Thursday, November 13, 2008

Too big to fail?

Revenue – 166 Billion
Profit Margin – (13.42%)

GM Generated over 160 BILLION in sales, yet they still can’t manage to get their costs under control.

GM’s not too big to fail; they’re too big to survive. The sad reality is that given current sales, GM’s internal costs are simply far too big. You don’t have the sales you want…you have the sales you have. GM can hope, pray and plan for sales to go way up but they’ve gotta survive these lean years first and that’s not happening. Hope for the best, prepare for the worst.

The government should not bail out GM. That would be a poor use of taxpayer dollars. The private sector, knowing the outlook and turnaround plan for GM, will not loan them the money, nor should we (taxpayers) for the same reason. I work at a supplier supporting GM in NE Michigan, I understand the potential impact a bankrupt GM would have if it failed as much, if not better, than most…but it doesn’t matter. GM has tied up many resources and is not using them efficiently. Those resources should be allowed to move elsewhere. Other industries, companies etc. GM generates a -7.5% return on assets, that’s a poor use of said assets.

Let’s walk through a bailout scenario –
GM get’s 50 billion…this buys time.
Sales remain steady(?) in the next 5 years
GM has to cut it’s internal costs by billions so that when the 50 billion dollar bailout run’s out they can not only pay it back (with interest), but generate a profit. Cash flow must be positive. Don’t forget, GM’s already got 45 billion in debt on the books.

To do this, what can they control…
Reduce current employee wages, beneifits.
Reduce retiree benefits.
Asset sales
Capacity reduction(s)
Reductions in development costs (including elimination of redundant brands)
New product development

Will sales go up? Maybe
Will sales go down? Maybe

They can influence sales, sure, but only to an extent.

That’s the simple scenario…I’ve seen allot of efforts to achieve those changes but so far it’s not worked. It’s not been enough. Would you buy a car from a company that just required a multi billion dollar bailout?

Let’s look at a Bankruptcy scenario –
GM files ch. 11
GM presents a plan to reduce all costs inline with sales
Asset fire sale
UAW’s pissed but can’t strike.
Sales drop..tbd
GM emerges smaller and right-sized in line with their sales.
The peasants rejoice?

Would bankruptcy hurt sales? Sure, but they already suck. And who’s gonna buy a car from a company that needs a cash injection from the fed every few years.

They’re both crappy, risky scenario’s. There are no guarantee’s in life, but I’m not willing to buy their stock (nor are most apparently) we shouldn’t be forced to invest in them via our tax dollars. I’d be (a bit) more comfortable with a bailout (loan) if GM was already in bankruptcy because at least then you know everything is on the table to ensure the necessary changes can be made.

It’s easy to focus on the blame game. The unions demanded too much. Management gave too much. They focused on trucks too long. Their quality is bad. There’s some truth to all these but at the end of the day…who cares. It’s for all those reasons that they should fail. Is any of that going to change enough in the future?

Keep in mind that the government helped make this mess. Their policies towards automakers are rooted not in logic but in political pressures. The government skews markets by supporting vehicles that people don’t want and can’t be built economically (volt, for example) while vehicles with high demand and margins are taxed and pushed out of production (trucks). They’ve done everything they could do to kill truck/SUV sales and promote the sale of unprofitable vehicles. If the government wants to help long term..they’d cut fuel taxes (including on diesel and state level taxes) and offer tax rebates on profitable vehicles. But politically that doesn’t work, the greenies would raise hell.

Today, right now, the facts remain.

GM’s market share is down, and will never approach previous levels
UAW costs are un-competitive
Current/future retiree obligations cannot be funded given the sales outlook
GM has too much capacity
GM has too many redundant brands and redundant products
Development costs are too high.

The numbers confirm all this.

I made a post about GM a few years ago…I can’t help but wonder how things would be different if Rick W had read it!

Actually that’s not totally fair. I think Rick Wagoner’s done a lot and been on the right path…it simply wasn’t enough, it was too little, too late.

What’s even more scary are the parallels between GM and our own government.

Enormous Structural budget deficit – check
Unfunded (and growing) retiree and health care liabilities – check
Huge Debt – check
Inflexible labor costs – check
Too many retirees’s being funded by too few employees - check
Generous employee benefits -check

Someone once said, as GM goes, so goes the nation. Let’s hope not. A GM failure could be catastrophic, but more catastrophic would be enormous government investment in a ship that’s already to far underwater to survive. Or a government that runs out of money and who's currency no-one wants.

As for me? I’m good. Looking forward to thanksgiving! Mmm…turkey. I’ve already told Mel all healthy eating rules are off for both of us on Nov. 26. 