right, they should hire that "Foos" guy of Hotrodding fame.....dig out a 1968 Camaro, modernize it offer a fuel thrifty aluminum small block in it, step back and watch the stampede form at car dealerships across the country.
Instead, we get rolling abortions like the Avalanche.
What a missed opportunity.
"The only problem with it is that Ford decided to be cheap and make it with a live rear axle instead of an IRS"
And thank God they did. It will hold up better at the drag strips. Most of the people I know who have bought these Stangs are my age, 40 yesrs old and above... and die-hard gear heads who want a bit of "old school" technology mixed in with the new stuff.
An indication of GM's problems is that it's replacement parts have been extremely expensive when compared to at least some other automakers. GM, to my knowledge, has never been able to reach needed agreeements with its suppliers to produce lower cost parts.
Seems reasonable to me.
I'd look at a CTS-V for my next car. Cadillac does seem to have a clue.
I agree. My 03 Mustang Cobra with IRS has severe wheel hop off the line. Thats why the new 07 Cobra will have a solid rear axle.
If Ford would put a real IRS under it, you wouldn't have severe wheel hop. ;) The S-Type R doesn't have wheel hop, and that thing pumps 400hp through the rear of a similar chassis (but a much different IRS).
I actually like the Avalanche - it actually shows some thought, and they're selling very, very well down here. However, were you to substitute the Aztek, I don't think you'd get any disagreement.
Cadillac retained more autonomy than any of the other traditional divisions under GM; which included the tradition of having their own chassis and own engines (which was restored when sales went to hell in the 1980s because of the Cimmaron and the "oops, we put a Chevy engine in place of the Cadillac one you were supposed to get" fiascos). They also have traditionally not shared design staff with anyone else - which probably explains why they actually are making interesting quality products again.
Total Cash - 26.39B
Total Cash Per Share - 46.75
Total Debt - 291.83B
Total Debt/Equity - 11.399
Be careful of the stats when you look at GM, as the above numbers include the GMAC financing operations,with the bulk of the outstanding debt of GM securitized by sold cars and your houses.
Of the total $291.8 billion of debt, $267.8 is incurred by GMAC, while the auto and other manufacturing operations have the balance.
Not nearly as dire a financial picture when analysed.
How do you know that expensive parts are not part of the strategy? Get people in the door and driving out with a new GM product that they're locked into with six year financing, especially "upside down" financing that guarantees the car will almost always be worth less than is owed on it. Since these people are now stuck with the car for over half a decade, they only have one source for parts.
Whatever buyers save on monthly payments by buying a GM versus a Honda or Toyota, they more than make up with repair costs. Keeps the service department in business, too. The dealership can afford to lose money in sales, as long as they can make it up some other way, with outrageous service costs, or huge markups on parts shipped to independant repair facilities.
And don't tell me "warranty", a GM warranty is worth little more than booty wipe.
Weak management and corrupt unions are to blame for this current imbroglio. They managed to sink the steel industry in the country and are well on the way to doing the same to the auto industry. By the way, the UAW is pulling the same strategy on Caterpillar.
"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."
What's good for GM is good for America?!
"If Ford would put a real IRS under it, you wouldn't have severe wheel hop. ;) The S-Type R doesn't have wheel hop, and that thing pumps 400hp through the rear of a similar chassis (but a much different IRS)."
I agree. The SRA is great for launching but doesnt have the handling and cornering of the IRS. I am torn between getting the 07 Shelby or the 07 C6 Corvette. If I win the lottery I would get the C6 Z06.
type in "GM 0% financing 9-11" into google.
alot of it is also perception and the way quality issues are covered in the media. the new Honda Accords where recalled last year for defective automatic transmissions, did you hear much about it in the media? no. A latch on a GM pickup truck fails, and its all over the news.
Great info. Thanks!
Their debt is almost 300 billion dollars.
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