General Motors Generally Awful
Posted by Martin Denholm on February 12, 2008
In a word: Downright ugly.
(Okay, that’s two words, but I want to emphasize the ugliness).
Despite a sleek new line of vehicles that resulted in near-record sales, continued progress in slashing its bulky labor and pension costs, and even a landmark new labor deal with the United Auto Workers union, it wasn’t enough to stop the world’s largest automaker (although it’s barely clinging to that title now, selling just 3,000 more cars than #2 Toyota) from chalking up a $38.7 billion loss in 2007.
It was the biggest annual loss in auto industry history.
Chairman and CEO Rick Wagoner can spin it any way he wants, stating that the firm has made significant progress in reducing costs and expanding into emerging markets, but the fact is, the mistakes of the past mean GM is still staring directly at a very bleak future.
In recent months, the prospects have become even cloudier, with the subprime mortgage loans and credit crisis having whacked its GMAC Financial Services offshoot (GM owns 49%), which suffered a $2.3 billion loss in 2007. In addition, a slowing U.S. economy and debt-laden Americans threatening to stifle sales growth.
If you’re looking for GM to turn a profit, the company warns investors to come back in 2010. According to CFO Fritz Henderson, GM needs to “get all the structural costs down” first.
Part of that involves laying off more workers. In response to the news, it offered buyouts to 74,000 employees and aims to replace them with folks who will earn half the previous hourly wage of $28.
The plan will see GM offer retirement-eligible employees a layoff package between $45,000 and $62,500 to retire with full pension and health benefits. But it will also extend the offer to other employees and give them the chance to either retire early or take up to $140,000 to leave with no pension or healthcare.
Silver Lining
The bulk of the annual loss came from a one-time tax writeoff of $39 billion during the third quarter. Excluding that loss, GM’s annual loss was just $23 million (4 cents per share), well above estimates that called for a 95-cent loss per share.
Overall, GM sales hit $181 billion in 2007 – down 12% from 2006. And the fact that GM’s North American region was the only one that didn’t post a profit is a major blow, given the launch of several new vehicles. It posted a $1.5 billion loss for the year – the same as 2006.
Meanwhile, its European operations recorded a $55 million profit (although sharply down from $357 million in 2006), while the Asia-Pacific region enjoyed an 84% profit surge from $403 million to $744 million. Earnings in Latin America, Africa and the Middle East doubled to a record $1.3 billion.
But GM needs to kick its recovery plan into high gear ASAP. If the already struggling U.S. economy slides into recession, you could see GM staring not just at a bleak future, but into the bankruptcy abyss.
Tuesday, February 12, 2008 — by Martin Denholm, Managing Editor, Mt. Vernon Research
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