|This company has recently filed for protection under Chapter 11 of the U.S. Bankruptcy Code.|
General Motors (NYSE: GM) is the biggest of the Big Three, the ponderous American auto makers who have traditionally dominated the North American market. In 2008, the firm generated $149 billion in revenue lost $30.9 billion. This represents a 17% revenue drop from 2007, on global sales that were 11% lower than 2007. Like its fellows Ford and now privately-held Chrysler, GM faces impending crisis. With sliding market share in the heavyweight North American market, massive pension and healthcare legacy costs, and rising materials expenditures, GM is hard-pressed to generate meaningful profit--it hasn't done so for years. With mounting financial troubles, GM reportedly put a two-year freeze on funding for new research and development (with the exception of the Volt) in October 2008. 
The situation became more critical during 2008 when the U.S. auto market collapsed. By the end of the year GM was on the verge of running out of operating capital and had to receive $13.4 billion in loans from the United States Government in order to continue operations. By mid-2009 the company had declared bankruptcy with a plan to split its operations and assets into a "good GM" and a "bad GM." The good company will keep the most modern production facilities and desirable brands like Cadillac and Chevrolet, whereas the bad one will be saddled with less desirable brands, older factories, and the company's tremendous healthcare and pension liabilities. In pursuit of this goal, by June 2009 GM management had already coordinated the sale of the Hummer brand to Tengzhong Heavy Machinery, Saab to the Swedish sports car manufacturer Koenigsegg, and Saturn to Penske Auto Group (PAG), while Pontiac's operations are to be curtailed altogether.
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To lower fixed costs and eliminate considerable flab in the form of excess production capacity, GM is shutting down plants and laying off workers; in the first quarter of 2007, GM's efforts successfully dropped costs from USD 10 billion to 7. By July 2008 market deterioration forced the company to accelerate this process by suspending its dividend and announcing plans to raise $4 billion through asset sales and another $2 billion through borrowing. By January 2009, the situation had become so dire that the company had fully or partially idled all of its 22 North American factories, and had plans to close 2,000 dealerships and layoff 47,000 workers. GM's bankruptcy, announced on June 1, 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. 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.
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. Nevertheless, GM reported that its European, Latin American, and Asian operations all lost money in Q4 2008.
In 2007, GM suffered a record $38.7 billion loss, of which $38.3 billion was due to a one time charge to write down deferred tax assets. Nonetheless, the firm's 23 billion dollar adjust net loss pales in comparison to the adjusted net profit of $2.2 billion in 2006. Adjusted net loss/income excludes charges for the special attrition program; restructuring, plant closure and impairment charges; gains and losses on the sale of business units and business interests; charges associated with the Delphi bankruptcy that continue to be under negotiation; charges associated with changes in estimates and accounting changes; and certain tax related items. A gas guzzling product line has caused the company to lose market share to Toyota Motor (TM) and Honda Motor Company (HMC), while its overseas sales, particularly its strong establishment in the booming Chinese auto market, were the major bright spot. Continued pressures in the subprime mortgage market resulted in G.M.A.C.'s loss of $2.3 billion in 2007, with G.M. absorbing a $1.1 billion loss from its 49 percent stake. A year ago, GMAC contributed $2.2 billion in earnings to GM's bottom line.
The 2007 UAW labor agreement will lower the firm's healthcare and labor costs significantly in 2008. GM has already offered all 74,000 of its employees severance packages that will allow the auto giant to replace its current $28 per hour employees with $16 per hour employees as the 2007 deal stipulates. GM has also been reducing its white collar workforce, with a plan announced in July 2008 to cut 20% of white collar jobs at the company.
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:
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. Recently GM began addressing this problem by announcing plans to sell its iconic Hummer division during the summer of 2008. 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. 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.
Today, GM is shifting gears from SUVs and trucks to lighter, more environmentally friendly and fuel-efficient vehicles. After the release of a 2006 documentary reawakened the story of GM's abandonment of its electric car venture three years earlier, GM found itself facing a tide of public disapproval. GM today is trying a new tack, leading the way in developing flex-fuel vehicles which can run on either ethanol or gasoline. Additionally, GM plans to launch the Chevrolet Volt in 2010, which will be the world's first commercially marketed hybrid plug-in electric car with a price tag of around $40,000. Despite its high price, GM expects to lose money on the first generation of the Volt.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), and Cruze (scheduled to be released in 2010 and achieve 40 mpg). 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. As of July 2008, 18 of GM's next 19 new automobile launches will be either passenger cars or crossovers, rather than trucks or 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- GM's expects to pay $1.1 billion to close four truck factories during 2008.
Combined with recent media attention to environmental problems, the consistently high price of gasoline has pushed many consumers toward fuel efficient cars. For May 2008 GM's truck sales were 35% less than a year earlier, resulting in plans to reduce truck production by 300,000 units for 2008. The government applied additional pressure to gas-guzzling car manufacturers in December of 2007 with a new energy bill that mandates 35 mpg for all cars, SUVs, and small trucks sold in the U.S. 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. As part of GM's commitment to make half of its vehicles ethanol compatible by 2012, in 2007 and 2008 GM purchased two companies, Mascoma and Coskata, with proprietary patents for technology to make ethanol from materials such as papermill waste, corn stalks, and wood chips. These acquisitions take advantage of incentives for ethanol passed as part of Congress' 2007 Energy Bill.
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 2002 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. In 2007, the firm posted record sales in Latin America, Eastern Europe (especially Russia), and Asia. Overall, GM increased market share outside of North America by 0.4% in 2007. These markets could be major sources of growth in the coming years.
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. While G.M. posted profits in 2007 in its European, Asian and Latin American auto operations, its North American auto business lost $1.5 billion for the year. Volume sales rose 20% for GM in China compared to 2006 and GM became the first manufacturer to sell 1 million vehicles in China. 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. It plans to start producing engines and transmissions in a new factory to open in 2010. GM India projects sales growth of around 10%, even as the total India car market is supposed to increase only 2%.
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.
Crippling overcapacity plagues the monolithic company, and GM's turnaround plan includes aggressive measures to cut back on structural (fixed) costs by shutting down under-used plants and laying off a sizable portion of its workforce. Along with this, in the first quarter of 2008 GM undertook a reduction in dealer inventories in order to keep these inventories in line with demand, thereby improving margins. Structural streamlining is not enough, however--GM also has a nightmare in legacy costs. With an estimated two to three retired employees for every active employee, GM must deal with a massive health care benefits burden of about USD 6 billion per year. GM's salaries and benefits are among the most expensive in the industry, with pension and benefit costs making up almost 60% of the company's total labor expenditure.
GM is dominated by the powerful UAW, and after a certain point it can do little but try to convince the union to give important concessions in order to keep the company afloat. September of 2007, however, General Motors and United Auto Workers (UAW) union reached a monumental agreement that will allow GM to shift $51 billion in healthcare liabilities to the UAW. The deal impacts 74,000 of GM's workers and will also allow GM to replace some of its $70/hour workers with far cheaper ones. In February 2009, Ford reached an agreement with the UAW administered healthcare (VEBA) fund for retired employees allowing the company to meet its required pay-in obligations through equity contributions instead of cash, as stipulated in the original contract. Many expect that GM will reach a similar agreement shortly, which will help GM preserve its limited cash resources to continue operations and hopefully avoid bankruptcy.
When Japanese automakers first entered the US market their cars required about half as many labor hours to build as their american competitors. By 2008 this gap had essentially closed as Toyota required on average 30.37 hours per vehicle, while GM averaged 32.29. Due to the ongoing deterioration of the automarket, GM is trying to further re-negotiate this contract to help further reduce costs.
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). 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 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. 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.
The subprime lending crisis also hit GM in 2007, as GMAC, the firm's financial arm that offers loans to car purchasers in competition with traditional banks, lost the firm $1.1 billion in 2007 compared to the $2.2 billion boost it provided in 2006.
|Manufacturer||2007||2008||Change in Production|
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.
Table 1. Comparison, overall company performance, 2006. Source: Company Data
|Dec 06 YoY Sales Change||-10%||-10%||3%||17%||4%||3%|
|2007 US Market Share||23.4%||15.6%||12.6%||15.9%||6.5%||3%|
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. The September 2007 deal between GM and the UAW regarding health care benefits and lower wages will mitigate these disadvantages; GM will forgo $51 billion in health care costs and be able to replace expensive employees with far cheaper ones.
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.
In 2006, Renault-Nissan, itself the product of an alliance between Japanese Nissan and a French company headed by "le cost killer" Carlos Grosn, announced its interest in an alliance with GM. After several months of talks, however, GM and Renault-Nissan were unable to reach exact agreement and parted ways. The latter has now moved on to Ford, which will likely accept the offer, giving it access to important markets in both Europe and Asia, and also providing a possible anti-union leveraging tool.
In 2007, most expected Toyota Motor (TM) to surpass GM as the worldwide leader in automotive sales, however GM defied these odds, remaining No. 1 and holding Toyota off by about 3,000 vehicles in 2007 by reporting worldwide sales of 9,369,524 cars and trucks, up 3% from a year earlier. Strong growth in Latin America, Asia Pacific and Eastern Europe offset diminishing market share in North America. Unlike Toyota, however, GM posted an adjusted net loss in 2007.
Table 2. Comparison of profitability and key operational metrics, data from 2003-2006.Source: Company Data and Autodata
|Global Unit Sales (USD thousands)||Revenue/Vehicle||Product Redesign/Replacement Rate||Showroom Age (days)||Incentives/Unit sold (USD)||3-yr Retention Rate|
|General Motors (GM)||9,000||18,000||75%||71||3,600||55% (Chevrolet)|
|Ford Motor Company (F)||6,800||22,000||60%||74||3,500||53% (Ford)|
|DAIMLERCHRYSLER AG (DAI) (sold Chrysler Group in 2007)||4,000||32,000||76%||75||3,700||38% (Chrysler)|
|Toyota Motor (TM)||---||---||83%||53 (Asian average)||1,400 (Asian average)||64% (Toyota)|
|Renault-Nissan||---||---||77%||53 (Asian average)||1,400 (Asian average)||49% (Nissan)|