Leaner, Meaner GM Less Likely To Discount.
“GM has an opportunity to completely reshape its business and ultimately become a viable competitor once again”.
Here’s a sentence that’s not made sense for some time.
“Detroit at last has something to celebrate”.
That was the conclusion of the Financial Times’ Lex column after General Motors emerged from bankruptcy.
GM has set some amazing, bad, records along the way. In the last four years it has lost $82 billion. It has received $60 billion in funding from the U.S. and Canadian governments this year.
GM starts its new life with the U.S. government owning 60 per cent of the company, the United Auto Workers 17.5 per cent, and Canada 11.7 per cent. Old GM holds the rest. GM has dumped the Saturn, Pontiac, Saab and Hummer brands, and more than one third of its dealers. It’s now all down to Chevrolet, Cadillac, Buick and GMC.
Decks cleared for action
The decks surely have been cleared for action. Much debt has been offloaded. GM now has rid itself of those killer healthcare and pension plans, and brags that its operating costs now are on a par with Toyota’s.
Headcount in the U.S. will fall to about 64,000 at the end of 2009 from 91,000 in 2008. There will be 34 factories, down from 47. Dealerships will total about 3,600, down from 6,000
The Obama administration refused to accept the GM line that car companies couldn’t survive bankruptcy because buyers would shun financially contaminated brands. Sales have held up despite this shame.
“With minimal debt, lower labour costs, fewer brands and dealers, and the shedding of health-car expenses for retired workers, the pieces are in place for the company to succeed,” said automotive writer Paul Ingrassia in the Wall Street Journal.
One negative for GM which emerged from the negotiations with the U.S. government, was the decision to build a new small car in America, and not China as GM wanted.
“But if Honda can make money on an American small car – which it can and does – the new GM should be able to as well,” Ingrassia said.
The rest of the industry will be pleased as well to see a leaner, meaner, more efficient GM less anxious to discount prices, says Bernstein Research analyst Max Warburton.
“GM has been the overriding deflationary force on industry pricing in the last few decades and while we do not expect a complete transformation – and do not completely discount the risk that another manufacturer – perhaps Toyota – replacing GM as a deflationary force, we would expect GM post-restructuring to be less negative for industry pricing,” Warburton said.
GM has said that its new breakeven point is sales of 10 million car a year on the U.S. market. It expects to break-even in 2010 and generate profits by 2011.
“These goals appear to be more stretch targets and are based on optimistic U.S. market share assumptions. In addition, GM may ultimately be forced to prop up key suppliers, which could prove a strain,” said Merrill Lynch.
“Competitors like Ford appear to have already capitalised on the struggles at GM and Chrysler and regaining the consumer’s trust and loyalty could prove challenging. Despite the uphill battle that lies ahead, we believe GM has an opportunity to completely reshape it business and ultimately become a viable competitor once again,” Merrill Lynch said in a report.
IHS Global Insight analyst Paul Newton has some positive vibes too.
“The reality is that only time will tell whether the changes are deep enough to be successful but correcting GM’s legacy cost structure will go some way to creating a company that can at last engage the competition on a level playing field. The common misconception held towards GM is that it is building cars no-one wants. This is clearly not the case as the company continues to top the U.S. sales charts month after month, despite suffering huge unit and market share losses,” said Newton.
“The issue is not building cars people want which it clearly does, even if not on the same scale as previously; it is building them profitably and rebuilding the brand appeal so that it can stabilise market share and perhaps being to grow again,” Newton said.
Neil Winton – July 15, 2009