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

(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.

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