Thursday, July 3, 2008

Is GM on the chopping Block?

In 1954, the last Chevrolet Corvette rolled off the production line with just a lowly 6-cylinder engine. In that same year, the parent company of Chevy, General Motors, had an equivalent stock price (adjusted for splits) of yesterday's closing price on the New York stock exchange ($9.98/share). A 54-year closing low!

Obviously, the stock price reflects a distancing of the investment community from General Motors.

Now, there are rumors that General Motors (GM) will have to file for bankruptcy (See Full Story).

The problem with GM, like a lot of American companies, is that it is being "hung" with massive retirement expenditures from years of bowing to the demands of the labor unions. The unions pushed for earlier and earlier retirements and more benefits for their retirees and now those retirees living longer. It's all well and good if your sales and market share are going up; but, as in the case of GM, their higher cost resulted in non-competitive products and they kept losing sales and their lead in the industry. Now, the company might be in real trouble and the union workers might find themselves in a "they paid me earlier but we lost it all later" kind of environment.

Beyond bankruptcy, I think that, with the dollar falling to such low levels, GM could very well be bought out by a European or Japanese company. Maybe Korean? If that becomes the case, I think the chances of old-line union operations in Detroit remaining operational will become just a memory. I wouldn't want to be in the United Auto Workers leadership shoes right now!

Please note: I have no "inside" track and some of this. It is only my speculative viewpoint.


Rob said...

To lay the blame for the problems of the Big 3 on the UAW is ,in my opinion, a bit simplistic. I was a UAW member for 11 years and took a buyout in 2007 from Ford Motor Company. I saw the "writting on the wall" if you will In addition I did not like being a UAW member. The UAW felt I worked for them, while I felt I worked for Ford Motor Company. While the UAW certainly did play a large role in the decline, the management at these companies also share a large part of the blame. They failed to plan and anticipate market conditions. Management, over many years, failed to design quality cars that people wanted to buy. One of the constant weights on Ford stock was the markets perception, correctly I might add, that Ford derived too much of its profits from SUV sales and not enough from sedan sales leaving it vulnerable to shifts in market conditions. Ford management was aware of this and chose to not do anything about it. Now they are suffering for that decision.

Cranky George said...

As I said, "if sales and market share were going up" having a large retirement debt would be manageable. But, in a decline sales environment (you can blame management for that), the burden for that debt become unmanageable. As a result, there is no "room" for them to retool and re-structure when the market turned sour on SUV's and trucks. They are now in deep financial problems as a result. That is why the have had to constantly go back to the UAW for concessions in order to stay afloat.

The stock price reflects this quandary and the company has no other choice to bankrupt itself to survive. It is the only way to shed its debt obligations.

Cranky George said...

I forgot some statistics. GM's retirement and health benefits extends to 1.1 million former and current employees. It totals about $65 billion. And, it adds $1300 to vehicle that it sells. Over the four years, the losses per vehicle have been, coincidentally, about $1300 per vehicle.

I should also mention that our Congress has been complicit in forcing our own automakers into selling SUV's. The federal economy standards (CAFE) only apply to cars. SUV fall in the truck category. Big, gas guzzling truck engines (a substantial part of a car's cost) are cheaper to make; and, as a result, more profitable for the automaker.

There is a lot of blame to go around for what has happened to GM (and Ford and Chrysler).