GM's Near Future
Now that all the hype from the North American International Auto Show in Detroit is winding down, it's time to take stalk of how well GM is faring in the real world outside the Detroit bubble. GM scored two "big wins" in Detroit: The Saturn Aura was named North American Car of the Year and the Chevrolet Silverado was named North American Truck of the Year. Last year, Honda walked away with both awards for the Civic and Ridgeline.
In addition, GM showed the world the Chevrolet Volt, a hybrid car that runs primarily o
n batteries which uses a small gasoline engine connected to a generator to charge the batteries rather than augment the drivetrain. This "series hybrid" powertrain gives the Volt the driving range of a normal gasoline car and it has no need for plug-in charging. If the Volt was a production ready car rather than a distant future promise, GM would have scored its biggest product coup in a generation. Unfortunately, the sexy Volt, despite being built on GM's small car Delta platform, is still years away from real world production as battery technologies (and costs) haven't caught up to GM's talented engineers.
There is lots of crowing at GM these days. Rick Wagoner, GM's CEO, tells the press that GM has turned the corner and these COTY awards are proof. Bob Lutz, Vice Chairma
n and proclaimed Product Czar took credit for the new Malibu (the last GM vehicle to ride on the aging Epsilon platform) and the much ballyhooed 2008 Cadillac CTS.
I doubt the redesigned Malibu will become a retail darling for desperate Chevy dealers. I predict it will still be relegated to the rental fleets here in LA. However, the new Cadillac CTS may be another story.
This week (15 January 2007), Autoweek magazine gave the '08 CTS a glowing review. Of course none of the editors had driven the car; but it must have looked good on the show floor. They say that the front grille was lifted from the fantastic Cadillac Sixteen concept car from a few years ago. I'll take their wo
rd for it. It looks more like a derivative of the "new" DTS sedan from last year. The rest of the styling continues the familiar Cadillac styling cues like vertical tail lights (think fins) and angular creases. Again, it looks like a shrunken DTS to me.
We are told that the "Corporate powers" finally figured out that GM/Cadillac should spend more money on the interiors. Gee, it took this long to figure that out, huh? Some of the interior work is stitched together by hand -- so that must seal the deal. At least the new Caddy gets modern engines and drivetrains. 
I'm not sure that COTY awards and new models are going to be enough to save GM. I got a disturbing email from my favorite Buick cheerleader, self proclaimed Buickman, and GM gadfly with his website GeneralWatch.com, Jim Dollinger.
Buickman sent out an email that contained a stock market analyst's assessment of GM. Stansberry & Associates put out a dim assessment of GM in general: "GM as done a terrible job of designing, building, a
nd selling cars for a long, long time." Ouch, the truth hurts!
Here are some of the disturbing statistics they throw out:
- Over the past 10 years, GM's gross profits have declined 46% -- not including legacy costs.
- GM is increasingly uncompetitive because it hasn't kept pace with its peers in key areas such as styling, performance, handling and interiors.
- GM is forced to offer rebates and incentives and deep discounting that leads to vehicles being sold below their total production costs.
- GM's corporate overhead has grown by 89%. Corporate overhead now exceeds gross profits.
- GM's total debt has grown by more than $200 billion over the past 10 years. According interest expense has skyrocketed.
- In 2007 (the year of the supposed recovery -- ed.) GM's corporate overhead and its interest expense will likely exceed gross profits again.
- GM's collective bargaining agreement with the UAW expires in September 2007. A UAW strike could bankrupt GM in just a few days!
The analyst's conclusion is grim: GM is already bankrupt and the shareholders just haven't realized it yet. I've been predicting bankruptcy for GM for two years now; but GM has not filed for bankruptcy. And even after all the 2006 stock manipulations from Kirk Kerkorian, GM still has a fairly high stock price compared to its real net worth.
But have no fear, Wall Street his here. The sycophants on Wall Street -- the private equity funds, the unregulated hedge funds and the investment bankers -- are all waiting to pick up some of GM's assets for "pennies on the dollar" after they become "unencumbered" by GM's legacy costs, debts and "inept managers."
If you haven't been following the automotive supplier business over the past couple of years, you should know that many suppliers to Ford, GM and Chrysler have filed for Chapter 11 bankruptcy protection. One supplier just gave up and went into full Chapter 7 liquidation! There have been buyers for these businesses and their assets. Some of the buyers are the bigger, healthy suppliers from Europe.
But more and more, American private equity funds with billions of dollars to spend have swooped in and purchased assets. The pain associated with lost jobs, reduced wages and reduced or eliminated employee benefits is handled in a bankruptcy court. What emerges is a downsized viable business with significantly undervalued assets. That's why these bankrupt companies are so attractive to the super-rich Wall Street elite. These vultures are buying downsized viable businesses with significantly undervalued assets. In a couple years, when the dust has settled, there will be another round of selling these companies to other companies (or private equity funds) at "market value" prices. Naturally, Wall Street will make nice fees on both sides of any transaction.
Perhaps the cynical analyst from Stansberry is wrong. But I wouldn't bet anything on current GM management. Even if Mr. Lutz and Mr. Wagoner can shine a light into the dark future with potential hit products like the Camaro or the Volt, it may not be enough to stop the GM from sinking. I've said it before -- and it bears repeating -- a GM bankruptcy would be a tragedy and major shock (or wake up call) for all Americans.
