GM: Bracing for a Crash?


By David Kiley General Motors' domestic market share fell to the lowest level on record in October, to a combined car and truck market share of 22.2%, down from 25.7% a year earlier. That's a share level that's unsustainable for GM (GM). Worse yet, it's tough to see from what reservoir GM can draw to reverse the trend.

With Ford (F) sales slipping, too, Merrill Lynch auto-industry analyst John Casesa sees Detroit at "a tipping point." If he's correct, GM will probably be the first outfit to tip, since it's the largest of the Detroit-based makers, with arguably the least positive momentum for new products and brand attraction. And it will likely take years for GM to change course.

Let's be clear: GM isn't in danger of going bankrupt. It has more than $30 billion in liquidity, including cash, money it can tap from pre-funded retiree benefits and bank lines. And that's before it raises cash from selling part of its GMAC finance unit. It could also raise $10 billion to $15 billion by selling GMAC's mortgage and insurance businesses.

BUYING TIME. And in GM's favor, the October market-share number reflects reality before it struck its deal with the United Auto Workers to finally have union members pony up with the rest of American workers, both blue and white collar, for health-care costs and premiums. That deal will cut GM's healthcare expenses -- expected to be $5.6 billion this year -- by $1 billion a year (see BW, 10/28/05, "What My Dad Taught Me About GM and the Auto Workers"). The end result is a boost of $3 billion in pretax income a year to GM's bottom line and about $2.5 billion after-tax.

But GM is having to put a controlling interest in its GMAC financing unit up for sale for some $12 billion to unlock some of the rich value in that asset, which has been dragged down by the woes of the North American and European car business. And several analysts now expect the auto giant to cancel its $1.1-billion-a-year shareholder dividend.

Is GM cutting costs on the margins and selling the furniture to buy time? Sure looks like it. While the company stresses it has embarked on a bold turnaround strategy, much of what ails it flows from accounting realities and its inability to increase the business at home.

BRAND WEAKNESS. GM is hamstrung when it comes to making decisions that make sense from a branding point of view. It is stuck having to be a cash machine to cover its bloated overhead of factories, employee benefits, and excess dealer distribution. The model that GM was built on -- offering a car to feed every market segment -- has deteriorated into a stable with too many contrived brands, most with little identity and overlapping product lines.

Consider what Casesa wrote in March, 2004: that with a 24% share and an annual U.S. auto sales rate of 16.9 million vehicles, GM bleeds about $2.4 billion in cash per year. If share plummets to 20%, the cash burn is $4.5 billion a year. Casesa estimated GM can last five years before it hits a liquidity crisis. "We believe that 25% market share is the threshold," Casesa wrote. "If GM falls below that, things get ugly fast."

GM has a fundamental problem with its North American vehicles: for all practical purposes, it doesn't offer that strong of a brand. Despite $193 billion in annual revenues last year, the auto giant didn't make the BusinesWeek/Interbrand Top 100 Global Brands ranking for 2005.

FRAGMENTED STRENGTHS. Today, GM is more like a holding company that manages a broad, unwieldy portfolio of brands, most of which are barely competitive in their segments. Yes, Chevy and Cadillac are strong. And Hummer is coming along. But Pontiac, Buick, Saturn, and Saab exist primarily through a legacy of distribution. If the company was planning brands with a clean sheet of paper, none of them would exist.

With such a broad portfolio, it becomes terribly difficult for GM to lead in any category: design, environmental/alternate fuels, safety, or quality. Even when GM scores well on J.D. Power & Associates' rankings for quality, the message must be disseminated across all those brands -- becoming fragmented and splintering in all directions.

GM bright spots in sales come with caveats. The Chevy HHR, a retro-styled car in the pattern of Chrysler's PT Cruiser, has sold more than 25,000 vehicles in just a few months on the market. Having driven the car recently, though, I found it under-powered. And the interior of the vehicle is not nearly as stylish or well-executed as its exterior, or the five-year-old PT's.

BOND BOMB. The Hummer H3 has pumped up Hummer's brand sales by between 4,000 and 5,000 per month, a needed boost since H2 sales and cachet have been dropping as gas prices have risen. The novelty factor of owning a preposterously styled massive SUV has apparently crested with those wealthy enough to fill the tank and confident enough tolerate the ridicule. Let's see how well H3 sales hold up after 9 or 10 months, when the supply of buyers who couldn't afford an H2 starts to dwindle.

More bad news followed GM's market-share loss announcement on Nov. 2. Moody's downgraded GM bonds into junk territory after the October sales were reported. GM "has aggressive plans in place to restore North American operations to profitability as quickly as possible," spokeswoman Toni Simonetti said in response to the downgrade, adding that the company plans to identify a number of North American plants to close by the end of the year. But Moody's also expressed doubt that GM's new line of large SUVs, due early next year, will hit sales goals.

Indeed, just as passenger cars are gaining momentum against sports-utes, GM is poised to launch a new flock of midsize SUVs -- and is especially weak on compelling high-volume passenger-car designs. Even models that are rated well for fuel economy and have improved interiors and styling are burdened by some other piece of GM baggage.

SLOW CLIMB. Take the Chevy Impala and Malibu, which now actually surpass Toyota (TM) rivals in fuel economy and quality, according to J.D. Power. The Impala and Malibu are names that most buyers who have barely sniffed GM's products in recent years associate with rent-a-car and police fleets, not their own driveways.

The Pontiac G6 has a new name and new styling, but will have a slow climb to respectability. It's just a first step in a long journey toward restoring any kind of discernable brand image for Pontiac as a sporty, performance-oriented brand.

GM product boss Bob Lutz has scored a few successes since joining the company in 2001. The Pontiac Solstice, whose design was overseen from top to bottom by Lutz, is an unabashed winner at a great price. But the Pontiac GTO, a hasty import from GM's Australian unit with some Lutzian reworking, hasn't set sales on fire (see BW Online, 10/7/05, "This GTO Needs More Retro").

TIRED, OLD NAMES. The Buick LaCrosse, which Lutz reportedly saved from being a rework of the 1990 Oldsmobile Cutlass Ciera is doing O.K., but that's not good enough. It debuted at the same time as the Chrysler 300, which proved that dynamic design in the staid category of midpriced four-door sedans is possible.

Over the next couple of years, Lutz-led designs will be coming off the assembly line at a torrid pace -- and what we have seen of them looks promising. There's a new Cadillac CTS with at least a family resemblance to the stunning super-luxury Sixteen show car of a few years ago, plus a boldly restyled Chevrolet Malibu.

But say that again slowly: "boldly restyled Malibu." There we go back again to GM's legacy issues -- tired, baggage-laden model names that GM dithers over keeping or trashing every time a new design is coming. Memo to Lutz: Toss more of these old model names.

THE MURKY MIDDLE. GM does some things pretty well, but almost nothing exceptionally well. Advertising ranges from pretty good to lousy. In baseball terms, GM designers hit far more singles and fly-outs than triples and homers.

Toyota and Honda (HMC) perform consistently at or near the top of quality rankings, and long ago seized leadership in environmental/fuel efficiency engineering. Nissan (NSANY) and Chrysler have positive buzz from bold designs, and Hyundai and Kia appear to dominate the value niches.

That leaves General Motors in the murky middle of the marketing battlefield -- no place to be for any General when trying to mount a counter assault. Tipping point, indeed. The picture for GM could still get worse before it starts to get better.

Kiley is marketing editor for BusinessWeek.

David Welch, Detroit bureau chief, also contributed to this article


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