Could GM Go Bust?

[ragingfish]

Quote »What GM Must DoLast week's surprise announcement puts the depth of its problems into focusBy JAY PALMERonline.barrons.comWHEN GENERAL MOTORS SLASHED its earnings estimates for the first quarter and the year last week, it rattled financial markets and cast a long, dark shadow over the company's future. As the stock market spun lower on the news, GM shares plunged, closing at 28.62 Friday, down 17% on the week, and the top bond agencies were poised to cut GM debt to junk status. Suddenly, a once-ludicrous question didn't seem so ludicrous: Could the world's largest auto maker go bust?"I'm not going there," the company's chief financial officer, John Devine, told Barron's last week. "It's not an appropriate discussion." But it is. GM's financial woes have put it on a collision course with its dealers, suppliers, investors, workers and, not least, retirees. To stay viable over the long run, GM (ticker: GM) must win concessions from each of these groups. If it can't win concessions voluntarily, it might have to do so with the help of the courts."The steps that GM must take to become viable again will be painful and difficult," says Ron Tadross of Banc of America Securities. "There will be no easy fixes. It's going to be hard, perhaps impossible, but CEO Rick Wagoner must somehow get the support he needs and the concessions he needs from all the different constituencies involved." Says Scott Merlis, an auto analyst with Thomas Weisel Partners: "The situation is not unlike what Lee Iacocca had to do when Chrysler was on the verge of going under in 1980. What he called it then was 'equality of sacrifice.' "GM has two problems: weak revenues and high costs.The revenue problems, as we noted in a cover story last month ("GM's Challenge," Feb. 28), are a result of 30 years of slumping market share and five years of steadily increasing, profit-sapping incentives, some of which were less than terrific at boosting sales. Most recently, GM has been hurt by weak sales of high-margin trucks and large SUVs. The culprits: an aging lineup, high gasoline prices and punishing competition from Toyota and other Asian car makers.Some new GM vehicles haven't been hits. Others may make a difference, but not before late 2006 and 2007. In the short term, GM must focus on costs.The irony is that GM has done a decent job of cutting costs and boosting productivity. It's now the most efficient Detroit auto maker, ahead of the Europeans and not far behind the Japanese. But unlike its foreign rivals, GM is burdened with high liabilities to active and retired workers, particularly fast-rising health-care expenses, that add a whopping $1,525 to the cost of every car made. Foreign car makers, most based in nations with socialized medicine, have a far lower health burden. As a result, GM last year earned a miserly $290 per vehicle in North America; Toyota earned about $2,000.So less than two months after Wagoner and Devine reaffirmed their expectations for 2005, the company has had to concede reality. Instead of breaking even in the first quarter, GM now looks for a net loss of $850 million, or $1.50 a share. For the year, earnings are put at $1-to-$2 a share, down from close to $5. And that 12-month target is based on hope for a second-half recovery. Some analysts, burnt by earlier optimism, now see a full-year loss.So what can GM do? In the short term, meaning a year to 18 months, it can:• Cut its $2 annual dividend by at least 75%, to 50 cents, even before May's scheduled board meeting. Yes, such a cut could lead some institutional investors and mutual funds to dump the stock. But the payout costs GM $1.1 billion a year, and slashing it would signal a new resolve to make tough decisions.• Slash management salaries and temporarily end bonuses. Nothing would send a more positive message. Are GM executives really serious about righting the company and reviving its stock price? Then make registered shares a bigger part of their compensation.• Seek further concessions from suppliers. This isn't a very promising avenue: GM has already squeezed these companies. The weaker ones are on the ropes; more concessions might destroy them, creating another crisis. The stronger ones have a diversified customer base and aren't apt to bend much more.• Ask for help from GM's 7,600 Cadillac, Hummer, Buick, Pontiac, GMC truck, Chevrolet, Saturn and Saab dealers. Wagoner & Co. should ask them to temporarily surrender some of their own profit. In return, the company could offer them stock or stock options so they'd have the potential for a long-term gain.• Start negotiations with the United Auto Workers now, not when the 2007 expiration of the current contract approaches. (There are indications that this already has started.) Ask for immediate concessions on health care and on layoff-pay rules. Under the current pact, laid-off or dismissed workers can collect up to 95% of their salary for as long as five years -- something GM can't afford.The company also will have to open a dialogue with retirees to get concessions on health-care costs. (Pension costs, for years General Motors' biggest bugaboo, actually appear more or less under control, after the company has poured billions into its retirement plans.) Following decades of downsizing, GM has roughly 422,000 retirees -- about 2.3 for every U.S. worker. Throw in dependents, and the ranks swell to 680,000.If the union and the retirees won't yield, GM might have no alternative but to enter Chapter 11, where the courts might let it make unilateral adjustments.In the longer term, besides designing vehicles that can sell on their merits rather than incentives, as we noted in our February article, GM must:• Reduce its number of factories.• Trim its roster of brands. Eight is simply one or two too many for a 25% share of the North American light-vehicle market. "Toyota sells roughly half as many cars as GM does with essentially two brands, Toyota and Lexus," says MaryAnn Keller, an industry consultant.The top chopping-block candidates are Saab and Saturn, which have been losing money for years, and Buick, which has an antediluvian -- and rapidly shrinking -- buyer base.Killing any brand would involve big upfront costs. But, says Tadross: "Some of these brands are already dead; they just don't know it yet."http://online.barrons.com/arti..._mainThe thing that concerns me in here is the final line: "Some of these brands are already dead; they just don't know it yet."I could care less if Buick or Saab get tossed. Buick shoulda gone before Olds IMHO. BUt Saturn! I LOVE Saturns! And I think the SKY and AURA are two VERY promising vehicles! I just would hate to see them kill off Saturn before they get the chance to explore it's true potentinal...

[kostby]

Quote, originally posted by ragingfish »"Some of these brands are already dead; they just don't know it yet."Unfortunately, the choice probably comes down to:1) "Shaft the retirees and (try to) save the company"-OR-2) "Don't shaft the retirees, and eventually run the company into liquidation." Gee, an out-of-business company doesn't have any money to pay the retiree's either, now does it? End result: Retiree's get shafted anyway!With a flip of the coin, I'd make the following draconian US domestic fleet cuts:GMC Truck & Chevy Truck - say buh-bye to (Tails) Chevy Trucks - sell the excess truck capacity to Toyota & Honda - Leaves Chevy dealers with GMC Trucks.Buick and Cadillac - say buh-bye to (Heads) Buick - sell the excess car capacity to Nissan. Turn all 100,000 aging Buick customers over to Cadillac & Chevy.Pontiac and Chevy - say buh-bye to (Heads) Pontiac - sell the excess passenger car capacity to Subaru. Leaves former (Olds-)Buick-Pontiac-GMC dealers with uh - lots of GMC trucks and nice dealerships with lots of space to begin selling Toyota/Honda/Nissan/SubaruSaturn & Saab - Sorry, coin landed on the edge - you BOTH lose.For Springhill, TN & Trollhatten, SWE, there's a future building Hyundais & Kias out there on the horizon somewhere...

[ragingfish]

Well, isn't Trollhatten gonna build the BLS alongside the SAABs for now?

[ToolGuy]

GM will never go bust. They have their ways...

[kharman]

don't let all the doom and gloom press get you...GM had been, until wal-mart passed them up a few years ago, the one company turning the most yearly profit...they are more than just GM, Saab, Toyota-venture, Hummer, Saturn and the rest of their vehicle stable, they are into just about everything from steel supplier to electric company...they will not be going bust any time soon....Quote, originally posted by ragingfish »The thing that concerns me in here is the final line: "Some of these brands are already dead; they just don't know it yet."I could care less if Buick or Saab get tossed. Buick shoulda gone before Olds IMHO. BUt Saturn! I LOVE Saturns! And I think the SKY and AURA are two VERY promising vehicles! I just would hate to see them kill off Saturn before they get the chance to explore it's true potentinal...

[GMJAP]

The thing that concerns me is the increasing whining from US Companies, including GM per the article, that they can't compete while providing healthcare insurance and pensions...

[GMJAP]

Quote, originally posted by kharman »don't let all the doom and gloom press get you...GM had been, until wal-mart passed them up a few years ago, the one company turning the most yearly profit...they are more than just GM, Saab, Toyota-venture, Hummer, Saturn and the rest of their vehicle stable, they are into just about everything from steel supplier to electric company...they will not be going bust any time soon....No, but they might get chopped up a bit....