GM told to cut deeper
BY IAN PORTER | 31st Mar 2009
The taskforce said the plan was not aggressive enough and would take too long to implement.
The stumbling giant has been given a further 60 days to come up with a more realistic plan.
And, in a frank assessment that shocked Wall Street and sent share prices tumbling, president Barack Obama even raised the spectre of bankruptcy as a possible way out of the mire.
The president said he realised that would be an unsettling development for the electorate and consumers, but stressed that, in the US, bankruptcy was a way to quickly clear away old debts so companies could get back on their feet.
“What I am not talking about is a process where a company is broken up, sold off and no longer exists. And what I am not talking about is having a company stuck in court for years, unable to get out,” Mr Obama said.
The taskforce, headed by Steven Rattner, dismissed many of the plan’s assumptions as being too optimistic and, in a major psychological blow to GM, said the vaunted Volt plug-in hybrid would be too expensive to be a commercial success.
In short, he said neither the GM nor the Chrysler plan “established a credible path to viability”.
The taskforce attacked the GM plan in five main areas, starting with GM’s assumptions about its market share in coming years.
GM’s plan estimates the company’s share of the US market would ease from 21.5 per cent in 2008 to 19.4 per cent in 2012 and 19.1 per cent in 2014.
“GM has been losing market share to its competitors for decades, yet its plan assumes only a very moderate decline, despite reducing fleet sales and shuttering brands that represent 1.8 per cent of its current market share,” the taskforce report points out.
The GM plan also assumed an improvement in the amount for which it can sell each vehicle. Again, the taskforce wasn’t having any of it.
“The plan assumes an improvement in the “net price realisation” despite a heavily distressed market, lingering consumer quality perceptions and an increase in smaller vehicles (where the company has previously struggled to maintain pricing power),” the taskforce says.
The GM plan outlined some heavy cuts in the number of brands – down to Chevrolet, Cadillac, Buick, GMC and a cut-down Pontiac – and models. It also signalled cuts in its total dealer network from 6246 in 2008 to 4100 in 2014.
Once more, the taskforce believed these cuts did not go far enough.
“The company is currently burdened with underperforming brands, nameplates and an excess of dealers. The plan does not act aggressively enough to curb these problems.” The taskforce points out that many GM dealers are underperforming and that these operators not only create an overall drag on GM’s brand equity, they also hurt the prospects of stronger GM dealers which “could help GM drive incremental sales”.
The taskforce also dismissed GM’s forecast that its plan would leave it with fewer, better models and that this would lift profitability.
“GM earns a disproportionate share of its profits from high-margin trucks and SUVs and is thus vulnerable to energy cost-driven shifts in consumer demand,” the taskforce said.
It also said that, of GM’s top 20 profit contributors in 2008, only nine were cars.
Perhaps one of the most damaging aspects of the taskforce’s report, however, was a passage dealing with the Chevrolet Volt, a plug-in hybrid that GM claims points to the future of motoring. The Volt will be sold in Australia under a Holden badge from 2012.
“GM is at least one generation behind Toyota on advanced ‘green’ powertrain development. In an attempt to leapfrog Toyota, GM has devoted significant resources to the Chevy Volt,” the taskforce says.
“While the Volt holds promise, it is currently projected to be much more expensive than its petrol-fuelled peers and will likely need substantial reductions in manufacturing cost to become commercially viable,” the taskforce says.
The taskforce appeared to be arguing for a bankruptcy when it addressed the issue of legacy costs and GM’s cash requirements over the restructuring period to 2014.
The world financial crisis has seen the value of assets held in GM’s pension plans plunge from $US104 billion ($A151 billion) in 2007 to $US84.2 billion ($A122 billion) at the end of 2008.
That left the plans funded only to 87 per cent of requirements (127 per cent in 2007) and means GM will have to kick in extra cash to meet its pension responsibilities.
“(GM’s) cash needs associated with legacy liabilities will grow, reaching approximately $US6 billion a year in 2013 and 2014.
“To meet this cash outflow, GM needs to sell 900,000 additional cars per year, creating a difficult burden that that leaves it fighting to maximise volume rather than return on investment.” Due to these deficiencies in the original plan, the taskforce dismissed it as not viable, although it conceded progress had been made. It also said it believed there was a viable business inside GM “if the company and its stakeholders engage in a substantially more aggressive restructuring plan”.
President Obama has given the company another 60 days to come up with a more viable plan.
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