John Shiels

GM Turnaround Collides With Dismal U.S. Car Demand: Doron Levin

Commentary by Doron Levin

Feb. 28 (Bloomberg) -- General Motors Corp. may look like a victim of bad luck, its turnaround plan undermined by a collapsing U.S. economy just as GM cars and trucks are starting to compete. Don't be fooled.

That interpretation of GM's latest woes ignores years and years of dallying and denial. The No. 1 U.S. automaker delayed drastic action, hoping that growing automotive revenue might be enough to outstrip ballooning costs.

GM has known at least since the early 1990s that its business model in the U.S. was defunct. The formula that once produced profits for GM, Ford Motor Co. and what was then the Chrysler Corp. -- as well as high wages for union workers -- was rendered obsolete after Japanese automakers broke Detroit's oligopoly.

Instead of changing their approach, GM and the other U.S. automakers made a feint, designing more and more vehicles based on pickup trucks, expanding categories like full-size sport- utility vehicles where Japan was weak. High gasoline prices since have neutralized that tactic.

At the beginning of 2008, GM had hoped to be on the mend, with its costs in line and its vehicles gaining ground in the market.

After the automaker posted a $722 million fourth-quarter net loss on Feb. 13, contributing to a massive $38.7 billion annual loss for 2007, GM chairman Rick Wagoner had little to say that was either encouraging or persuasive.

Greener Pastures

``Certainly in total, automotive earnings should continue to improve,'' Wagoner said. ``We expect the strength in Asia and Latin America to continue.''

Yes, GM is prospering overseas, though not enough to make up for losses at home. And what guarantee does GM have that the same economic difficulties now gripping the U.S. won't spread to the fast-growing automotive markets of Brazil, Russia, India and China?

GM is running out of options in its race against time. The company's financial cushion from its glory days is almost gone. It won major concessions from the United Auto Workers union last fall. But the impact of lower labor costs probably won't reach GM's bottom line for two more years. The Chevrolet Malibu, Cadillac CTS and Buick Enclave have won critical acclaim and could bolster market share in the U.S., though that won't be easy in a market where demand is falling.

Gathering Storm

Meantime, GM's financial reserve dwindles and the company has no clue when cash flow might turn positive. Rod Lache, equity analyst for Deutsche Bank AG, on Monday cut his rating on GM to ``hold'' from ``buy.'' The slowdown in the U.S. economy ``could be deeper and more protracted than previously expected,'' he said in his report.

Deutsche Bank forecasts GM's net operating cash outflow at about $5 billion this year, which would leave GM with $21.3 billion. The sum isn't all that much for an automaker the size of GM, which burns cash at a ferocious rate during a slowdown.

Lache might be on to something when he writes ``it would be prudent for GM to seek external financing'' now, even if GM shares are diluted as a consequence, to hedge against the possibility of a sudden liquidity squeeze. Were that to happen, a bankruptcy filing or a forced merger might be unavoidable.

Wagoner deserves credit for seizing the liquidity issue and pulling off the sale of 51 percent of GM's GMAC finance subsidiary to Cerberus Capital Management LLC in 2006. Had he not done that, GM today would have $14 billion less in cash and be choking on 100 percent of GMAC's real estate-related losses, instead of about half. Absent the GMAC deal, GM might well be in bankruptcy already.

Foreign Friends

A new and intriguing potential source of capital for GM might be the sovereign-wealth funds, or SWFs, which have $1.9 trillion in holdings, according to a Merrill Lynch & Co. report in October, and could quadruple in size in the next three years.

Citigroup Inc., hurt by the subprime mortgage mess, last month said it was borrowing $14.5 billion from investors to replenish capital. The lenders include the governments of Kuwait, Singapore and Saudi billionaire Prince Alwaleed bin Talal. Perhaps sovereign funds willing to take a flyer on the second biggest U.S. bank might be inclined to invest in its biggest automaker.

Prospective investors will want to know that GM is being realistic about its position in the U.S. automotive market and its costs. If GM needs to close plants or consolidate brands faster than it's done so far in the face of an awful U.S. car market, the automaker shouldn't hesitate.

Without a financial cushion, GM no longer has the luxury of putting off until tomorrow what it should have done yesterday.

(Doron Levin is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Doron Levin in Southfield, Michigan, at dlevin5@bloomberg.net

OCCOMSRAZOR

I was interested in reading this until the "collapsing U.S. economy" comment. Such hyperbole, but to be expected in an election year.

The problem with GM is that they are no longer in the automobile business, they are in the health and human service business.

Bink

Very Gloomy!!
Too little too late??
Hope not.

John Shiels

The auto sales in the US are at ression levels they may not sell 16 million units this year. It has been the veiw of many auto makers not just the domestic ones. People and businesses can stall a purchsae in uncertain times. I was looking at a new dooley which was stickered at 55 and I bet I can get a great deal but it is not a comfortable time to buy.

Independent1

I think all the domestic car makers are in trouble because they never dealt strongly enough with the broken business model they were using. Their labor and other costs are just not as low as their competition.

I remember reading an article a few years back where Wagoner was quoted as saying that they were hoping the economy would hold up through 2008 because that is when their labor legacy costs would peak and then begin to subside. Doesn't look like the economy is going to cooperate.

John Shiels

They have many problems not all their own. Would they be profitable if they had no health-care cost like an Japanese employee? Would they be profitable if they had a young workforce like Toyota does with few retirees in this country? Toyota won't build another plant here and Honda is closing their motorcycle production here to move it to Japan whre it is cheaper for them.

wtknght1

I agree. Where do "they" get this crap!!?? I'm just amazed at how the doom and gloom sayers just come out of the woodwork. It's cyclic folks...you can't expect everybody to buy a new car every year...there will be ebbs and flows to every market.

Interest rates are lower than they've been in 20+ years, unemployment is lower than during the Monica administration (oops, I meant ****-on... uh, Clinton)...

Yeah, gas is high and that sucks...so ride a bike when you're not racing and help out.

AUTO_X_AL

Been to Michigan Lately?

Unemployment is crazy around here. I work at a GM dealer and I'm doing pretty damn good for this horrible economy. It's bad around here but I think things could be worse. In the Clinton days things were a HELL of a lot better around here. GM will be fine and everything will work out.

heavychevy

Corvette needs to go SOLO. PLEASE!!!!!!!!!!!

John Shiels

then they would cost the same as a Ferrari.

John Shiels

when you have major banks borrowing billions from overseas and housing starts tanking things are not rosie. Commercial construction is in the tank on Long Island and home improvements are near none. People are becoming inverted in mortgages and people are defaulting in auto loans at a record rate. I do not see it going away very fast. Heating cost and fuel cost ripping money from people's and businesses pockets is not good. Diesel will be 4.00 per gallon in a few weeks here it is 3.90 now The interest rate is low but people and businesses have a real hard time getting credit now even with a good record and that will grind everything to a halt. I see construction equipment on Ebay going for nothing and even then no bids at all.

Z06Norway

You dont think US economy is in trouble ? you know something the rest of the world dont know ?
US is in BIG economy trouble, Us dollar versus other currency had dropped like a rock last 5 years.
usd vs. Norwegian krone (my money ) is now 1 usd = 5.21 NOK
5 years ago it was 1 usd= 8.50 NOK

USA is in resession

Hope you guys can turn it around, good news is it SHOULD be easier to export your goods now, cars etc.
Just let your administration visit my administration and force them to take our unfair and stupid duty system away.
ALOT of people would buy US cars if the duty system was different.



Rune

WNeal

I glad I just bought my new 08 Z06 now while they still make em.

xsiveone

No offense, but what island are you living on?

My toughest time financially other than now was in the late 80's and early 90's before Clinton took office.

I think that the major problem with GM is that the people that used to buy American cars or nothing are dying off. Also, it didn't help that GM put all their eggs in one basket with large trucks and SUV's and ignored cars. Guess what is taking a hit now that gas prices are high? It reminds me of the 70's all over again when the American car companies couldn't sell their land yatchs when gas prices went up. This is all catching up to them.

John Shiels

Thank you Rune! You have confirmed we are on a oneway street in many area's of exporting to closed markets around the world. How much is a new z there?

John Shiels

The good news is there a millions now buying cars that don't remember the domestics problems in the 70's & 80's they were unborn or to young. It will be a tough road back one mad customer complaining will trump 9 happy ones not talking.

I started in business in 1975 when interest rate was 18-19% and had an easier time than now. now even if you get the job it's harder to make good % profit like in '75. Now I have been bidding on private and municipal projects and have been low bidder with a General Contractors where we thought we had the job only to see it canceled with in the 45day limit they to accept the bid. I have bid on a firehouse 6 times and every time they have canceled it in the past two years.

New dooley at the local dealer is 55,000 sticker and if things were good I'd grab. Being what they are I do not need a payment to worry about. I wouldn't buy anything not completely necessary so this will start the cycle downward in other businesses. I won't be taking new Hoosiers at 1400+- a set and blowing through them in three days very often this year along with all the other expenses involved it $1,000 per track day. Where I use to do 30-40 track days some years it won't happen this year.

xsiveone

Yes, but the kids of the people that the US automakers lost in the 80's are now buying cars. If your parents buy imports, odds are that their kids will too.

I agree that the American cars are getting much better now. I just hope that it's not too little too late.

heavychevy

Not if they ***** out some base Vettes, which they have always done.

Better that than the car go down with the company. I imagine all the big scares that were dying down from Ford and GM and Chrysler are going to pick back up before the economy is able to start creeping back up.

Thanks Bush.

John Shiels

with all the other parts they use frorn other cars in a Corvette which are made by hundreds of thousands to make a 30-40,000 units would be very expensive for each part. All three are in serious trouble with Chrysler supposed loss of 2.72 billion last year with a lot less of available funding. Then Tata motors likely to take over Jaguar from India.

outnumbered

I'd like to know what the heck you guys do that is not in the tank. I am sure it is different in many parts of the country. In Maryland many! small businesses are closing. They have little to no business.

Our new liberal a$$ Governor surely didn't help with all if his new taxes either.

Another thing, you haven't heard the last of the automakers losing their shorts, domestic and import. All you have to do is watch the TV and see the endless barrage of commercials desperately trying to move product.