GM in Crisis—5 Reasons Why America's Largest Car Company Teeters on the Edge

Popular Mechanics ^ | November 18, 2008 | Larry Webster

[Delacon]

GM in Crisis—5 Reasons Why America's Largest Car Company Teeters on the Edge

Strapped for cash, GM is on the brink of bankruptcy. It's a dramatic shift for a car company that had begun to right itself after decades of trouble. So what happened? We turned to PM Advisory Board Member and Chairman of the Center for Automotive Research, David Cole, for his take. Ironically, GM's perfect storm of troubles hit just as the company seemed to be making progress on a number of fronts: The company is producing its most competitive cars and trucks in decades, and the upcoming 2011 Chevy Volt has generated more excitement for GM than any product in recent memory. On the cost side, the market slowdown has closed factories, which has removed most if not all of the industry's overcapacity of cars and trucks. And when a new labor agreement kicks in, GM's cost to produce a car will fall to a point where it can once again be profitable. That's the good news. The question is, will GM be around to benefit once the economy improves? The troubles at GM are vast and complex, but Cole summarized what he sees as the immediate and long-range factors that have brought the once dominant automaker to its knees.

By Larry Webster

Published on: November 18, 2008

(Photograph by General Motors/John F. Martin)

1. Demand Shift and Uncertain Energy Policy

Cole says that "The first shot was the dramatic rise in energy prices this past summer. That caused a rapid mix shift in vehicles—and had a major impact on profitability." GM, Ford and Chrysler have relied on SUVs and trucks for the majority of their profits. Those vehicles commanded high sticker prices and by the late nineties made up 50 percent of the U.S. car market. When demand for the big vehicles dropped quickly and customers went for smaller, less expensive, less profitable cars, auto companies had two major issues to deal with: A loss of revenue and a backlog of unwanted trucks. Cole adds, "A big factor is our lack of an energy policy in this country. We just haven't had one. When we do things like corn-to-ethanol that don't have a foundation in economics or technology, you're really kind of teeing up to a situation where you're going to have a problem."

2. The Financial Meltdown

"The Big Kahuna in this is the financial meltdown," said Cole, "When you're down to 10 or 11 million light-vehicle sales a year, that is such a precipitous fall even from a recessionary standpoint. What has really caused the problem is lack of cash." Wall Street's problems have hit GM in two big ways: The company can't borrow money to ride out the storm, and the credit squeeze has dramatically hindered car sales. The auto industry lives on credit as do its customers, so when access to car loans or leases is limited, sales fall off a cliff. Yearly auto sales in the U.S. have hovered around the 15 to 16 million mark for the past few years and many analysts believe the total for 2008 could be as low as 10 million—the lowest in more than a decade.

3. Legacy Costs

Every car GM makes carries "legacy costs"—the costs of providing healthcare and pensions to scores of retired workers. For every GM worker, there are about 10 dependants, which are defined as retired workers and their families. According to Cole, "When the international car companies came to the U.S., the move stuck the domestics with a very large disadvantage related to legacy costs. And that's $2000 a car." That two grand must be built into the sticker price of any new GM car and truck. And that's money on top of developing, producing and marketing a car—costs that Honda, Toyota and others don't have. It makes competing difficult for the domestic automakers, "like playing basketball with a bowling ball," according to Cole. GM's per-hour labor rate for car assembly is about $75 per hour, compared to $40 to $45 for other car companies. That particular disadvantage, says Cole, will be "gone by the end of next year," when a new labor agreement goes into effect.

4. Sub-Par Quality and Lackluster Cars

Back in the early '80s, while GM president Roger Smith fell in love with the idea of automating workers out of car factories, Toyota and others focused on refining their production techniques and produced much higher quality cars. Customers left GM's brands en masse. The company's market share has fallen from a high of just over 50 percent in 1962 to around 23 percent in 2007. In recent times, the quality gap has narrowed considerably but "perception trails reality," commented Cole. Getting those customers back would require a herculean effort. Vehicle's like GM's very first attempt at a crossover—the sub-par 2001 Aztec—didn't help. Cars like that left customers will little incentive to return.

5. Global Slowdown

GM operates in 41 countries, and if its U.S. operation has been in decades of decline, other markets have been growing, particularly in Asia. But the financial shock has spread across the globe and sales are down everywhere. In effect, GM is bleeding from several wounds. As the largest of the Big Three, GM has been the focus of the media spotlight. But Ford and Chrysler are facing similar problems. And of course, thanks to many of the same factors, even healthy car companies are feeling the pain. The domestic auto companies weren't the only ones that capitalized on our thirst for light trucks. Half of Toyota's offerings are trucks and minivans. The difference is, Toyota doesn't come into this tough period already weakened by past mistakes.

[rbg81]

My experience with Amercian cars has been largely positive—but (oddly) many patriotic FReepers seem to hate American cars with a passion. Its really a sad state of affairs. I don’t think much of the country has a clear idea of how big a hole it will blow in the economy if the Big Three fade away.

Personally I think the Dems effort to save the auto industry is just them going through the motions. In the end, they will do nothing. The Greens (whose opinions really could with them) would luv to see those ugly auto plants go away. The Union leadership probably knows this and is in on the charade.

[expatpat]

It’s not a myth. I’ve had Fords, Lincolns, Buicks, Olds, Pontiacs, and none of them have been up to the standards of Toyota and Honda. I had a Honda Accord for 10 years and never had a problem with it.

[roadcat]

Am I imagining the following, or is it factual. The automakers showcase these fancy concept cars at auto shows. People say “ooh” and “wow” and want them. Then crappy production cars are made, and look nothing like the concept cars. If any make it to production, only a few are made and only the dealers get them and they’re uber-expensive. GM should listen to the people, and actually make cars that the people want.

[meyer]

5 Reasons Why America's Largest Car Company Teeters on the Edge

And they are...

1 - government
2 - government
3 - government
4 - UAW (with government backing)
5 - government

[ChiMark]

I’ll disagree on the quality point.
The cars are hardly piss poor.

Their fixed costs are killing them.
The other side of this is the cost of government regulation.
Compliance with a myriad of pollution ,safety and EEOC laws add to the fixed costs of production. Producing euro style
cars overseas has proven very successful for G.M. but guess what?
you can’t import these vehicles into the U.S.per
union thug agreements. Another prohibitive tariff which hurts consumers and the company.

If G.M. is to fail, let it fail. There is a better chance for possible reorginization through bankruptcy.

We don’t need a government run albatrosse.

[uncle fenders]

I would like to see the rules for normal cars left alone, but I think a special new LIGHT commuter should be allowed, a light weight car restricted to lower speed roads that didn’t have to meet all normal safety standards. High mileage alternatives vehicles. If motorcycles are legal and safe enough then so are light cars. I think it should be an option to those that want them...and as far as that goes someone should kick California in the nads, and let all the efficient diesels in the country...

[redangus]

But if you compare the gas mileage of today’s GM large SUVs and pickups you will see that it is much higher (up to 2 mpg city/4 mpg highway) in the GM vehicles than in the Toyota and Nissan models. Toyota also has quite a large SUV fleet, I believe 7 at this point, so they were also building what Americans wanted. The big jump in gas prices hurt everyone, it’s just that Honda especially and Toyota, Kia, Hyundai and Nissan to a lesser extent had more small cars available when the sh*t it the fan this summer.

As for the crappy small cars of the 70’s American cars in the 70’s were crap regardless of size.

[roadcat]

Meanwhile Datsun gave us the 240-Z, ushering in the era of dominance by Japan.

And that was a fluke. Mr. Yutaka Katayama as put in charge of Nissan USA Western Division in Los Angeles in 1960. He loved the American life-style, and was in conflict with an aloof Nissan Corporation in Japan. He was a maverick, and pushed for the 240Z against corporate idiots back in Japan. He was later punished for his arrogance for making Nissan successful in America and was transfered back to Japan.

[terycarl]

the A..M.C. pacer and gremlin were WONDERFUL little cars....232 straight six, 7 main bearings, (engine still used in the Jeep) people wouldn’t buy them because they’re not the type of car that americans want.....give them a Rambler American with a three hundred horsepower engine and they’ll snap it up......pathetic

[Parley Baer]

Reason #1. UAW

[dr huer]

Buying GM stock is a gamble. If GM goes bankrupt the stockholder probably gets zero. WSJ editorial opinion seems more but not totally on the side of Chapter 11 bankruptcy as the best for america. Bush says Chapter 11. What will Obama say. He was a community otganizer. What do such persons do? Organize groups in the community to get specials from the government. Now it looks like big business groups need the same. Wall street has got theirs. Can GM and UAW similiarly qualify? If Obama says yes the stock buyer might triple his $3. Gaze into your crystal ball, but be prepared to lose all your bet.

[ricks_place]

The myth that ricegrinders are better than American cars...

I bought a slew of Toyotas (a couple of Fords) in the past 25 years; very reliable as noted in the commie journal Consumer Reports. This September I bought a CTS; a better car than any Toyota I ever drove or owned. An awesome car.

[ptshredder]

Bye the way, I also drive an almost 22 year old Toyota pickup that I put $300 into 19 years ago to replace a head gasket.
All 3 of the automakers deserve to go down. They made their bed with the unions and they can all suck water as far as I’m concerned. Not a dime for a bailout.

[Enterprise]

Gee. You would think that the Dorkacrats would be hi fiving each other. They accomplished what they wanted. The production of "gas guzzling" vehicles like SUVs and P/Us has been drastically curtailed. People are skeptical now of purchasing ANY GM vehicle because they aren't sure GM will be in business for much longer. OOPS! If GM and the others go out of business, a couple of million UNION WORKERS are suddenly out of work!

The loopiness of this is hilarious! First - institute policies to put the big auto companies in an economic morass. Then, when it appears that the policies have succeeded - BAIL THEM OUT! What F****** GENIUSES!

[CodeMasterPhilzar]

I'd second that take on GM quality relative to the others. I've had several Chrysler/Jeep vehicles, all maintenance headaches. (RamCharger, Dakota PU, CJ-5, Cherokee) Minor to modest problems, but really, after the first year (new) you start to wonder when you get in it in the morning and turn the key - will it get me to work and back today?

For many years I was a Ford guy. Owned two different F-150s, an Escort wagon, and a Winstar minivan. The 1990 F-150 was great, plain, straight 6 cyl 5 spd manual, 4x2 regular cab, 8 ft bed. Just a plain old truck. I had that for 6 or 7 years. The Escort my wife drove wasn't bad, wasn't great. The last F-150 (1997 4x4 supercab) and the Winstar were disasters. They didn't nickel and dime us, it was $300, $500, $800... at a pop. I'll never own a Ford again, period. Not even if they gave me one free - I couldn't afford the maintenance on it, and I need reliable vehicles to get me and the wife to our jobs. My wife now drives a new Sierra 1500 4x4 crew cab. Funny thing, the dealers were really willing to deal on them back when gas was 3.40 a gal or more. ;-) But hey, her commute is under 3 mi each way, why not something big, comfortable, and safe?

[Proud2BeRight]

I will compare any of my 40 years of GMs with any comparable ricegrinder on the full range of attributes; longevity, reliability, maintainability, performance, looks, comfort, safety. I really enjoy my 284,000 mile GM Van for it's great service and utility. Plus, I love to smoke riceburners with my Pontiacs.

Personally, I guess I am a guy who still takes some pride in buying from American companies.

[truthguy]

CAFE stands for Corporate Average Fuel Economy. The key word is AVERAGE. The American Car companies fought against this because they sold more large (or larger) cars, SUV's, and Trucks than did the Foreign Manufacturers. Therefore it was easier for the Foreign Car Companies to meet the CAFE standards. What the Car Companies were arguring for is to make adjustments for the types of vehicles they sold. I wish some people on this site would do some research before posting

There are a number of idiots posting here tonight mentioning the notion that GM, Ford, and Chrysler should have made more small cars. WRONG! They lost money on small cars because they have legacy costs of about $2000-$2300 per car. It's extremely difficult if not altogether impossible to make a profit on a small car for an American Car Company. If you look at equivalent cars the gas mileage is nearly identical. If you don't believe it then look it up.

Lots of really dumb posters here on the Auto Industry. More of these posters should do some research before posting so that they will know what they are talking about.

[truthguy]

I will compare any of my 40 years of GMs with any comparable ricegrinder on the full range of attributes; longevity, reliability, maintainability, performance, looks, comfort, safety. I really enjoy my 284,000 mile GM Van for it's great service and utility. Plus, I love to smoke riceburners with my Pontiacs. Personally, I guess I am a guy who still takes some pride in buying from American companies.

Good for you. I've had no real problems with my American Cars either. I've got 137,000 on my Dodge Dakota with only one problem-the radio clock was losing about 1-2 minutes per week. They replaced it in 30 minutes under warranty. No other problems. I'm extremely happy.

[businessprofessor]

when the Japanese started building plants here they could hire young workers who were healthy...some of them are getting older now....others will be eligible to retire in a decade or so...eventually they’re going to encounter the legacy costs of an aging workforce themselves.

Their legacy costs will be much smaller than the Big 3's costs. They do not promise the pensions and retiree health care. The health care costs for workers will increase as workers age but workers can be asked to contribute more also. The big money is in the pensions and retiree health care.

[businessprofessor]

My experience with Amercian cars has been largely positive—but (oddly) many patriotic FReepers seem to hate American cars with a passion. Its really a sad state of affairs. I don’t think much of the country has a clear idea of how big a hole it will blow in the economy if the Big Three fade away.

I detest the unions. I boycott union dominated companies when feasible. I also prefer Japanese cars disregarding the union issue. I have had great experience with Japanese cars over the last 20 years.