General Motors (NYSE: GM) has been losing market share for decades. Now it looks like GM will run out of cash in the next six months unless the government steps in to bail it out. And President-elect Obama seems to have concluded that GM is too big to fail and will provide the financing it needs to keep GM going. Is this the right thing to do?
Before addressing this question, let's look at GM's current financial condition. It reported a $4.2 billion third-quarter operating loss on Friday and said its available cash fell to $16.2 billion on September 30 from $21 billion at the end of June. That loss is merely the latest in a string of losses totaling $73 billion since the end of 2004. And today, a Deutsche Bank analyst set a share-price estimate of zero -- arguing the automaker did not have enough cash to last the year.
How did GM get into this mess? Its board has kept on a CEO, Rick Wagoner, under whose watch GM stock has lost 95% of its value -- the stock dropped from $68.63 on June 1, 2000 when he took over to $3.33 today. There are two reasons for this: First, GM refused to invest the profits from its SUVs and trucks into more fuel-efficient vehicles that customers would want to buy as gas prices rose. Second, it depended too heavily on auto finance for its profits -- and given the current credit crisis, such dependence is fatal.
So, is GM worthless? From an investor perspective it is. But shutting it down completely would throw 2.5 million people out of work. I think GM should file for bankruptcy and fire its board and executives. If banks are not willing to give it the money it needs to operate in bankruptcy, then the government should step in.
If the government steps in, GM needs some major surgery so it can operate profitably as a smaller, more focused competitor. And it must develop a long-term strategy that allows GM to take market share away from its better-run competitors. Coming up with such a strategy will not be easy, but without one, it might be better to just liquidate GM rather than to keep it operating.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 3 of 3)
11-11-2008 @ 4:07PM
Jim Bo said...
We have the same access to raw materials as the competition. We have the same cad and advanced design capabilities. We have the same manufacturing processes. We have access to competitors vehicles to disassemble and reverse engineer. So, why can't GM and Ford keep up? Why can't they turn out a quality product?
What is the ONLY difference between US and Japanese car makers?
You KNOW where this is going already...
U A W has rendered the US car makers unable to compete. U A W promotes mediocrity.
UAW has effectively killed the US car makers. Congrats folks. Enjoy your retirement.
Jim Bo
11-11-2008 @ 3:58PM
Larry said...
It is too late to save GM and Ford. The only way out is for the companies to file for bankruptcy. THey have to get upt from under the liabilities of the healthcare and pensions that the UAW receives and were granted in the boom times before foreign competition. There is not enough money to save them. The unions and thier left wing government supports runied the manufacturing base within this country and only a major world war or depression will bring it back.
11-13-2008 @ 8:43PM
Sean said...
I can't see anyone here looking at global operations.
GMH in Australia has not made a profit since 2003/2004 and yet GM US gave GMH Australia $1Billion to develop the new Commodore three years ago and there has been no profit realised from the outlay.
GM need to start cutting the fat and pure waste from its unprofitable global operations as well as it's domestic market if it going to survive.
It's all good and well to buy into and take over other car manufacturers but some of the purchases have been poor commercial decisions and combine that with the lack of a rapid response in the face of changing domestic and global product demand then it's safe to say management of GM have dropped the ball.
Americans need to look past the domestic situation and open their eyes to what is happening globally.
GM is failing on a worldwide scale.
11-11-2008 @ 7:30PM
Jack said...
When I got laid off no one picked up my healthcare, no one funded my retirement.
So if we the masses have to bail out the companies, then all the employees should take a major cut in pay and benefits. I didn't make anyone stay there and work for a company that everyone knew was headed to the abyss.
11-12-2008 @ 12:14AM
Michael A. Grand said...
I started working for General Motors Corporation in 1978 as an assembler and spot-welder in the body shop. There was nothing this company could not do to keep the line moving. It worked like a military operation. The Honey-Money Bees made that line work for the corporation. In return they were rewarded in money and benefits. The Teamwork was incredible to watch. Just hang-in there. The USA Automobile Industry is going to evolve into the biggest industrialization this world has ever seen. It will stand along side the development of the Atomic Bomb and The Moon Landing in scope.
11-12-2008 @ 10:49AM
Jeff said...
I may have missed the comment, but do you realize that even with the losses, GM is the 2nd largest producers of cars in the world. In addition, the US is not the largest consumer of vehicles per person, but the largest overall consumer of vehicles. So not to make vehicles in this country would be crazy. If GM falls then Chrysler and Ford have little chance. It would mark the end of the US being a dominate industrialized developed country
11-12-2008 @ 12:22PM
L said...
What if Obama decides to impose tariffs on foreign-owned car manufacturers? Will that force Americans to buy American and thereby bolster the industry? Interesting possibility.
11-12-2008 @ 12:34PM
L said...
Union members may not like to hear this, but GM is a prime example of how the we kill the goose who laid the golden egg. Union demands increased for decades until they squeezed the company dry. The company had to cut corners in auto production to save money to pay for the benefits, featherbedding, etc. Yes, you got what you thought you deserved, but look at the results. Yes, the companies' management could have also cut their own salaries, but that wouldn't have made much difference. GM is going broke because they can't sell their resultant sub-standard cars, and because they have to pay off the pension and benefit funds. That's the truth. And that is why so much American manufacturing has gone overseas. The only answer I can see for this country is to start producing something again - and OIL is the one thing we do have, is valuable, and have not produced.
11-12-2008 @ 5:17PM
ron said...
Why in the world should we bail out companies that just don't get it. From CEO to CFO's & union workers, you have to build cars and trucks that are competive. Your average GM product is not well made, and rest assured they do not last.
My last GM was in 1989, it spent way to much time in the shop.
I have now been driving German Cars and with little if any trouble. Quality products sell!
For many years GM has overproduced poor Quality cars and trucks. Then they put there buyers upside down because there product depericates so fast.
If you build a great product people will buy it. If you build it in a limited number better yet.
Poor Quality, large numbers, is not a formula for success.
As for the SUV craze, GM made few real improvments over six to eight years. Same old frame, axels, transmissions, engins. New sheet metal, new appointments, but no real developmental safty change. not much Reasearch and development.
We could be driving GM products that even with a V8 average 24 MPG, highway and 18 city. My German car has been doing so for 18 years, it has never had any failures in well over 150K miles. It still dose not use any oil.
If the Germans can do it surly we can.
No GM needs to come to a quick death. A new GM sould take its place. Perhaps the employees should buy the company out and work to produce a better product.
When every worker has a stake in the company the product is better.
As for the CEO's compensation, his pay and bonus should be tied to the bottom line. Zero about now, workers should be first when assets are sold.
Building great cars, is just not that hard.
Look at toyota, Subru, Mercedes, BMW, Honda, Just a few who get it. All have one thing in common, they last so long you get tired of them before they wear out.
11-18-2008 @ 10:52AM
Lisa said...
To: Linda.
Beleive none of what you hear and some of what you see! I agree the unions can be like bloodsuckers but don't down play the workers. Many of those people work exteemely hard and their bodies are breaking down, in fact GM needs to hire more people to help lighten the work load off some of the employees instaed of getting rid of people in the job bank they need to put them on the line. No disrespect intended toward you but if you have not worked there you can not comment on what is going on, if you really knew you would have compassion. I have seen 200+ pound men quit and leave that job while there are still women ( even single ones especially ) still there stuggling just to keep it so they can support their families and not depend on the taxpayers, that'll be the next thing people complain about.
11-18-2008 @ 3:27PM
John said...
The unions are not to blame for what trouble that GM is in as a union member I'm proud to work for General Motors. I think top management is to blame for the trouble that the auto industry is in, the workers were talking a long time ago GM should be making autos that common person would buy. I guess they wouldn't listen. They need the bailout to help the proud workers that work for the american auto indrustries.We have good and skilled workers in the auto companys.