General Motors

note: this article does not cite its many sources, and is based in-part on the author's assumptions and opinions (all true though). Any attempt to hold a differing perspective will be deemed ignorance.

Mesa, AZ - I have been following GM's finances and business practices for a long time. Since starting my MBA I have been around people who understand the situation a lot better than I do. As long ago as September of 2007, I was told by my accounting professor that GM will almost certainly end up going bankrupt unless there's a fundamental shift in strategy.

Well, other than a few very superficial marketing claims, there hasn't been a shift in strategy at all. I recently watched an interview of Bob Lutz (GM's co-chairman) by Charlie Rose. Those of you who watch PBS will know who Charlie Rose is. He's one of those rare journalists who is very intelligent, and as a bonus he works for a network that isn't beholden to corporate sponsors. Throughout the interview it became more and more apparent and obvious that Bob Lutz has no clue where automotive trends are headed. He spoke with warm nostalgia about the heyday of the American muscle car in the 60s and 70s. He blamed unwanted government regulation for the trend toward more efficient vehicles. He stated that Americans still largely prefer big powerful cars and that's what he is passionate about.

A large portion of the Bob Lutz interview was devoted to the in-development Chevrolet Volt. The Volt is a car that has less range and is less efficient than was the GM EV1 -which was the subject of the documentary "Who Killed the Electric Car". The EV1 was an electric-only car that was hugely popular among those who knew of it during it's brief existence as a lease-only car available in California, Arizona, and Georgia. This new model, the Volt, is like GM's way of saying to less-informed people: "Hey look, we're at the forefront of alternative fuel and environmentally friendly automotive design!" when really the Volt represents a muted final gasp for air as the stern of a sinking ship slowly slips into the sea. [alliteration intended]

Back to GM's finances... It's been a few years now since GM has made any money. That's right. Every time GM sells a car they loss money. In 2007 they manufactured about 9,370,000 cars and made a totla profit of about -$38,700,000,000. So that means that GM LOST $4,130 on every car it sold. If GM stopped making cars and fired all their employees today they would have far better outlook than by keeping the status quo.

GM needs money to operate. Fortunately they have lots of money. Estimates put their current cash holding at about $15 Billion. The problem is the rate at which that money is being spent. GM has been spending about $1 Billion per month until recently. In the last couple of months spending has increased to closer to $2 Billion to $3 Billion per month. If the rate of spending doesn't dramatically decrease, GM could be out of money in less than 6 months. If GM runs out of money what will this mean? Well, this means that employees won't be paid, utility bills won't be paid, suppliers won't be paid, those to whom GM owes money won't be paid... in short GM will be unable to remain in business at all. Of course they would also have to file for bankruptcy which in theory means that they would attempt to reorganize in way that would make them more viable for the future; but in practice it would mean an end to the company and a quick and dirty sale of assets to whomever wants them.

So why can't GM just start spending less? General Motors owes about $60 Billion to employees, former employees and the family members of both of those groups in the form of pensions and other benefits. They can't just 'cancel' these benefits because of the contracts they have with the unions. The unions are far more concerned about the salaries and benefits of union members than they are about the balance sheet of the company.

Why isn't GM earning more? General Motors' products are not selling as well as they used to. At one time GM vehicles accounted for nearly half of the automobiles sold in the United States. Recently that figure has dropped to less than 20%, with a high degree of likelihood that Japan's Toyota Motor Company will outsell GM in the United States for 2008. Compounding this problem is the fact that GM is currently in a death-spiral of asset liquidation. In order to pay the bills, GM has recently announced that they are putting the Hummer brand and two parts factories up for sale. Selling assets in this way will both shrink the company and limit potential future revenues at the same time, with only short-term liquidity to show for it. Unfortunately there has been little to no recent interest by anyone in purchasing either Hummers or Hummer (that's a bit of word play for you).

What should GM do? GM is currently lobbying with all their might to get essentially a $25 Billion loan from the government. They would use this money to remain in business for a few months longer in hopes that American consumers would somehow stop buying better-engineered and higher performance Japanese cars, and start buying inferior American cars. In other words GM will still end up running out of money, it just wouldn't happen quite as soon. GM is also trying to buy Chrysler, but they need a loan from the government to be able to afford such a purchase. If GM bought Chrysler, they would likely drop all Chrysler's models apart from the minivans, the Jeeps, and maybe one or two models like the 300M or the Charger. Chrysler is owned by a private company called Cerberus capital management, and as such is able to keep its finances secret so that no one knows exactly how much trouble Chrysler is in. I personally suspect that if GM does not buy Chrysler, Cerberus may end up letting it go for next to nothing to the highest bidder (maybe to the recent buyer of Jaguar and Land Rover - Tata Motors of India). However you slice it, a GM-Chrysler partnership is not any more viable than either company on their own.

What will happen if GM fails? If GM actually shuts its doors and goes out of business it would mean the loss of about 1 Million jobs. There are dealerships, suppliers, subsidiaries, financial institutions etc, that all rely on GM for substantial portions of their own business. The fact of the matter is that GM's management, CEO Rick Wagoner in particular, have been irresponsible in managing the direction and strategy of the company. In no way do I fault the million people who face imminent unemployment. They are just cogs in the system. It is the decision-makers that are responsible for this mess. I am not arguing that they should be thrown in jail, but if GM goes out of business, there are going to be a lot of very angry people who will be looking for someone to blame for their situation. They will very likely want to blame the government for not giving GM free bailout money. What they should be doing though is looking back and wondering why they didn't start looking for jobs elsewhere about a year ago. Just ask Lehman Brothers whether the government will sometimes stand buy and let a poorly managed company go out of business -regardless of how big that company is.

full disclosure - I own a Chevrolet Malibu.