The once mighty General Motors, the world’s largest company at one stage, is now fighting to avoid following financial giants like Fannie Mae and Freddie Mac to the brink of collapse.
It’s a long way off, but when a company as large as GM boasts that it has $US24 billion in liquid assets, as it did a week ago, and then reveals plans to cut costs, sack staff and sell assets to raise a further $US15 billion over the next two years, you know there’s a problem. Or two. Unlike Bear Stearns, or the Fannie and Freddie show, GM is not important enough to the stability of the US economy for anyone to stop it sliding into bankruptcy and irrelevance.
The switch from outright confidence a week ago to one of hacking and slashing (20% of its white collar US staff of 32,000 will go) and selling off well-performing assets overseas, you know there’s the sniff of danger in the company’s accounts.
That $US24 billion was the company’s financial resources at the end of March. Now it’s warning of a sizeable second quarter loss, and those losses continue as it cuts production of gas guzzling SUV’s and pick ups and tries to boost output of the smaller, more fuel efficient models that consumers want. Given the state of the car industry, the incentives (zero financing for six years) to get rid of unwanted stocks, and the cutbacks already announced, analysts say the weekly cash burn at GM is huge.
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Retirees on the company’s pension plan face cuts, marketing and ad budgets will be slashed (bad news for Madison Avenue, US media companies of all sizes and online businesses) and capital spending will be reduced. And yet it should be spending more on building new plants for smarter, more fuel efficient cars. Car industry analysts said that as well as announcing all these financial and operational moves, the company should have been revealing big cuts to models and plants that produce the SUVs and pick ups consumers don’t want.
The moves question the long term presence of GM in Australia, China and Europe: it’s losing money here, but its making money in China and Europe. Australia is a cost cut, China and Europe are possible joint ventures with local car groups to raise much needed capital. That’s a situation Ford Australia also faces.
GM said it was reshaping itself to handle annual US car sales of 14 million a year and oil prices of $US130 to $US150 a barrel until the end of 2009. GM is two months behind the same blinding realisation that Ford reached mid-May when it started its cuts and moves to re-invent itself.
Chrysler is still groping, although it has had one try and cutting. Its privately owned by private equity groups, so there’s not the pressure of having to meet the expectations of listed companies, but its owners also own 51% of GMAC, the weakened finance of once owned by GM. Chrysler’s owners face real financial pressures as a result of the subprime and credit crunches.
In a way GM is as much a victim of high oil and petrol prices as it is of the credit and subprime messes. Consumers don’t have enough to spend because their home values are falling, or they have been laid off, or they don’t have a house any more. And when those who want a car look at GM, they find models they don’t want.
But there is growth in the US car industry. Germany’s Volkswagen is returning to car making in the US with a $US1 billion plant in Tennessee after closing its last factory in 1998. Around 2,000 jobs will be created. VW won’t have a shortage of trained people to pick from. The plant will have turnout 150,000 cars a year when it opens in 2011. It is building the plant because the high value of the euro has made it too costly to produce cars in Europe and export them to the US.
The US is a low cost manufacturing area now, for the right product. BMW is thinking of expanding its US car making operations for the same reason. GM, put simply, is off the pace.