General Motors: The End Is Near

Is this weekend’s Barron’s, Jay Palmer looks at General Motors (GM). It ain’t pretty.

GM’s legacy obligations include over $60 billion for the company’s biggest millstone: health care. But “even if the unions and the retirees agreed to a 100% elimination of all pension and medical benefits,” says Ron Tadross, a Banc of America auto analyst, “GM would still not be especially competitive.” Ranked against rivals like Toyota (TM), GM operates at a $2,500 disadvantage per vehicle, losing money, on average, on every vehicle it sells, versus Toyota’s $1,700 profit. Legacy costs account for just $500 of this.
Tadross has said that the chance of GM filing for bankruptcy now stands at 30%. And two other well-known auto analysts, who asked not to be identified, tell Barron’s that the odds are 50-50.

I have no idea what Kirkorian was thinking. One of my rules is that eccentric billionaires are allowed to make one investment that defies all logic (Buffett and U.S. Air, Howard Hughes and RKO, Gordon Gecko and Bluestar), but I don’t think GM can be saved. Palmer disagrees:

The basic problem, as Barron’s has noted on several occasions, is that the company hasn’t come up with enough vehicles that it can sell without giveaway incentives and hasn’t shrunk its capacity to match its reduced U.S. market share. The blow that high oil prices have dealt to sales of SUVs, on which GM depends heavily, is exacerbating the problems.
To survive, let alone prosper, General Motors must close plants, lay off workers, deeply cut or temporarily eliminate its $2-a-share dividend, cut executive pay and bonuses, and redirect resources from its marginal brands. With revitalized Cadillac on a roll and Chevrolet more than holding its own, the Saab and Hummer operations are good candidates for a sale or closing. Saturn also might be a candidate for elimination, although GM executives insist all three brands are essential to bringing non-GM owners into showrooms. Some feel the company should also shutter Pontiac or Buick. It has to take at least some of these actions soon.

Posted by on October 15th, 2005 at 8:34 pm


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