This post non-Saab specific. Actually, it’s non-car specific. The article that follows should send shivers down your spine if you’re a Saab enthusiast, or equally, if you’re a GM plant worker in the United States.
The article in Car and Driver that was quoted in the previous post spoke of future Saabs possibly being built in Korea. After reading this article, I’m inclined to believe it. I wouldn’t be surprised at all to see US plant closures over the next 5-10 years.
One stat that i’d heard in general terms, but never this specific, should be enough. Thanks to their unionised workplaces, GM spends about $2,000 per car produced, on health benefits for current and retired employees. They spend less than this amount per car in steel.
The article over the fold, from The Telegraph in the UK, is one of the best summaries I’ve seen of GM’s current financial predicament. For the sake of the brand of vehicles that I love, I hope they pull through.
There’s a really big car crash taking place in Detroit
By Luke Johnson (Filed: 10/04/2005)
tragedy unfolding at MG Rover is not the only crisis in the automotive
industry. There is a slow-motion car crash taking place in Detroit that
is symbolic of the profound decay of US manufacturing. I am talking
about the frightening collapse of General Motors Corporation (GM), the
biggest carmaker in the world, and by certain measures, still the
biggest business in the world.
is no ordinary disaster. It could have deep effects on employees,
pensioners, suppliers, dealers, investors, bond holders – and the
world’s confidence in American capitalism. It is an extreme example of
Schumpeter’s "creative destruction" which lies at the heart of the
West’s economic system.
For more than 60 years,
every other car sold in the US was made by GM. No longer. This year its
market share has slumped to a record low of 25 per cent. It owns weak
brands such as Buick, Cadillac, Chevrolet, Saab and Pontiac, which tend
to have poor resale values. It has relied for years on sales of highly
profitable, gas-guzzling sports utility vehicles and pick-ups. But in
an era when oil fetches more than $50 a barrel, such vehicles are
losing their appeal – and, anyway, ferocious Japanese competitors such
as Toyota, Nissan and Honda make them better – and cheaper.
is a prisoner of its past. It has unionised plants and armies of
retirees – almost two and half pensioners for every active worker –
420,000 of them in all. And its workers enjoy generous healthcare
benefits that are crippling the business. Right across the US there has
been a ruinous increase in such costs, so that in 2005 GM will incur
health care spending of $5.6bn (�2.95bn). It covers 1.1m Americans, and
has become the largest medical provider in the country.
GM’s pension and health insurance burden is more than $2,000 for every
car it sells – more than the cost of the steel that actually makes up
In fact, GM’s core auto business has
lost money for years, both in the US and around the world with local
brands such as Opel and Vauxhall, even though it is the global market
leader in perhaps the world’s largest industry. It has subsidised its
manufacturing activities with profits from its financing arm – General
Motors Acceptance Corporation (GMAC).
become a vast bank, providing not just car loans but also mortgages and
business lending. GM uses its creditworthiness to raise cheap money at
wholesale rates to fund its banking activities. But, thanks to a recent
profit warning, its bonds have been downgraded – almost to junk level.
Further setbacks could make its entire financing operation un-economic.
For the fixed interest market, a default of GM bonds would be
The problem with GM is that it is really big, and so it really matters.
has revenues of $193bn and an enterprise value of $280bn – of which a
mere $17bn is the equity value. Its shares now languish at just over
half what they were 40 years ago, and effectively represent a stub
option on a turnaround. Currently, they yield almost 7 per cent, but
with a projected negative cash flow this year of $2bn, that $2 a share
dividend may well be slashed. Investors have minimal confidence in the
company: its stock trades at less than two-thirds of book value and a
price/earnings ratio of 6. Even though it has $35bn of cash on hand, 12
per cent of its stock has been sold short by the bears, who eagerly
anticipate its demise.
Sadly for GM, its outlook
definitely is poor. With rising interest rates, benefit and material
costs, it cannot afford to continue offering substantial rebates and
cash incentives to its customers – so it is likely to keep piling up
unsold inventory. Meanwhile, the militant United Auto Workers union
will resist any attempts to cut members’ entitlements. Competitor firms
such as the Japanese and German carmakers have more modern,
non-unionised plants with minimal pension obligations, and can operate
at dramatically lower costs. And they have better-designed, sexier,
more fuel-efficient cars.
General Motors is a
member of the elite Dow Jones Industrials Average. It has capital
expenditure of $8bn a year and a marketing budget of $3bn. Surely it’s
too important to fail? But in an age when China can come from nowhere
in a few years to be the world’s dynamic economy, anything is possible.
If GM did go bust, the consequences for the US economy would be
catastrophic. Unfortunately, while GM has some new model launches
planned for 2006, conditions this year are only likely to deteriorate
Rick Wagoner, the chief executive, is
paid $8.5m to keep the show on the road, but effectively he no longer
runs a business for shareholders. He runs a social construct for staff,
pensioners, suppliers, dealers and the like. His mission is to keep the
edifice from crumbling into bankruptcy, and stop its decline from
becoming a death spiral like MG Rover’s. For the sake of the West, I
hope he succeeds.