What GM Must Do - to avoid "going bust"

[mgescuro]

http://online.barrons.com/article/SB..._magazine_main

What GM Must Do
Last week's surprise announcement puts the depth of its problems into focus
By JAY PALMER
online.barrons.com



WHEN 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."

[rickhunter1max]

move the headquaters to japan I don't know they never listen to us.

[camaro chris]

if GM goes under whos with me to start a company that'll build corvettes camaros gtos trucks and luxury cars?

[mgescuro]

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.

Buick definitely. There's not a reason why Cadillac can't absorb Lacrosse and Ranier. However, Buick is a very big name in up-and-coming markets. So, to close the Buick division in the US, might necessitate losing a major foothold in China, which might not be the smartest move for GM to make.

Saturn... definitely a possibility. But seeing as their newly announced cars have a lot more buzz than anything that has come out since the Cadillac Sigmas... it might be a bit premature. Furthermore, the loss of a car company with such a loyal following and such stratospheric customer service and a SOLID history of customer satisfaction would be extremely detrimental to GM. Losing the Saturn brand is one thing. Losing the Saturn intangibles is wholly unacceptable.

Saab. I dont think they should close it. At best... sell it. But... that puts GM in an awkward position in that the no longer sell any premium cars worldwide. And would be about 5 years from Cadillac achieving half the numbers Saab already has. So, that's not necessarily a position GM wants to be in either.

So.. 3 brands that GM "can" close. But there are significant reasons as to why GM should not close the brands.

[FusionSVT]

Keep Buick in China, but close the Buick in america.
Close SAAB
downsize Pontiac or eliminate it all together
Keep Saturn
Keep Chevrolet


GM America should look like this
Saturn-Scion
Chevrolet-Toyota
Cadillac-Lexus
Pontiac-Nissan

you dont need anymore divisions then that.

[McG]

that's an excellent article.

In some ways I have a morbid curiosity about the Chapter 11 route.

I would love GM to be able to make some of these decisions unilaterally.

Retirees?... beat it

UAW, want someplace to work? ...get paid like the rest of the human population.

Buick?... I don't need no stinkin' Buick (keep Saab and and an opel-ized Saturn).


I'm fairly strongly anti-union, so I'd like them to get the worst of it.

[mgescuro]

Originally Posted by FusionSVT

Keep Buick in China, but close the Buick in america.
Close SAAB
downsize Pontiac or eliminate it all together
Keep Saturn
Keep Chevrolet


GM America should look like this
Saturn-Scion
Chevrolet-Toyota
Cadillac-Lexus
Pontiac-Nissan

you dont need anymore divisions then that.

Saturn = VW/Nissan
Chevrolet = Toyota/Honda
Cadillac = Benz/BMW/Lexus/Audi/Infiniti
Saab = Volvo/Acura

Pontiac can be covered by Chevy and Saturn.
Buick can be covered by Cadillac in the US. Maybe Buick can remain a nameplate in China. But there really isn't much left in the US. I mean... Rendezvous and Terzza are the only Buicks really selling. And they're not exactly the bext examples of Buicks.

[VivienM]

Originally Posted by mgescuro

Buick definitely. There's not a reason why Cadillac can't absorb Lacrosse and Ranier. However, Buick is a very big name in up-and-coming markets. So, to close the Buick division in the US, might necessitate losing a major foothold in China, which might not be the smartest move for GM to make.

At the risk of us disagreeing again, I don't like the idea of them killing Buick, and for other reasons. The way I see it, there remains a market for boring, dependable, conservative, luxury(as opposed to performance)-oriented cars. If GM kills Buick, that's basically confirming one of my big fears: namely that wannabe sport sedans with firm suspensions, high-revving engines, and whatnot, like my archnemesis the Honda Accord, are soon going to be the only type of car (ignore SUVs... not everybody wants a gas guzzling behemoth...) available.

I don't think Cadillac can absorb that market; if anything, Cadillac has gone sporty, OHC, etc to compete with the Germans. They'd be destroying that if they dumped Allure/LaCrosse/Lucerne-type cars into the Cadillac brand. And putting that into Chevy... well, Chevy is pretty low on the GM brand hierarchy.

(BTW, I saw a blue Allure a few days ago... Wow. I want one. When GM introduces -100% financing, or four years from now, whichever occurs first, I'll be at the dealer)

[Thunderkiss65]

Originally Posted by McG

that's an excellent article.

In some ways I have a morbid curiosity about the Chapter 11 route.

I would love GM to be able to make some of these decisions unilaterally.

Retirees?... beat it

UAW, want someplace to work? ...get paid like the rest of the human population.

Buick?... I don't need no stinkin' Buick (keep Saab and and an opel-ized Saturn).


I'm fairly strongly anti-union, so I'd like them to get the worst of it.

So are you against Police and Fireman unions?

And fairly strongly makes no sense whatsoever. Youre either one or the other.

[jokuvaan]

Closing one brand means always that customer base needs to be moved to other GM brands. Saab customers would be lost forever and that makes position of Saab different from others endangered brands.

[1999 White C5 Coupe]

One more thing that GM should do:

Improve quality and reliability!

[VivienM]

Originally Posted by mgescuro

I mean... Rendezvous and Terzza are the only Buicks really selling. And they're not exactly the bext examples of Buicks.

I disagree. Look at the latest GM sales release, where you will see "Buick LaCrosse had its second-best sales month and is contributing to an improving sales mix for Buick. LaCrosse retail sales were up 48 percent compared to combined year-ago Century and Regal retail sales.", for example.

From the February 2005 numbers:
Century 768
LaCrosse 6,047
LeSabre 8,336
Park Avenue 312
Regal 63

Rainier 1,016
Rendezvous 3,540
Terraza 976

So, let's do the math, shall we? 21058 Buicks were sold in February 2005. The two models you listed account for 4516 Buicks, or 21.4% of Buick sales. Buick's strong sellers remain (as they should) the LaCrosse and LeSabre.

[jokuvaan]

Originally Posted by 1999 White C5 Coupe

One more thing that GM should do:

Improve quality and reliability!

Are you mad!!? Do you know what that would cost!!

[FusionSVT]

Originally Posted by 1999 White C5 Coupe

One more thing that GM should do:

Improve quality and reliability!

They have you just dont do your research. If you could in the future not spew out BS when youre talking you of your ass itd be appreciated.

[GM_Fanatic]

Originally Posted by FusionSVT

They have you just dont do your research. If you could in the future not spew out BS when youre talking you of your ass itd be appreciated.

Thank You!...I probably wouldn't of been as nice...