General Motors Death Watch 141: No Respite in Sight
By Robert Farago
August 1st, 2007 418 Views
In the second financial quarter, General Motors made $891m. The General's camp followers have been delighted with the slim not to say two percent profit. Meanwhile, GM North America (GMNA) lost $39m. The General has been almost universally commended for this fact, as it compares with a $3.95b loss in ’06. Supposedly, the division's move “close to profitability” indicates that management has stopped the rot, as a prelude to rebuilding a framework for success. But lessening losses is not the same as making money, especially when you need money.
And make no mistake about it: GMNA needs LOTS of money. It needs tens of billions of dollars to eliminate the mountain of debt and future obligations the company incurred in the downsizing process. Union buyouts, plant closures, pay-offs to former parts maker Delphi, the upcoming Wall Street requisite United Auto Workers pay-off, and more. Again, GMNA ain’t making it. Literally and figuratively.
At best, GM CEO Rick Wagoner’s $9b worth of operational cuts have brought the automaker's U.S. expenditures in line with its income. That’s fine, if you assume that income will increase from here on out and expenditure won’t. Both of which are false assumptions.
Next financial quarter, GMNA will shell-out $1b in capital expenditures. Annual plant closures and scheduled production cutbacks will also take their toll on revenues. More critically, if the two-month sales drop (July down 18.5%) is any indication, The General will continue to shed market share in [what analysts predict will be] a contracting market. Do the math. GMNA is about to make less money selling fewer vehicles.
What then? Rabid Rick has two choices. He can cut even more capacity from the system, continuing GM's death spiral. Or he can instruct his troops to cut prices to move the moribund metal, further eroding his employer’s too-slim profit margins. Which are already crumbling under direct assault from Toyota et al.
On Saturday, GM announced zero percent financing for up to 60 months on crew cab and extended cab Silverado pickup trucks. The move will wipe-off some $2500 - $3000 off their margins, halving GM's per truck profits. This after cutting back on Silverado production by 10 percent. And truck inventories continue to rise.
Once again, still, GMNA’s future depends on selling a lot of something that makes the company a lot of money; something other than what they’re already trying to sell. Now that GM’s new pickup trucks have failed to generate the anticipated turnaround bucks, GMNA must pin its hopes on the new Pontiac G8, Cadillac CTS, Saturn Astra and Chevrolet Malibu.
The General is only planning on importing, at best, 30k to 50k Aussie-built G8s for beleaguered Pontiac/GMC/Buick dealers. The Cadillac CTS has sold just 24k units this year. Even if the new, spizzarkle-prowed model doubles that total, it’s still a drop in an ocean of red ink. The Saturn is imported from Europe at a loss. Which leaves the hopes of a company resting squarely on the shoulders of the new Chevrolet Malibu.
So far this year, GM sold 60k Malibus (many of which were discounted to fleets). In the same time period, Toyota sold 212k Camrys and Honda flogged 180k Accords (hardly any of which sailed with the fleets). If GM thinks it’s going to slay the competition with the new model– whose form and greasy bits are not a million miles away from the slow-selling Saturn Aura– it’s sorely mistaken. Even if the Malibu is significantly better than the Camry and Accord (also set for a refresh), conquest sales will be like pulling teeth. The demand for an alternative simply doesn’t exist.
All of which leaves GM where it is now: depending on sales abroad to generate enough cash for the corporate mothership to stay afloat. This quarter, 58 percent of GM’s revenue originated overseas. That’s all fine and dandy (especially if you’re a United Auto Workers’ negotiator), but what happens if GM’s foreign operations go sour? Amid all the jubilation over GM’s foreign-sourced profits, there are signs of struggle and danger.
According to GM’s number, their Asia Pacific market share is decreasing– in an expanding market. GM Brazil has hit a production capacity wall. And Shanghai Automotive’s hook-up with countryman Nanjing Motors suggests The People’s Republic of China wants the lion’s share of their domestic market for themselves. And last but not least, the lean, mean, lean production machine known as Toyota is beginning to turn its attention to these ripe pickings– which could turn moldy in the face of an international economic downturn.
In short, GM’s overseas profits are not guaranteed; whereas ongoing and increasing U.S. losses are a sure bet. On balance, the automaker isn’t. Even if the rest of world continues to make enough cash to subsidize GMNA, we’re heading towards the point where GM’s Board of Bystanders must contemplate declaring GMNA bankrupt to save the corporate mothership.
Can the US Auto Industry Survive?
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Originally Posted by Strike For The South
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