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Will GM declare bankruptcy? | March 14, 2006
By Jim Harris
2005 was a very, very bad year for GM. The company lost US$8.6 billion—the second largest loss in the company’s history and the first since 1992. It announced 30,000 layoffs in November and debt rating agencies Moody’s and Standard & Poor’s respectively rateD its debt four and five levels below junk status.
Over the last 10 months, each debt downgrade marked a deterioration in the company’s financial viability, increasing GM’s cost of borrowing and the likelihood it will default on loans. A number of Wall Street analysts have openly speculated about GM declaring bankruptcy, while bloggers have begun a GM death watch. As of June 30, 2005, GM had US$284 billion of debt, but as of Feb. 2 the company was only valued at US$13.35 billion.
And it has been a rough road for investors who watched the stock plummet more than 80 per cent.
Addicted to SUVs
The truth is GM is addicted to SUVs. Some analysts estimate large SUV sales accounted for more than half of GM’s worldwide profit. And SUV sales plunged 30 per cent in 2005.
The picture would have been far, far worse had GM not launched the most aggressive discounting in its history; the anyone-can-have-an-employee-discount program ran from June to October 2005.
Which leads to the second problem: GM is now addicted to discounting. The only way to slow its continued market share loss is more discounting. This means GM is in deeper trouble than it’s letting on—the bulk of consumers who considered buying GM did so during the employee discount offer and without those cuts the sales for October 2005 slumped 26 per cent.
So GM has been caught in a downward spiral: addicted to profits from gas guzzlers consumers don’t want, propped up by deep discounting, leading to lower profitability and more market share loss.
Blame the employees
But listen to GM executives and you won’t hear the real nature of the problem. GM chairman and CEO Rick Wagoner repeatedly pointed to pension and healthcare costs as the company’s problem.
Consumers don’t want to buy the most inefficient vehicles available.
Crude awakening
As the price of oil rose dramatically in 2005—to more than US$70 a barrel—consumers began turning away from GM, yet the company’s strategy is to assume high oil prices are temporary.
But oil was US$100 a barrel in the late 1970s and early 1980s, when adjusted for inflation. And if you don’t think oil will break that price, think again. Oil production capacity is now running at more than 95 per cent. Any reduction in oil producing or refining capacity—remember Hurricane Katrina? —could spike prices.
It’s not that we’re out of oil, it’s just that we’re reaching peak production, when oil cannot be extracted any faster. As demand continues to rise, shortages and price spikes are inevitable.
Oil will break $100 a barrel by 2010, I predict. When gas surpasses $2 a litre in Canada and US$4 a gallon down south, how many North American consumers will be lining up to buy GM gas-guzzler SUVs, no matter how deep the discounts?
GM’s strategy
And GM’s comeback strategy? Launch an even larger SUV and trucks, codenamed the GMT-900. And Canadian taxpayers have subsidized GM’s failing strategy. In March 2005, the Liberal government gave $200 million of tax payers’ money to GM—ostensibly to protect jobs—but that didn’t stop the automaker from announcing 30,000 North American layoffs just nine months later.
Canadians should ask: Why are no hybrids built in Canada? Why would any government subsidize the car company with the highest carbon dioxide emitters in the world? Why don’t we have mandatory fuel efficiency for vehicles sold in Canada, so we can have energy security?
2005 was a very, very bad year for GM. The company lost US$8.6 billion—the second largest loss in the company’s history and the first since 1992. It announced 30,000 layoffs in November and debt rating agencies Moody’s and Standard & Poor’s respectively rateD its debt four and five levels below junk status.
Over the last 10 months, each debt downgrade marked a deterioration in the company’s financial viability, increasing GM’s cost of borrowing and the likelihood it will default on loans. A number of Wall Street analysts have openly speculated about GM declaring bankruptcy, while bloggers have begun a GM death watch. As of June 30, 2005, GM had US$284 billion of debt, but as of Feb. 2 the company was only valued at US$13.35 billion.
And it has been a rough road for investors who watched the stock plummet more than 80 per cent.
Addicted to SUVs
The truth is GM is addicted to SUVs. Some analysts estimate large SUV sales accounted for more than half of GM’s worldwide profit. And SUV sales plunged 30 per cent in 2005.
The picture would have been far, far worse had GM not launched the most aggressive discounting in its history; the anyone-can-have-an-employee-discount program ran from June to October 2005.
Which leads to the second problem: GM is now addicted to discounting. The only way to slow its continued market share loss is more discounting. This means GM is in deeper trouble than it’s letting on—the bulk of consumers who considered buying GM did so during the employee discount offer and without those cuts the sales for October 2005 slumped 26 per cent.
So GM has been caught in a downward spiral: addicted to profits from gas guzzlers consumers don’t want, propped up by deep discounting, leading to lower profitability and more market share loss.
Blame the employees
But listen to GM executives and you won’t hear the real nature of the problem. GM chairman and CEO Rick Wagoner repeatedly pointed to pension and healthcare costs as the company’s problem.
Consumers don’t want to buy the most inefficient vehicles available.
Crude awakening
As the price of oil rose dramatically in 2005—to more than US$70 a barrel—consumers began turning away from GM, yet the company’s strategy is to assume high oil prices are temporary.
But oil was US$100 a barrel in the late 1970s and early 1980s, when adjusted for inflation. And if you don’t think oil will break that price, think again. Oil production capacity is now running at more than 95 per cent. Any reduction in oil producing or refining capacity—remember Hurricane Katrina? —could spike prices.
It’s not that we’re out of oil, it’s just that we’re reaching peak production, when oil cannot be extracted any faster. As demand continues to rise, shortages and price spikes are inevitable.
Oil will break $100 a barrel by 2010, I predict. When gas surpasses $2 a litre in Canada and US$4 a gallon down south, how many North American consumers will be lining up to buy GM gas-guzzler SUVs, no matter how deep the discounts?
GM’s strategy
And GM’s comeback strategy? Launch an even larger SUV and trucks, codenamed the GMT-900. And Canadian taxpayers have subsidized GM’s failing strategy. In March 2005, the Liberal government gave $200 million of tax payers’ money to GM—ostensibly to protect jobs—but that didn’t stop the automaker from announcing 30,000 North American layoffs just nine months later.
Canadians should ask: Why are no hybrids built in Canada? Why would any government subsidize the car company with the highest carbon dioxide emitters in the world? Why don’t we have mandatory fuel efficiency for vehicles sold in Canada, so we can have energy security?
