|
|
|
ONLINE FEATURES
Book Reviews
BW Video
Columnists
Interactive Gallery
Newsletters
Past Covers
Philanthropy
Podcasts
Special Reports
BLOGS
Auto Beat
Bangalore Tigers
Blogspotting
Brand New Day
Byte of the Apple
Economics Unbound
Eye on Asia
Fine On Media
Green Biz
Hot Property
Investing Insights
Management IQ
NEXT: Innovation
NussbaumOnDesign
Tech Beat
Working Parents
TECHNOLOGY
J.D. Power Ratings
Product Reviews
Tech Stats
Wildstrom: Tech Maven
AUTOS
Home Page
Auto Reviews
Classic Cars
Car Care & Safety
Hybrids
INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads |  |
NOVEMBER 1, 2004
GM: A Dangerous Skid With profits crashing, it might have to cut production lines and capacity General Motors Corp. (GM ) Chairman and Chief Executive Officer G. Richard Wagoner Jr. never thought the price war he launched three years ago would last this long. GM hoped to boost sales in the wake of the September 11 terror attacks, grab some market share, then pull back on 0% deals and rebates. But since then, competition in North America has heated up, GM's fleet has aged, and competitors have responded with their own aggressive rebates. As a result, GM's market share has fallen, and margins have suffered in the past year. That culminated in the third quarter, when GM missed earnings expectations by a surprising $100 million and lost money in its core North American business. Says Wagoner: "We have to be more aggressive to address some chronic problems." That's putting it mildly: Wagoner may need to take a hard look at his strategy. He's hoping cost cuts, and new cars due next year, will keep GM chugging along until a bevy of new, higher-profit trucks and SUVs arrive in 2006. But with European operations hemorrhaging and health-care costs soaring, GM may need more drastic action. Some analysts think it may even have to close plants in the U.S. to boost margins. "This company has too much capacity," says Stephen Girsky, an analyst at Morgan Stanley (MWD ). "It's causing them to make bad long-term business decisions." In fairness, there are no easy choices. Closing plants means wrestling with the union and possibly buying out workers, which can run into the tens of millions of dollars. As it is, GM likely will be shelling out truckloads of money to pay off workers as part of its plan to cut 12,000 jobs in Europe, where the company has lost more than $3 billion since 2000. Also, Wagoner is loath to cut capacity and cede market share, since doing so would leave GM with lower revenues from which to pay health-care and pension costs that are expected to hit $6.7 billion this year. Clearly, he would rather keep fighting for market share and shave costs. The company has already targeted $600 million in cost cuts in North America this year by using vehicle platforms more efficiently and shelving a program to build a Hummer competitor to the Jeep Wrangler. Meanwhile, the company will launch several new models, including the Pontiac G6, in the hopes of reviving interest in its struggling car brands. But the challenges are mounting. GM expects its health-care costs to rise next year. And while its retiree ranks -- and therefore its pension and health-care costs -- will begin to shrink in 2008, those costs will continue to be a big drag well into the next decade. Meantime, in mid-October, the Securities & Exchange Commission asked GM for information on how its health-care and pension-fund accounting affects earnings. Analysts say the scrutiny may nudge GM to be more conservative in how it estimates fund income, potentially yielding less for the bottom line. And it's not as though Wagoner can count on GM's finance arm, GMAC, to prop up the auto side forever. While GMAC is expected to earn more than $2 billion in '04 and close to that next year, higher interest rates and a downgrade of GM's debt rating by Standard & Poor's (MHP ) could slow it. In the near term, S&P's Oct. 14 downgrade to BBB-, a step above junk, won't hurt GMAC earnings, say analysts. But it could in the long run. "If GM's profits don't improve, investors will assign a higher probability that the company's rating will fall to junk," says Kris Grimm, Lehman Brothers Inc. corporate bond analyst. That would boost borrowing costs. S&P gave GM a stable outlook, so analysts don't think it risks hitting junk status before 2006. If it does, GMAC will find it harder getting cheap capital to make auto loans. Add it all up, and Wagoner's margin of error is thin indeed. "GM needs flawless execution on its new products to get consumers into its showrooms," says Girsky. If that doesn't happen, the auto maker may be forced to make the kind of cuts in North America that it plans in Europe. If so, Wagoner has some options: GM will likely replace two underused Lansing (Mich.) plants that make the Chevrolet Malibu Classic and Pontiac Grand Am -- which sell mainly to rental fleets -- and replace them with one new SUV plant. The company also may shutter a van plant in Baltimore and an SUV plant in Linden, N.J., and could cancel shifts in other factories. None of these moves will come cheaply, but without some big wins in the market, Wagoner may have little choice.  By David Welch
BW MALL
SPONSORED LINKS
Get BusinessWeek directly on your desktop with our RSS feeds.
Buy a link now! Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2004, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
