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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 FY2008, the firm generated $149 billion in revenue lost $30.9 billion.^[1] This represents a 17% revenue drop from FY2007, on global sales that were 11% lower than FY2007.^[2]

By the end of 2008, 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.^[3] 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."^[4] 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.^[5] 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.^[6]

On October 9, 2009, GM finalized the agreement with the sell of Hummer to Tengzhong for $150 million USD, where Tengzhong will take over production in 2012.^[7] Tengzhong's acquisition of Hummer marks China's first major entry into the U.S. auto market. Because China has fallen behind on its pledge to boost energy efficiency by 4% per year, Tengzhong's acquisition of Hummer, a brand known for its gas-guzzling vehicles, will be under the pressure of the Chinese government to become more energy efficient.^[8]

Contents 1 Looking for a place to start contributing? 2 Company Overview 2.1 Business Segments 3 Key Trends and Forces 3.1 Commodity Prices Play an Integral Role in GM's Cost of Goods 3.2 Amidst Government Pressure, GM has Geared its Vehicles toward Fuel Efficiency 3.3 A Strong International Presence Plays an Important Role in GM's Strategy 3.4 Unlike Other Foreign Automakers, GM's Structural, Labor, and Legacy Costs are Significantly Affected by UAW 3.5 Although Leasing is Least Profitable, GM Relies on Financing and Incentives to Keep Sales High 4 Market Share 5 Competition 6 References

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Company Overview

GM's bankruptcy, announced on June 2009, 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.^[9] 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.

GM plans to file an initial public offering in 2010, in which the U.S. Treasury will hold an approximate 60% stake of the company, the Canadian government will hold a 12%, and the remainder held by the union retiree trust fund.^[10] The U.S. expects to divest its shares no later than 2018, while Canada plans to sell at least 5% of GM shares annually based on market conditions.^[10] By September 2009, the U.S. Treasury has provided a total of $76 billion in loans and equity investments to GM, Chrysler, and their financial divisions to help keep the auto makers afloat.^[11] On October 8, 2009, GM chose a new head of U.S. sales to replace Mark LaNeve, who is leaving the industry in the first change to CEO Fritz Henderson's leadership team.^[12]

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.^[13] Nevertheless, GM reported that its European, Latin American, and Asian operations all lost money in Q4 2008.^[14]

Business Segments

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, Hummer, Pontiac, Saab, Saturn
• 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. 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.^[15] 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.^[16]

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),^[17] and Cruze (scheduled to be released in 2010 and achieve 40 mpg).^[18] 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.^[19] 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.^[20]

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. 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.^[21] 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 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.

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

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. 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%.^[22]

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.

Unlike Other Foreign Automakers, GM's Structural, Labor, and Legacy Costs are Significantly Affected by UAW

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. 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.^[23]

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.^[24] Due to the ongoing deterioration of the automarket, GM is trying to further re-negotiate this contract to help further reduce costs.

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).^[25] 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.^[26] 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.^[27]

Market Share

U.S. Auto Industry Market Share by Sales

Manufacturer	May-06[28]	May-07[29]	May-08[29]
GM	25%	24%	19%
Toyota	15%	17%	18%
Ford	17%	17%	15%
Chrysler	13%	13%	11%
Honda	9%	9%	12%
Nissan	6%	6%	7%
Hyundai	-	5%	6%
BMW	-	2%	2%
Volkswagen	-	2%	2%
Daimler	-	1%	2%

Global Auto Industry Market Share by Production^[30][31]

Manufacturer	Rank	2007	2008	Change in Production	Manufacturer	Rank	2007	2008	Change in Production
GM	1	13.0%	11.9%	-11%	Suzuki	11	3.6%	3.8%	1%
Toyota	2	11.8%	13.3%	8%	Chrysler	12	3.5%	2.7%	-25%
Volkswagen	3	8.7%	9.3%	3%	Daimler	13	2.9%	3.1%	4%
Ford	4	8.7%	7.8%	-13%	BMW	14	2.1%	2.1%	-7%
Honda	5	5.4%	5.6%	0%	Mitsubishi	15	2.0%	1.9%	-7%
PSA	6	4.8%	4.8%	-4%	Kia	16	1.9%	2.0%	2%
Nissan	7	4.8%	4.9%	-1%	Mazda	17	1.8%	1.9%	5%
Fiat	8	3.7%	3.6%	-6%	Avtovaz	18	1.0%	1.2%	9%
Renault	9	3.7%	3.5%	-9%	Faw	19	1.0%	0.9%	-6%
Hyundai	10	3.6%	4.0%	6%	Tata	20	0.8%	1.1%	36%

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.

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.

References

1. ↑ WSJ: General Motors Reports $9.6 Billion Loss in Fourth Quarter
2. ↑ WSJ: General Motors Reports $9.6 Billion Loss in Fourth Quarter
3. ↑ Marketwatch: Detroit gets its wish - $17 billion in U.S. loans
4. ↑ WSJ: U.S. Threatens Bankruptcy for GM, Chrysler
5. ↑ WSJ: U.S. Threatens Bankruptcy for GM, Chrysler
6. ↑ The Economist: General Motors sells Saab: Unstable Atom
7. ↑ Iconic Hummer brand sold to Chinese manufacturer
8. ↑ 3rd UPDATE: GM Finalizes Deal To Sell Hummer To China's Tengzhong
9. ↑ The Economist: The bankruptcy of General Motors; A Giant falls
10. ↑ ^{10.0 10.1} General Motors Aims for IPO Next Year
11. ↑ Treasury says GM still on track for IPO next year
12. ↑ GM Picks U.S. Sales Chief After First Exit From CEO’s New Team
13. ↑ http://seekingalpha.com/article/86523-general-motors-corporation-q2-2008-global-sales-call-transcript?source=feed
14. ↑ WSJ: General Motors Reports $9.6 Billion Loss in Fourth Quarter
15. ↑ WSJ: Unpopular Models Slow Down GM
16. ↑ WSJ: Unpopular Models Slow Down GM
17. ↑ GM Q2 Earnings Call
18. ↑ Marketwatch: GM to invest $500 million in small car plant
19. ↑ GM Q2 Earnings Call
20. ↑ http://seekingalpha.com/article/88637-general-motors-q2-2008-earnings-call-transcript?source=feed
21. ↑ http://www.reuters.com/article/topNews/idUSN2849133620080728?feedType=RSS&feedName=topNews
22. ↑ WSJ: GM India Expansion Plan on Track
23. ↑ WSJ: Delphi Wins Approval to End Retiree Benefits
24. ↑ http://www.autoblog.com/2008/06/05/chrysler-ties-toyota-for-most-efficient-manufacturer-in-north-am/
25. ↑ The Economist: The car industry's big chill
26. ↑ http://seekingalpha.com/article/88637-general-motors-q2-2008-earnings-call-transcript?source=feed
27. ↑ http://seekingalpha.com/article/88637-general-motors-q2-2008-earnings-call-transcript?source=feed
28. ↑ Auto Oberver - A Historic Year For US Vehicle Sales
29. ↑ ^{29.0 29.1 29.2} US News - How Toyota Could Become the U.S. Sales Champ
30. ↑ [http://oica.net/wp-content/uploads/world-ranking-2007.pdf OICA - World Motor Vehicle Production, 2007]
31. ↑ [http://oica.net/wp-content/uploads/world-ranking-2008.pdf OICA - World Motor Vehicle Production, 2008]