QUOTE AND NEWS
TheStreet.com  1 hr ago  Comment 
NEW YORK (TheStreet) -- General Motors' compensation program will begin taking claims, the first step in distributing $400 million reserved to give relief to victims of its vehicles' defective ignition switch. Kenneth Feinberg, a compensations...
The Economic Times  2 hrs ago  Comment 
The GEAC meanwhile had earlier this month cleared 15 proposals for confined field trials for rice, brinjal, chickpea, mustard and cotton.
MarketWatch  4 hrs ago  Comment 
Mobileye surges 54% to $38.45 on market debut
MarketWatch  7 hrs ago  Comment 
Forbes  5 hrs ago  Comment 
Musicians and record labels across the country have come together to sue Ford and General Motors over technology built into a number of recent models that allows CDs to be ripped right onto the hard drive of the car.
TheStreet.com  5 hrs ago  Comment 
Detroit (TheStreet) -- U.S. auto sales continued to set a blistering pace in July, as Chrysler sales rose 20%. Ford said sales gained 10% and GM sales gained 9%. Chrysler had its best July since 2005, Ford had its best July since 2006 and GM...
Yahoo  Aug 1  Comment 
As General Motors tackles a safety crisis, a look its numbers from June show just how intent the company is on keeping new-car sales on the rise during a record spate of safety recalls. The Detroit automaker ...
Forbes  Aug 1  Comment 
The 2015 Cadillac ATS Coupe is the lightest vehicle in its class. How Cadillac made that happen is fascinating.
Forbes  Aug 1  Comment 
With a record number of recalls in the headlines, led by the General Motors ignition switch recalls, the New York City Department of Consumer Affairs took it upon itself to enforce a city statute the city interprets as a ban on selling used cars...
Automotive World  Jul 31  Comment 
General Motors is pushing ahead with wireless phone charging, and sooner than expected. The option was first promised for the Chevrolet Volt, but never materialised. Last year, GM squashed reports that it would offer wireless charging for...




 

General Motors is the biggest of the Big Three, the ponderous American auto makers who have traditionally dominated the North American market.

GM's bankruptcy has given greater impetus to this downsizing, calling for closing another 14 factories and 2,400 dealerships, eliminating 29,000 jobs, and canceling nearly $80 billion in debt.[1] But GM's survival cannot be assured by cost cuts and capital infusion forever. GM hopes that a few new hit products will raise profits, and is refocusing on crossover-utility vehicles (CUVs) and sedans. Product reviews have been positive so far. Still, it will be challenging for GM's new models to capture attention when all of the Big 3 are using the same strategy and introducing their own new lineups.

Company Overview

In addition to its primary business targeting individual consumers, GM also sells commercially and in fleets, including stripped-down models to rental car companies. Recent reductions in the latter have succeeded in somewhat bolstering GM's profit per car sold.

GM's cars are sold under a number of different brands and marque. As grouped by primary region of distribution:

  • North America: Buick, Cadillac, Chevrolet, GMC
  • Europe: Corvette (as standalone brand), Opel, Vauxhall
  • Asia/Pacific: Buick, Daewoo, Holden, Wuling (joint venture)

Whereas GM management traditionally believed that selling cars under a large number of brands and marques helped increase market share, this thinking has been undermined by recent experience. Despite the billions of dollars of development costs for each new vehicle, new designs under brands such as Buick, Saab, Pontiac, or Saturn rarely attract buyers from other car producers. The best example of this is the Saturn marque, which has been unprofitable for every year of its 20 year existence. Along similar lines, GM offers many low volume models; as more than 25 of GM's 60 models sell less than 3,000 vehicles per month.[2] These models are usually unprofitable due to high production and engineering costs per vehicle resulting from the small volume of production. Nevertheless, GM continues building many of these unpopular cars because GM dealers still profit from them, and their discontinuation would put further strain on GM's already struggling sales network.[3]

More substantially GM continues to reduce production of trucks by closing several factories and offer a number of redesigned smaller cars such as the Malibu, Aveo (the Aveo has a 1.4 liter engine which is the smallest GM has ever sold in the US),[4] and Cruze.[5] Similarly, GM has recently entered the CUV or cross-over market. These are vehicles which though appearing quite similar to trucks, are built like cars (i.e. tighter suspension, lower to the ground), allowing them to handle like a car. This is more attractive to consumers who use their vehicles to commute frequently. Also, and perhaps more importantly, CUV's are much more fuel efficient than regular SUVs. These smaller vehicles offered by GM have been well received by both auto-critics and consumers, nevertheless competition remains fierce as all major automakers seek to downsize their fleets with innovative new products. Also, a massive readjustment of product offerings is not cheap, developing new cars is notoriously expensive as is discontinuing outdated models.

Key Trends and Forces

Commodity Prices Play an Integral Role in GM's Cost of Goods

  • Steel: One of the main ingredients in cars is steel, so increases in steel prices reduce GM's margins. GM cannot easily substitute another material for steel to reduce its costs, unlike almost any other input into car production, even labor.
  • Aluminum also affect GM's margins as this metal is also a significant production input, accounting for around 300 pounds of a new car's weight.
  • Oil prices: Increasing gasoline prices inflate the day-to-day cost of car ownership. Since consumers buy cars only infrequently, rising oil prices have only a limited impact on year-to-year car sales, but over time they cut into the industry's sales. Although oil prices have recently moderated they will likely remain definitive in the future as the global economy recovers.

Amidst Government Pressure, GM has Geared its Vehicles toward Fuel Efficiency

Combined with recent media attention to environmental problems, the consistently high price of gasoline has pushed many consumers toward fuel efficient cars.Unlike, Toyota Motor (TM), Honda Motor Company (HMC), and Volkswagen (VLKAY), GM is far behind in fuel efficient technology, suggesting that the new bill will increase GM's productions costs as the firm plays catch-up. At the same time, GM may have been wise in putting off investments in alternative fuel cars, thereby allowing other companies to bear the expense of determining which technologies were in fact feasible.

GM has a somewhat tarnished image in fuel efficiency, with its recent electric car controversy and its extensive line of fuel-guzzling SUVs and trucks. However, recent investment in flex-fuel technology and CUVs may pay off for GM as it starts to market a new product lineup to restart profitability and replace tired models. GM hopes to successfully reinvent itself to ride the wave of fuel efficiency.

A Strong International Presence Plays an Important Role in GM's Strategy

While GM's overseas industry had traditionally been considered a spot of hope, due to GM Europe's consistent profitability and the company's leading position in the burgeoning Chinese auto market. About 65% of GM's sales are outside the United States.[6] GM's sales continue to grow rapidly in eastern Europe, but more slowly in Western Europe due to the economic slowdown there. GM is slightly stronger in Latin America and Australia, and its acquisition of South Korean automaker Daewoo puts it in a strong position for all of Asia, where the well-established automaker also manufactures and designs for export.

GM's greatest overseas hope is China, where it leads all automakers in sales and is poised to take advantage of a booming automobile market.The Rise of China's Middle Class and trends of increasing luxury consumption combine to promise a lucrative stronghold for GM in China, where brands like Buick are well-regarded and in high demand. GM is also pursuing joint ventures and export manufacturing possibilities in China.

GM's operations in India, where it has an annual production capacity of 215,000 cars per year, are slated for expansion despite the company's problems in North America. Currently, the company operates two manufacturing facilities in Gujarat, India. GM India funds its expansion through money accrued from the Indian operations, which remain profitable. GM India projects sales growth of around 10%, even as the total India car market is supposed to increase only 2%.[7]

Emerging markets provide a good opportunity to continue producing "legacy" products from Europe and the United States and thereby stretch additional revenue from vehicles now obsolete in wealthier markets.

With Conflicting Shareholders, GM Faces Critical Governance Issues

Following rescue bailouts of $52 billion and C$4 billion from the United States and Canada, respectively, GM became a puppet company to government interests. With government officials such as pay tsar Kenneth Feinberg slashing executive compensation, for the first time in GM history, the company became essentially run as a state-owned enterprise (SOE). This resulted into an unprecedented change in GM’s corporate governance structure. But unlike conventional state-owned enterprises, GM was controlled by capitalist countries, not socialist developing countries with a centralized dictatorship. As such, the complex nature of GM’s true ownership and incentives became blurred.

In addition, Ed Whitacre was appointed CEO by the Obama administration. It is only natural that after investing over $53 billion in GM, the government wants a CEO who will defend its interests.[8] Thus, the advantage of having Whitacre, a seasoned executive who during his time at Southwestern Bell dealt extensively with the government (regulatory changes of the telecoms), is that the US government will be able to once again swiftly implement its decisions and make sure that the company is running in the direction that the US Government sees fit. In times of considerable systemic risk and a difficult corporate environment, it helps to be able to implement decisions quickly, in a semi-dictatorial manner. Nonetheless, this comes at the expense of corporate democracy.

Although Leasing is Least Profitable, GM Relies on Financing and Incentives to Keep Sales High

Financing the acquisition of new vehicles through loans or leasing is ubiquitous throughout the world auto market, but especially in GM's most important market: the United States, where 90% of car purchases involve loans or leasing (compared to about 2/3 in Europe).[9] This is especially true for GM, which has used financing incentives such as interest-free loans, rebates, and 'employee pricing' to stave off falling car sales. Such incentives were made possible by low interest rates and a frothy real estate market allowed individuals to easily use a home equity part loan to pay for an automobile- nearly 30% of California car buyers borrowed against the value of their home to purchase a new car. As credit has become scarce and real estate values have collapsed, GM has become less able to offset falling sales with easy money.

For GM leasing is the least profitable form of financing as the company often has to offer incentives to the leasee and again when selling the vehicle after the lease.[10] As GM tries to reign in incentive spending, it has stopped financing leases altogether in Canada and plans to reduce leasing by 50% in the US.[11]

Competition

Due to GM's global presence and diversity of products, the company competes in one way or another with every mass auto producer. As explained above, GM's non-U.S. operations are managed with considerable independence from Detroit, often developing their own cars, funding investment from in country profits, and negotiating for subsidies or bailouts with host country governments.

GM continues to spend heavily on traditional advertising (including billboards and movie placements), unlike many of its lighter Asian competitors. This New York City Escalade billboard is six stories high.
GM continues to spend heavily on traditional advertising (including billboards and movie placements), unlike many of its lighter Asian competitors. This New York City Escalade billboard is six stories high.

Yet the biggest threat is still from foreign companies. The influx of foreign cars into the US market has had huge ramifications for the Big Three. The UAW's old method of keeping the Big Three in check, by demanding steep concessions whenever a clear leader seemed to emerge, worked both to placate workers and to maintain balance in the US auto industry. However, foreign companies now account for more than half of the US auto market. Now, UAW demands do no more than put Big Three companies at a direct and pronounced disadvantage.

Foreign companies like Toyota and Nissan are poised to dominate the mainstream, small- to medium-sized car market with their flexibility, cheaper prices, and (in Toyota's case), early investments in fuel efficiency. Cars like the highly successful Toyota Prius are a big challenge for GM's own Saturn hybrids. GM will also have to fight these newcomers in what remains of its highly lucrative gasoline-based SUV/trucks sector.

Dollar figures in billions
Dollar figures in billions
Dollar figures in billions


References

  1. The Economist: The bankruptcy of General Motors; A Giant falls
  2. WSJ: Unpopular Models Slow Down GM
  3. WSJ: Unpopular Models Slow Down GM
  4. GM Q2 Earnings Call
  5. Marketwatch: GM to invest $500 million in small car plant
  6. http://seekingalpha.com/article/86523-general-motors-corporation-q2-2008-global-sales-call-transcript?source=feed
  7. WSJ: GM India Expansion Plan on Track
  8. Edward Whitacre Stays as GM CEO; What's Wrong with This Picture
  9. The Economist: The car industry's big chill
  10. http://seekingalpha.com/article/88637-general-motors-q2-2008-earnings-call-transcript?source=feed
  11. http://seekingalpha.com/article/88637-general-motors-q2-2008-earnings-call-transcript?source=feed
  12. Ford 2010 Form 10-K, Page 51
  13. Ford 2010 Form 10-K, Page 51
  14. Ford 2010 Form 10-K, Page 51
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