In other words, when competition from Japan made it impossible to continue supporting a bloated and very highly paid semi-skilled workforce with gold-plated benefits, GM tried to grow its way out of the problem by skimping on quality. Instead it generated volume through fleet sales, and poured most of its energy into larger vehicles where higher prices and less fierce competition allowed them to preserve better margins. When oil prices spiked, they were totally hosed. The result is a motley collection of badly tarnished brands and an unsustainable cost structure. The government's plan to fix all this?
- GM has been losing market share slowly to its competitors for decades. In 1980, GM's US market share was 45%; in 1990, GM's US share was 36%, in 2000, its share was 29%. In 2008, its share was 22%. In short, GM has been losing 0.7% per year for the last 30 years.
- Fundamentally, the lingering consumer perception is that GM makes lower-quality cars (despite meaningful improvements in the last few years), which in turn leads to greater discounting, which harms GM's price realizations and depresses profitability. These lower price points are an important impediment to enhanced GM profitability and need to be reversed over time in order for GM to bring its margins into line with its best-in-class peers
- GM earns a disproportionate share of its profits from high-margin trucks and SUVs and is thus vulnerable to energy cost-driven shifts in consumer demand. For example, of its top 20 profit contributors in 2008, only nine were cars.
- GM is at least one generation behind Toyota on advanced, "green" powertrain development. In an attempt to leapfrog Toyota, GM has devoted significant resources to the Chevy Volt. While the Volt holds promise, it is currently projected to be much more expensive than its gasoline-fueled peers and will likely need substantial reductions in manufacturing cost in order to become commercially viable
- Absent the successful introduction of a number of new-generation nameplates, as described in the Company's plan, GM's product portfolio is more vulnerable to CAFE standard increases than the portfolios of many of its competitors (although GM is in compliance today with current standards). Many of its products fail to meet the minimum threshold on fuel economy and rank in the bottom quartile of fuel economy achievement.
- As GM moves through its forecast period, its cash needs associated with legacy liabilities grow, reaching approximately $6 billion per year in 2013 and 2014. To meet this cash outflow, GM needs to sell 900,000 additional cars per year, creating a difficult burden that leaves it fighting to maximize volume rather than return on investment.
- Sustainable profitability: A viable GM should be able to generate meaningful positive free cash flow in a normalized business environment, generate net free cash flow over the course of a business cycle and invest capital in research and development and capital expenditures sufficient to maintain or enhance its competitive position while also earning an adequate return on its capital.
- A healthy balance sheet: The restructuring must substantially reduce GM's outstanding debt and existing liabilities to a level where they are consistent with both its normalized cash flow and the cyclical nature of its business. Given the deterioration in the auto market since late last year, this will require substantially greater balance sheet concessions than those called for in the existing loan agreements.
- More aggressive operational restructuring: The restructuring plan must rapidly achieve full competitiveness with foreign transplants and more aggressively implement significant manufacturing, headcount, brand, nameplate and retail network restructurings.
- Technology leadership: The new GM will have a significant focus on developing high fuel-efficiency cars that have broad consumer appeal because they are cost-effective, have good performance and are reliable, durable and safe.
In order to execute a new, more aggressive restructuring plan within 60 days, we will work with GM to use all available tools to implement this plan. The best path to achieve this may well be an expedited, court-supervised process to extinguish unsustainable liabilities, should an out-of-court restructuring not be possible. The Administration is prepared to stand by GM throughout this process to ensure that GM emerges with a fresh start and a promising future. Consumers thinking about buying a GM car and workers and communities that depend on this iconic American company should have confidence that GM can and will come out of this crisis as a stronger, leaner and more competitive car company.
What does this remind me of? Oh, right:
If legacy costs are NOT on the table, then all this is an exercise in BS.
But, doesn't is sound so good? In a mere sixty days, the company will be reformed into a new, stronger, leaner, kinder...
Erm, you get the point...
Ah, a government run auto manufacturer. I'm sure that we will come to enjoy the same level of quality and innovation that the Soviets were so proud of with their auto market.
Hey, they could fire the UAW and staff it with the new GIVE Act slaves.
I think it will be a common strategy for staffing gummint projects and jobs.
I suspect that bankruptcy (or something with another name that is essentially the same thing) is exactly what the Obama Administration has in mind. When the President mentioned the possibility of "controlled bankruptcy" in his speech this morning, he was probably talking about the government overseeing that process. I'm guessing that means (at least) that GM's DIP loans will be guaranteed by the taxpayers.
All that said, I thought Chrysler was more likely to need bankruptcy protection than GM was, so there's no good reason to trust my judgment now.
we're screwed; that is all.
I like Phase 3!
Do the "Big Three" have issues other than "legacy costs"? No question. But please stop downplaying that UAW is the single biggest obstacle the domestic auto makers have. Management simpley has no control over these costs, and the union is completely inflexible.
The UAW spent good money on this last election to prevent a bankruptcy judge from having any say. Obama/Pelosi/Reid are bought and paid for, and they will not do what needs to be done to "save" General Motors. The goal has never been to fix GM, but rather keep the union rolls filled.
Yeah but how will the union rolls be kept filled when GM goes under and lays them all off?
That is exactly my point. Obama will not allow GM to go under.
That's why GM needs to go Chapter 7. Sell off the plant, equipment, and IP to whoever thinks they can do a better job. Whoever that is can hire the idle labor at a market wage. The firm in its current state is simply unworkable and needs to be rebooted.
Megan,
As I read the government's memo, they are providing GM with 60 days working capital in order to come up with a viable business plan because the plan submitted to them was not viable. They fired the CEO and told GM to go back to the drawing board with consultants that they will provide.
The business planning process will focus on these goals:
-a clear path to profitability with realistic assumptions
-creating a viable balance sheet
-more operational restructuring
-achieving technology leadership
If you review those remarks in that context, the government's comments are not a silly business plan. Rather, they are setting goals for a more realistic planning process.
Two words for these grand ideas:
Fatal Conceit.
They never learn.
You keep taling about a brain-drain being an issue over the last few years, but what is your evidence of this phenomenon? There are people who move to Michigan to work at GM, you know.
Megan asks the right question- why isn't this being done in bankruptcy reorganization?
GM didn't even make a gross profit last year. It is time to put the company into bankruptcy, clear away the cash draining debt service, legacy costs, dealership arrangements/contracts, and the union contracts. Stringing out this process will not only not save GM in the end, but will also doom Ford for certain.
The whole government bail-out of GM is simply the process of one giant wealth destruction machine propping up another. What I want to know is how Obama's budget is any less like a underpants gnome business model.
Well for one the government can send men with guns to take your underpants whenever they want.
Yeah, but what happens once everybody stops wearing underpants?
"the government's comments are not a silly business plan. Rather, they are setting goals for a more realistic planning process."
I noticed during the campaign last fall that Obama's "plans" are often simply lists of goals, with no hint of how those goals will be reached. He'd say things like 'My plan is to do something that will work really well for everyone, at little cost', and the media would just eat it up. It left me wondering if he understands what it takes to actually do something, as opposed to lobbying to try to get someone else to do something.
Obama's work as a community organizer wasn't helping people to do more for themselves, it was teaching them how to grab more resources from the government or others. His view of life seems to be that someone somewhere has a lot of money in their pockets. The rest of us just need to pull some of it out, and we're at Phase 3 - profits!
Let's make a comparison that happens to be real. Tesla Cars (some extremely innovative Californians who make the sort of electric cars that at least some customers are queuing up to buy) are looking for finance. Would the US taxpayer do better for future employment by investing in GM or in Tesla?
Tesla is still a very risky proposition. But if it goes ahead it is likely to develop new skills and ideas that other businesses can use even if the company fails. If the company succeeds, there will be a substantial new US manufacturer out there at the expending edge of the world automotive industry.
GM is also now a very risky proposition. If the company goes into bankruptcy, there are a good many excellent if not very modern assets for other businesses to pick up and use; re-creating employment as they do so. If a rescue package for GM succeeds, we will have a reduced size, struggling auto manufacturer competing in the over-crowded main segments of the world automotive industry. In that competition, it is unlikely to develop a particularly innovative or low-cost structure - those are not 'the GM way'.
The finance needed for Tesla is one or two orders less than that required for a GM rescue package.
If venture capitalists were forced to choose between the two, anyone think they would take GM? Is there any good ground for the US government to prefer GM?
My guess is that the new GM would gladly pay current UAW wages if it could get rid of the work rules. (And maybe the obligation to existing retirees).
Reminds me of the Sidney Harris cartoon, "I think you should be more explicit here in step two."
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