Failure is Possible
“Rich people don’t care [about high gas prices].” Bob Lutz’ statement–
made during the launch of GM’s new SUV’s in August 2005– encapsulates
the automaker’s history of arrogance, ignorance and self-delusion. Then
again, what else could GM’s Car Czar have said? Whether or not GM should
have seen the gas crunch coming, the die was cast. Now, as gas prices
crest $4 a gallon, as Delphi and GMAC teeter on the abyss, as GM’s stock
price hits a historic low, GM’s slide into Chapter 11 is beginning to
assume the mantle of inevitability. And why not? There is no Plan B.
Clearly, GM’s Plan A– make better SUVs and pickups– was a non-starter.
Not to belabor the obvious, but soaring gas prices gored GM’s cash cow.
Year-to-date, the General’s high-profit SUV and truck sales tumbled 22
percent. In April, GM’s truck sales fell by 27 percent. Sales of the
once all-conquering Chevy TrailBlazer fell 73 percent. Despite the Chevy
Silverado’s perch on America’s top ten list, despite their new CUVs, the
company that made billions on high-profit light trucks is making
billions no more.
A new charge of the light truck brigade is not a possibility. Even if
U.S. gas prices suddenly descended to $3 a gallon, American consumers
will continue to approach gas guzzlers with a ten-foot pole. It would
take a good year of relatively low– or at least stable– gas prices to
lure buyers back to… no. Actually not. Once backwards, twice shy. And if
that doesn’t send the pickup and SUVs genres back to their original,
pre-90’s market share, federal regulations and fashion will.
What GM needs right now– and for the foreseeable future– is six brands'
worth of class-leading, fuel-efficient automobiles that will, at the
very least, stop SUV refugees from jumping ship. That it ain’t got. Not
now, and not a year from now.
Meanwhile, American new car sales in general, and The General’s share in
specific, continue to crater. Cadillac, Chevrolet, Buick, GMC, Hummer,
Pontiac, Saab and Saturn are ALL losing market share in an American new
car market that shows no signs of recovery. Inventories are piling-up;
every single GM light truck has more than 100 days supply. Despite the
obvious light truck glut, GM’s outdated business model is forcing the
company to restart truck and SUV production. As it does so, GM’s
prospect for its unspecified “turnaround” move from bleak to non-existent.
Contrary to popular belief, foreign profits can’t staunch the arterial
spray of red ink; the carmaker’s losses in the North American market are
too deep and too broad. GM has assured the markets that it has adequate
liquidity to weather the storm. On March 31, GM reported a $24b cash
pile. That's $6b less than six months ago. No one knows how much that
cash pile lives stateside. And given that GM’s accounts are [officially]
unreliable, there’s no exact way of knowing what additional calls will
be made on that cash. There will be many…
Delphi’s restructuring plan is, once again, in tatters. Given GM’s
ongoing reliance on Delphi for parts, the chances are high that this
sinkhole will claim even more of GM’s money. By the same token, an
unknown number of GM suppliers have hit/are about to hit/will hit the
wall. As the American Axle strike and Plastech bankruptcy prove, GM’s
only as strong as its weakest supplier. When Chrysler goes down… It’s
only a matter of time before other parts makers suck-up GM’s cash.
At the same time, GM’s part-owned ResCap mortgage unit needs $600m to
stay afloat; co-owner Cerberus won’t be ponying-up the funds. If ResCap
files, it could well take all of GMAC down with it. If GMAC files, GM
won’t be far behind… The General will open its wallet to stave-off that
In the midst of all this, the central question bedeviling RenCen has now
become: what can we do to hold out until the U.S. market recovers? The
obvious answer: nothing. There is nothing GM can do in the short to
medium term to bank enough profits to save itself from Chapter 11. U.S.
franchise laws and GM’s depleted financial reserves make it impossible
for GM to do what needs doing: jettison excess dealers and dead brands
(everything save Chevrolet and Cadillac) to trim itself down to a
sustainable, indeed, profitable level.
Surely GM CEO Rick Wagoner knows this. Logic suggests that if Wagoner
knew for certain that GM was condemned to file for Chapter 11, he would
unfurl his golden parachute and float off to some exotic tax haven,
leaving someone else to suffer the final ignominy. And surely
presidential candidate Hillary Clinton knows that only a stroke of fate
(so to speak) could propel her to the White House.
The truth is that GM’s refusal to admit the possibility of defeat doomed
it from the start.