April 13th, 2006

What's New at GM-Pontiac?

The pain continues at General Motors. GM lost $10.6 billion last year! They currently have $64 billion in unfunded healthcare obligations. Unfortunately, it seems our favorite car maker is not making a lot of progress in improving their sales. Last month their sales were down about 4%. Let's hope that the sales slump is due partly to deciding not to sell so many cars at low profit levels. Apparently, they have decided to cut the special incentives that made up so many of the sales in the past and have implemented pricing that is more competitive on a day to day basis. GM has also decided to cut the number of cars they sell at low margins to the car rental companies. Maybe by dumping fewer cars into the fleet market it will help them sell new cars through the dealer network. One of their problems has been seeing many of their customers buy used rental cars instead of new cars. Time will tell if this strategy will work to improve their bottom line.

Many of you have probably been watching as GM sells off its non-auto businesses. They've sold off their GMAC commercial division and it looks like the remaining home mortgage business is in the process of being sold. These were the two most profitable divisions of GM. They've sold off their shares in Isuzu. Rumors have it that they would like to sell off Saab if they could find a buyer but that's not likely to happen. Much of the money they are receiving from these sales would be used to fund employee buyouts of retirement plans. There have been rumors that Holden could also be sold. If that were to happen it would be very detrimental to the future possibilities of a 2008 or 2009 GTO. Holden has been the designer of the current GTO and are supposed to be working on the next generation GTO. Stay tuned on that issue. Apparently, Toyota could be very interested in buying Holden.

So what happens to GM after they've sold off their profitable subsidiaries and they can't get their car/truck divisions to start increasing market share and making money again? The future doesn't look good. Currently it costs GM about a thousand dollars a car more in retirement and medical benefits than it does for Toyota . They obviously have to reduce these expenses if they are to stay in business. Can they produce cars that the American consumer wants to buy? The answer is yes. Just look at how well the Chrysler 300 has been selling. Ford knows how to make a Mustang that sells. The consumer is dieing for unique or interesting styling. Can GM make the grade? Let's hope so. What's wrong with retro styling? After all look how popular the old cars are to us baby boomers. Many of us would love to see a new updated version of a popular car from earlier days. That's an advantage Detroit has over all the imports, their heritage. The imports don't have one.

Within the next few months Toyota is likely to announce that they are the world's largest car maker. GM's U.S. market share is somewhere around 25 to 26% now while Ford is down to 18%. GM and Ford are struggling against the Japanese car makers while Korean brands such as Kia-Hyundai are growing leaps and bounds. Once the Chinese makers start shipping cars to the U.S. the future looks even worse for GM and Ford.

Rick Wagoner, GM CEO, appeared on “Face the Nation” Sunday April 9 th , to assure the public that they will get their act together after cutting costs over $8 billion in the last year with help from the UAW and by recently cutting white collar management positions. Let's hope they cut some the layers of management/red tape that keeps them from bringing out fun cars.

GM has made buyout offers to 131,000 employees at GM and Delphi to take a cash offer if those employees accepting the offer will agree to drop their retirement and medical plans. Delphi provides GM 40% of the parts it uses to manufacture its vehicles. Delphi is currently in bankruptcy and could face having its employees go on strike as they try to get them to take very large pay cuts. GM has 1.1 million retirees currently receiving benefits. President Bush has stated they need to work their problems out by themselves as we continue to let foreign makers take over our car manufacturing industry. Something this country cannot afford to allow to happen if we expect to remain a strong country in this world. Wagoner said that he did not see declaring bankruptcy as a solution. Wagoner made one profound statement, “what is happening at GM reflects what is happening in the U.S. economy in general.” Let's hope it all works out. I fear that some day we will all wake up and realize that we don't own our own country anymore because we gave it all away to other countries under the guise of fair trade.

Your resident GM economist,

The "Real" Bill McCoy