GM in the Barrel, Again

Posted by: David Welch on June 24, 2008

Here we go again. With truck sales in an out-and-out freefall, we once again have talk that General Motors will lose another sales crown. This one would be trailing Toyota not just in the global markets, but here at home in the US of A. Some media reports have hinted that GM’s 0% finance offers are targeted toward keeping Toyota off GM’s tail.

I don’t buy it. And hopefully, GM Chairman and CEO Rick Wagoner and President and COO Fritz Henderson aren’t thinking that way, either. I doubt they are. Sales crowns mean nothing when a company is fighting for survival. More likely, GM is trying to squeeze every last sale in this weakest of car markets to keep cash rolling in the door. When I wrote about GM’s cash problems several weeks ago, Wall Street analysts variously estimated that GM would run down to—or close to—its bare minimum of cash of about $10 billion by the end of next year. And that was before June sales started sinking like a Hummer dropped in the Detroit River. It was also before Standard & Poor’s put the Detroit carmakers on watch for a possible downgrade deeper into junk territory. As Gimme Credit analyst Shelly Lombard put it, everyone sees GM burning a lot of cash, but there’s a lot of uncertainty over where the truck market bottoms out.

So here we are in summer 2008 and GM is back to where the company was in its dark 2005, only worse in some ways. Market share fell below 20% in May. It was 26% at the end of 2005. The drop in truck sales has GM once again buying out another round of workers. About 19,000 will head off into early retirement or take some kind of buyout deal. GM bought out 34,500 of them with a deal done in 2005. Like 2005, cash is burning and only overseas operations are making any money.

The good news is that GM has already done some of the restructuring it needs. It has a labor deal which will help in the next two years. And its newest passenger cars and crossover suvs are selling. The company is even boosting production at its car plants. Those new vehicles, like the Chevy Malibu sedan and Buick Enclave crossover suv, sell at much higher prices than their weak predecessors. That makes once thinly-profitable cars ( or money losers) look a little better on the income and cash flow statements.

The problem is that those bright signs only mitigate the greater damage that comes from the drop in pickup truck and suv sales. As evidence, GM will build 170,000 fewer trucks in the second half of the year and only 47,000 more cars. And those cars don’t generate as much cash as the trucks once did. GM had almost $24 billion in cash at the end of March. The company has said that it needs $18 billion to $20 billion to last an ugly downturn. The company will likely have to raise cash. Hopefully for GM’s sake, it has planned for a downturn that is as ugly as the one we're seeing today.

Reader Comments

xavier durant

June 24, 2008 4:50 PM

Planning and foresight are not GM's strong hand. It is poor planning and lack of foresight that has got GM into the mess it finds itself, again.

What's more the people who created the mess are still running GM into the ground. Expect bankrupcy.

JD

June 25, 2008 11:56 AM

Xavier-
I guess GM didn't plan for $135/barrel oil.
How foolish of them!
Didn't Toyota just build and start up a full size truck factory in Texas within the past yr? And introduce a new larger SUV?

Had Oil not gone to the obscene, GM and Ford would have been in good shape with stronger car lines, new technology, international growth, and strong truck profits.

Dan

June 25, 2008 12:10 PM

GM has plenty of assets it could sell to raise cash in the near term. If the market recovers by 2010, then GM will be fine. If Obama sinks the economy into a '70's style recession past 2010, then GM and the rest of the USA are in big trouble.

glenn e

June 25, 2008 5:33 PM

liberal democrats hate gm, they enact cafe laws designed to hurt the domestics .build what the tree huggers tell you or go out of business what industry is next?

john

June 26, 2008 2:38 PM

lack of quality has put these firms in dire straights, they should have had a quality control program in force and stuck to it.

Qunicy

June 27, 2008 1:52 AM

JD:

The price of gasoline in Japan has ALWAYS been at least 2x as expensive as in the U.S., so Toyota has always had a lineup of fuel-efficient cars that they can fall back on.

So what if Toyota tried to get into the gas-guzzling SUV market? Toyota knew they can afford the loss and fall back on their fuel-efficient car line if it doesn't work out.

GM had no such option and that IS due to their shortsightedness.

Those who do not study history is doomed to repeat it. Remember what happened during the 1970s oil crisis? GM's lack of a fuel-efficient lineup gave Toyota an Honda the opportunity to penetrate the U.S. market with their fuel-efficient cars. Today we are seeing the exact same thing happen-- AGAIN.

Lance

June 27, 2008 3:40 PM

I find it hillarious that after GM crushed (literally) the EV-1, they're now on the brink of disaster thanks to the high price of gas. If I didn't know better, I'd think they had a death wish.

http://www.buyingadvice.com/who-killed-theelectriccar.html

Jeff

June 30, 2008 7:48 PM

JD, Dan and Glenn.
Yes, not one of these million dollar executives knew that the price of oil would rise. Did they think [or hope against hope] that it would drop to $2? Maybe from all of W's influence with the Saudis.
And housing prices ALWAYS go up so let's keep building giant pickups for the construction bubble!
Now if we can just keep those liberals away and can continue the good times with our oil companies [and our kids in the military]to protect us, I bet we'll all be paying $0.50 per gallon real soon.
I so enjoy the whining and complaining and finger-pointing by the mullet community as the realization slowly dawns that we are finally being forced to live in the same world that the Japanese and Europeans have been successfully dealing with for decades.
GM, Chrysler and Ford just blew it living for the next quarterly statement. In the military, the leaders would all have been cashiered by now. In the Chinese army, possibly shot.
Speaking of which, can you fit a rifle rack in a Smart car?
It's over. Deal with it.

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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