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American icon General Motors is in big trouble – it’s losing out to its rivals, and struggling to foot the bill for its pensions and healthcare commitments. Can it survive?
Is GM in serious trouble?
GM is still the world’s biggest car-maker – it will make 9.2 million vehicles this year. But it may lose its crown next year, as Japan’s Toyota powers ahead in terms of units sold – just as it already has in terms of profitability and market value. The Japanese giant is worth $163bn, and made a $10bn profit last year with operating margins of 9%. By contrast, GM’s collapsing share price (down a third in the past year) means it is worth just $15bn. The Detroit behemoth loses money on every vehicle it sells – a total of $3.8bn in the first three quarters of the year. In September, its US sales slumped 24% (Toyota’s were up 10%) and its October market share looks set to fall to around 20.5%, its worst showing in 25 years.
What is the problem?
The most basic problem is that GM, like rival Ford, has struggled to build vehicles customers want, especially in its core market, North America. GM has been slower to develop new lines than its Asian competitors, and has invested too heavily in America’s love affair with sports utility vehicles (SUVs) and pick-ups – together, these account for 60% of GM revenues in North America. But the US passion for gas-guzzling Hummers is cooling in the wake of spiralling fuel costs, leaving GM overexposed to a declining market.
How does that compare with Toyota?
In recent years, Toyota has consolidated its reputation for building cars that are more reliable and fuel-efficient than US cars – a competitive advantage at a time when petrol prices have rocketed. Just as Toyota pre-empted GM (and Ford) on the worldwide shift to smaller, fuel-efficient cars, it’s also now leading the way on hybrid fuel-technology cars. Unlike its US competitors, Toyota has not needed to hand its customers big discounts (this year, GM has been offering customers the same incentives it gives employees). But then, unlike GM, it’s not weighed down by “legacy” costs of pension and social-security obligations – the other central problem crippling GM.
What are the legacy costs?
The so-called “legacy” problem faces many of America’s older-established industries and businesses – the practical challenge of paying the pensions and healthcare costs of previous generations of workers. But the scale of the problem at GM is unparalleled, thanks to the huge number of employees it had during the 1960s and 1970s. Today, GM has fewer than 200,000 US workers (around two-thirds of its global workforce), but some 1.1 million US retirees and dependents – making it the largest private-healthcare provider in America. The firm’s market capitalisation is $15bn, half the size of its unfunded pensions liabilities. More worryingly, its unfunded healthcare liabilities are estimated at $70bn, and could be much higher if average life expectancy continues to rise. Indeed, the accounting mess involved is currently under investigation by the SEC.
What does this mean for the business?
On healthcare costs alone, GM will pay out $5.6bn this year – equivalent to $1,564 for each car sold. In the long-run, that’s a potentially fatal competitive disadvantage. In mid-October, GM’s biggest supplier, the parts-maker Delphi, went into Chapter 11 bankruptcy. That’s bad for GM (which was Delphi’s parent company until 1999) because of the potential disruption to production and because when GM spun off Delphi, it gave guarantees about legacy obligations in the event of “financial distress” at the parts business. Now these promises may cost GM anything up to $11bn, and the talk in Detroit is of whether GM will soon be following Dephi into bankruptcy. GM still has a cash pile of around $19bn, down $5bn on this time last year. Even so, analysts at Bank of America last week estimated the chances of GM going under have jumped from 10% to 30%.
Why does it matter if GM goes bust?
Fifty years ago, GM boss Charlie Wilson claimed what’s good for America is good for GM – and vice versa. At that time, GM sold more than half the cars in America, and the saying became a business adage that stuck. Today, GM is still an American icon, and its business problems are essentially the same as the large-scale problems of public policy America faces when it comes to social security and healthcare. Just as the private sector is seeing the slow death of defined benefits in compensation policy, the public sector – in the form of Medicare and the Pension Benefit Guaranty Corporation – isn’t going to be able to continue to finance health and pension provision for those not covered privately. This raises policy questions about how to provide for the retired and keep US businesses competitive at the same time.
How is GM tackling its problems?
GM chief executive Rick Wagoner is in no doubt about the root cause of GM’s ills. “If we don’t fix healthcare, we can’t fix the North American business,” he says. Two weeks ago, Wagoner signed a deal with the main car union, the UAW, which should save the firm $15bn on pensions and healthcare costs for non-union retirees – a pact greeted positively by Wall Street. GM is cutting its workforce by 25,000, and announced it is selling a majority stake in GMAC, its profitable financing arm, in a bid to raise cash. All of this has helped steady nerves shattered by the Delphi bankruptcy.
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