"Once you start losing revenues, you get into a vicious cycle that you can't get out of very easily."
General Motor lost money again in the first quarter of 2009 , and is just as certain to lose money again in the second quarter, given the company’s deep cuts in production now in the schedule.
Bankruptcy, once unthinkable, seems unavoidable in the wake of the $6 billion first-quarter loss — and a $10 billion cash burn — which only exacerbated the company’s already precarious financial situation. Worse, the company revenues plunged by nearly 50% in the first 90 days of this year, suggesting that the Obama Administration’s Auto Task Force really did have cause for recommending the dismissal of former GM chairman Rick Wagoner.
“Once you start losing revenues, you get into a vicious cycle that you can’t get out of very easily,” observed Ray Young, the company’s youthful chief financial officer who was plucked off the finance staff last summer to help guide GM through the grave and grave-digging crisis it is now facing.
Young also outlined another of GM’s serious problems. The drumbeat of bad news is drowning the company. “A lot of impact is already in the marketplace. We have anecdotal evidence that that spills over into places like Brazil. We can’t quantify the bankruptcy concerns, but there is an impact. If we have to go through a court process, it’s going to have to be quick,” he said.
The clear implication was that a long stay in bankruptcy court could very destructive to the company’s health. Perhaps any stay is fatal. GM needs to get customers to focus on the company’s products, not the bad news, Young said during a conference call with reporters and analysts. How GM can do that, given the lack of significant new products and the plentiful supply of bad news is not at all clear, to put it kindly.
“We probably have the greatest product in the history of the company,” said Young. Maybe so, but few people are buying either that statement or, more significantly GM vehicles. And it’s a global problem.
At the same time as the sales slump continues, GM has succeeded in reducing its structural costs in North America by more than $3 billion, or only roughly one-third of its cash burn. More ominously, perhaps, is that the first quarter figures also showed that GM lost market share, while even bankrupt Chrysler managed to keep its market share relatively flat during the same period.
How can sales pickup when GM is getting ready to dump Saturn, Pontiac, Hummer and Saab as part of the restructuring? GM’s stated goal is to rebuild as it restructures, Young said, but the elimination of four brands is bound to hurt GM’s market share in the short term, even if the sales of these four weak brands have dropped dramatically in recent months.
Young said the ongoing restructuring has reduced the company’s break-evenpoint so that GM could make a lot of money on relatively small volumes — once the economy begins to recover. He omitted that it has to shed the debt on its balance sheet for this to be true. And GM has also paid a significant price for the cuts that make its future uncertain. The company has been forced to trim its product development effort, Young conceded. “We’ve cut all the non-essential projects in manufacturing,” Young added.
GM is now looking for potential collaborators, he said.
The first quarter financial report also indicated that the problems in Europe are much deeper than GM has admitted in the past. Young also conceded that in Russia, which GM – and a lot of other automakers – touted as the next big thing, sales have dropped 40%.
Over the past four years, GM has tried all kinds of strategies to keep the wolf from the door. The take away from the first quarter results is that GM has now run out of options. The door has been blown away.
Toyota announced today they lost more in 1st quarter than gm so this is not just an american auto problem. Of course toyota has more money in the bank so better able to weather the storm. However, I have to agree with Young on the products. As a loyal toyota driver who now has drives to late model GM cars, there is no question that GM’s products are at the top of the heap design, quality, and mpg wise. As Young points out however, getting Americans to even consider their products given the well deserved poor reputation of past years and now with bankruptcy concerns is a tall order. Still it is ironic that they have the best products at a time when most americans don’t believe it and don’t seem to care anyway.
There are no customers because unemployed workers don’t buy cars. Neither do those fearing to be unemployed soon. No one in authority is addressing the need to bring the workforce and its wages back to a condition where we can once again buy new goods.
Interesting to recall that Henry Ford had two key reasons to raise the pay of his first Model T workers: maintain workforce stability (the early turnover rate was several hundred percent a year)…and create a built-in market for his own products. Henry Ford helped create the American middle class. Will the steady erosion of automotive pay and benefits help destroy them?
Paul A. Eisenstein
Bureau Chief, TheDetroitBureau.com
“We probably have the greatest product in the history of the company,” said Young…
GM may have the best product in the history of the company-but how does it compare to OTHER MANUFACTURERS? GM cannot compare itself to GM’s of old-but to Honda and Toyota–they are the competition!
Cadillacs stack up well against their competition-but a Chevy Impala?? Please. The consistency across products is frightening and perplexing. I am hopeful that a dramatic reduction in nameplates will allow the reborn GM to have better quality and consistency across all products and not just a select few such as the Chevy Malibu and Cadillac CTS.
I fear that downsizing a company to viability may not work-but clearly GM is not capable of managing all it’s brands now-so I hope against the odds that it comes out of this a stronger and more nimble organization.