If you own a GM product or you have seen the 2009 new models, you might scratch your head and ask what anyone could see wrong with GM cars and trucks. Some may be quick to say, “oh, they do not have any fuel efficient cars or trucks, no hybrids, and all they make are large cars with lousy quality”. Surprisingly that is not true.
GM’s quality and product line up is very competitive and represents a good value for the consumer. The problems with GM lie elsewhere. The chronic problem is that GM makes too little money for each car or truck it sells to cover its overhead and put money away for a rainy day.
The selling price of GM products is largely set by competition who also make wonderful cars and trucks too. The answer lies on the cost side where GM’s legacy costs, their current wage rates and work rules, and their breadth of models has driven up their unit cost. New UAW contracts will help but they will not be enough. GM must shrink their product pallet considerably in order to get inventories in line and to be able to concentrate better on fewer models. While difficult, this will help a lot, but still not enough.
When we consider, however, legacy costs we find the sins of the past. Retiree health and pension costs, once thought acceptable, are sinking the GM corporation today. These costs are considerably higher than like industries and far more than what Toyota or Honda must pay. Dealing with the reduction of these costs is a sensitive and King Solomon like problem. When these costs are cut, someone else is gets the hardship. Hopefully there is a lower level, more similar to like industries that GM can afford and will not over burden their former workers.
The more silent but dangerous legacy cost comes from the corporate bond holders who in the past financed “blue chip” GM’s rich life style. When GM needed cash (for anything), banks and investors would come forward with plenty of cash but of course for a price. GM was considered a safe corporate bond and trusted to pay bond holders under all conditions. Often that came from selling more bonds in order to keep current on the current outstanding ones. (Sound like a ponzi scheme?) The total bond obligation today is eating GM’s cash supply and leaving too little left to run the rest of the business. The Obama Administration’s talk about restructuring, if necessary, and wanting to see GM stakeholders with more skin in the game, targets these bond holders. The message, “take 50 cents on the dollar or face looking at less”.
On top of all these systemic problems, GM, like all other car companies, is selling into a low demand market. It will need government cash to weather this storm and survive until car sales go up again. The key, however to long term success is to reduce these underlying costs and then compete upon quality, attractive models, and great customer service.