GM Spirals the Drain (Part 2)

[DanS]

From the Mean Street blog in the WSJ...

As for the meat and potatoes of the actual proposed restructuring, GM gives a good effort. It projects the U.S. auto industry supporting 12 million new cars in 2009 and 13.5 million in 2010. Not unreasonable. And GM makes the right noises about cost reductions with “wages and benefits fully competitive with Toyota by 2012.”

But the restructuring plan comes up short on the most fundamental question. Will this company actually make money? Just look at the details — or what details are lacking.

GM says it plans to focus on only four brands. So why does the number of models only drop from 48 to 40?

GM has 6,600 dealers, which it says it will cut to 4,700 by 2012. Honda has 1,300 dealers. Even Ford has only 4,100 — which it will cut further.

And nowhere in the document does GM lay out, year by year, its own projected market share. This is perhaps the most critical part of any business plan. The kind of thing you learn in the first day of business school.

Turn to Exhibit B-1 — and you find something interesting. It is only in an appendix entry — and not stated explicitly. GM appears to have changed its market share assumption for 2009 GM U.S. volume from 20.6% a year ago to 22.5% today.

In this environment, it seems strange that GM is actually increasing its market share assumptions. And car business is all about volumes.

That points to the real flaw in the GM restructuring plan. The U.S. car industry has been a credit junkie that now has to go cold turkey.

In 2007, GMAC financed about half of GM’s retail car sales, many to customers with weak credit. Today GMAC can’t finance to customers with credit scores under 700. In fact, today GMAC funds only 6% of GM’s retail car sales. No wonder GM sales have fallen off a cliff.

Will that change over the next year?

Ask yourself how long it will take housing to hit a bottom and you’ll understand why the GM restructuring plan ain’t gonna cut it.

http://blogs.wsj.com/deals/2008/12/02/mean-street-why-gm-is-doomed/

[DanS]

The CNN/Opinion Research Corp. poll, conducted by telephone on Dec. 1-2 with nearly 1,100 people, showed that 61% of those surveyed oppose government assistance for the major U.S. automakers.

But Wednesday's poll suggests that Americans believe bailing out the Big Three is a bad idea.

A full 70% of respondents indicated that a bailout is unfair to taxpayers.

In addition to being unfair, the poll showed that a majority of those surveyed think a bailout would not help the economy.

http://money.cnn.com/2008/12/03/news/economy/automakers_poll/?postversion=2008120312

And in another CNN article on the same poll...

Opposition to the bailout of the auto industry is widespread across the country, even in the Midwest, where the domestic automakers have their headquarters and many of their assembly plants. The poll indicates that most opposition to the bailout comes from the West, where it reaches 67 percent.

Sixty-one percent of those polled in the Northeast, 64 percent in the South, and 53 percent in the Midwest oppose using federal dollars to help the automakes.

The poll also suggests that a vast majority of Republicans, 70 percent, oppose the bailout. Sixty-two percent of independents and 55 percent of Democrats in the poll also said they oppose it.

[Dinner]

The brand policy is becoming a bit more clear. Pontiac will be reduced to just a few sporty models, Hummer gets the axe unless a last minute suitor shows up (which is very unlikely), Saab will for sure be leaving the US and might even be shut down entirely, while GM is considering trying to spin off Saturn as a whole separate company.

The Detroit Three will begin congressional hearings today, submitting their detailed restructuring plans to U.S. lawmakers. GM's plan, revealed in a press release issued yesterday, shows how seriously it is committed to a restructuring plan that will ensure profitability-and how grim their financial status truly is.

GM is requesting loans of up to $12 billion, with immediate access to $4 billion this month in order to survive until the end of the year. In addition, the company is seeking a $6 billion line of credit, "to provide liquidity should a severe market downturn persist." In order to access these loans, GM would have to achieve specific restructuring requirements.

The plan details several of these requirements, including focusing on four "core brands" for product development: Buick, Cadillac, Chevrolet and GMC. GM's other four brands sold in the U.S.-Hummer, Pontiac, Saab and Saturn-will be significantly reduced or let go altogether.

GM acknowledged that it was trying to rid itself of the Hummer brand back in June. Saab's fate was not completely unforeseen, as its sales are down by more than 30 percent for the year compared with last year-the only GM brand doing worse is Hummer, which is down by almost 50 percent. Pontiac will be reduced to a brand of niche vehicles, likely to be sporty models. Saturn has the most uncertain fate.

According to the release, Saturn dealers have a "unique relationship" with GM, which apparently means other alternatives outside of a complete shutdown or sale exist. GM executives have been mum about what those other alternatives might be, but one option could be spinning the brand off as its own entity.

The release also details GM's plans for future fuel efficient vehicles. By 2012, GM is aiming to have more than half of its lineup become flex-fuel capable and offer 15 hybrid models. GM will invest $2.9 billion in alternative fuels like hydrogen fuel cells, and advanced propulsion technologies estimated to improve fuel economy by anywhere from 12 to 120 percent. The Volt is also cited as being scheduled for production in 2010.

GM's plan calls for engagement of current lenders, bondholders and unions to negotiate "needed changes", as well as further reduction of executive pay. Labor agreements would also be under review, with changes to job security provisions, paid time-off and post-retirement health-care obligations cited as being necessary.

House Speaker Nancy Pelosi D-Calif., one of the biggest supporters of offering financial aid to the Detroit Three, said yesterday that if the plans submitted by the automakers fall short of congressional expectations, lawmakers could dictate how the restructuring of the companies should occur in law. Undoubtedly, GM's executives are holding their breath as hearings commence today.

http://rumors.automobilemag.com/6367730/news/gm-to-reduce-or-eliminate-four-brands-for-government-aid/index.html

Also the UAW said they're willing to negotiate about the Job Bank but unless it's totally gotten rid that's probably a nonstarter. GM's also playing games with improvements in fuel economy; they say half of their cars would be flex fuel vehicles but that's a joke since no one ever uses alternative fuels in a flex fuel car. On the upside they say they will build 15 hybrid models.

[Dinner]

Article on UAW's proposed concessions: http://www3.signonsandiego.com/stori.../?zIndex=18815

[Vanguard]

Originally posted by Asher


I'm not sure you want to be arguing about what is efficient and what isn't, given that you are here defending GM.

I'm arguing in favor of subsidies for GM in an economic crisis. Nobody is suggesting that GM get $10 billion a year forever.

Longer term, we probably need single payer healthcare and to do something about tax policy. But that would help all industry.

There may be a deadweight loss with subsidies. But it is borne by the Japanese. There is a net benefit to everybody else.

Japan is our trading partner. What hurts them, hurts us.

After all, trade only has benefits because each side produces some goods more efficiently than the other. So any action that reduces their efficiency also harms us (in some sense).

The whole point of trade is mutual benefit. If both sides don't benefit, then, in the long run, neither side does. The amount Japan wastes in subsidies is money they would otherwise be spending on our goods.

[Asher]

Originally posted by Vanguard


I'm arguing in favor of subsidies for GM in an economic crisis. Nobody is suggesting that GM get $10 billion a year forever.

I'm just pointing out GM itself, subsides or not, is incredibly inefficient. It's why they're tanking, and rightly so.

[KrazyHorse]

GM was ****ed up before the macro environment went in the ****ter. They got LUCKY to hit this now so they could blame their troubles on other people.

[DanS]

These hearings are interesting. A whole lot is said, but I don't see indications of any minds changing.

Dodd says a consensus is forming for a bailout, but then he berates the White House and the Federal Reserve for not bailing the auto industry out. If he had the votes, he would not need the White House or the Federal Reserve. So I assume that he doesn't have the votes.

[Vanguard]

I don't see any reason to think that GM has highly inefficient manufacturing processes.

There is probably some inefficiency in management, specifically:

1. too many product lines;

2. poor anticipation of changing market conditions.

The first is easy to change and does not warrant the destruction of the company. The second is the cause of their cash problems, but arises at least partly from the general market collapse, which means that it is not really "inefficiency".

The other major element of "inefficiency" is GM's high labor costs. But these costs mostly come from providing health care. If GM stopped providing health care to all its employees the company would become highly profitable overnight.

But this isn't an increase in "efficiency". It is just a transfer of costs from GM's ledger to someone else's. There is no increase in wealth.



Regarding subsidies: I've changed my mind. Since America consumes more cars than average, subsidies to auto production probably help us more than other people. Of course that also means we will lose more once the US auto makers are out of business and Japan starts extracting rent from auto production. But that may not even happen. And meanwhile we have the subsidies.


As for the bailout hearings: at this point I no longer care. If the American people don't want an auto industry, I'm not going to force one on them.

[Dinner]

Here's a direct link to "GM's viability Plan".

http://gmfactsandfiction.com/wp-content/uploads/2008/12/restructuring-plan-for-long-term-viability.pdf

Ray Young of GM talks about the Viability Plan.

[Asher]

Originally posted by Vanguard
I don't see any reason to think that GM has highly inefficient manufacturing processes.

I'm not surprised you don't, but this is why you are wrong. You don't think or know.

Their wages are far higher than their competitors (According to NBC News last night, average GM wage after tax is $23.50, average SmartCar is $15). Their supply lines are long and stretch across vast areas of the country (they're all in different states). NBC contrasted this to the SmartCar factory where all of the parts are built in one complex. It takes 20 hours to build your average GM car, while it takes 3.5 to build the SmartCar, etc.

Yeah, the SmartCar is smaller but it's not that small.

http://www.msnbc.msn.com/id/21134540/vp/28059469#28059469

[DanS]

Chrysler needs bankruptcy right this moment in the worst way...

Chaos Hampers Chrysler As Workers Exit;Vendors May Crack Down
Dow Jones
December 05, 2008: 04:12 PM EST

DETROIT -(Dow Jones)- Chaos within Chrysler LLC is impairing its ability to carry out day-to-day business, as the auto maker has become hamstrung by an exodus of some of its more seasoned workers.

Some of Chrysler's major parts suppliers, concerned about a potential bankruptcy filing and unsettled by growing confusion over parts orders, are preparing to demand cash upon delivery of parts, according to three people familiar with the sector.

At least five major suppliers have made the legal preparations to make the move, the people said. Such a move would almost certainly increase the severity of the cash crunch imperiling the smallest of Detroit's auto makers. Massive layoffs and voluntary buyout programs have created a vacuum in the decision- making process, the people said.

Chrysler, which seeks an emergency $7 billion government loan to avoid collapse before year's end, let go of 5,000 white-collar workers, or about one- quarter of its salaried work force, last week alone. Chrysler's overall work force is now half the size it was two years ago.

"We really don't have any insight to what's going on in Chrysler," one person familiar with the situation said. "We are told one thing one day and the exact opposite the next."

http://money.cnn.com/news/newsfeeds/articles/djf500/200812051612DOWJONESDJONLINE000947_FORTUNE5.htm

[Wezil]

Stick a fork in them.

[DanS]

They're sending invoices to everyone, including Wezil...

By my count, we're now at $23 billion (DOE loans) + $37 billion (new from congress) + $1 billion (Sweden) + $2 billion (Germany) + $7 billion (Canada) = at least $70 billion.

Automakers ask for a total of $6.8B from Canada in loans and credit lines

December 5, 2008 - 3:18 pm

By: THE CANADIAN PRESS

TORONTO - The Canadian divisions of the Detroit Three automakers are seeking a total of $6.8 billion in loans and credit lines from Ottawa and Ontario.

Chrysler Canada has asked the Canadian government for $1.6 billion in energy loans while General Motors is seeking $2.4 billion in repayable loans.

GM is also seeking $800 million immediately to get through their liquidly problems.

A source knowledgeable with the numbers says Ford Canada is seeking a $2 billion stand-by credit line.

[KrazyHorse]

Hopefully our government shutdown will prevent this.