General Motors (Part 1): The Decline

To many, General Motors is an American institution. Founded in 1908, GM became the world’s largest automaker in terms of global sales in 1930. Today, the company manufactures and sells cars and trucks under almost a dozen brand names around the world. Buick, Cadillac, Chevrolet, Pontiac, Saab, Saturn and Hummer are household names. Generations grew up driving GM or Ford vehicles. GM employs more than 250,000 people around the world and is ranked 9^th on the Fortune 500 in terms of global revenue.

However, in the first quarter of this year, something remarkable happened. Toyota surpassed GM in global sales. The announcement was another milestone in General Motor’s long downward spiral which has cost thousands of employees their jobs and erased billions of dollars of shareholder value. On May 13, 2002 a share of GM stock closed for the week at $50.04. Today, that share is worth only $4.36 as the company burns through cash and tries to fend off bankruptcy. Its market capitalization is only $2.46 billion.

The Situation Today

In little more than a year, the value of GM stock has declined from a high of $41.39 on October 8, 2007 to today’s record lows. On the surface, the reasons are obvious. The company lost an astounding $38.7 billion dollars ($68.85 per share) in 2007 and continued the trend this year with consecutive losing quarters. The company recently announced it’s most recent third quarter results – yet another $4.2 billion loss on lower revenues. A survey of analysts expected the loss to be around $3.70 per share (or three-quarters of its current share price) and the actual number was much worse – the company lost $7.35 per share (almost double the value of the share itself.) Since 2002, the company has accumulated net losses of over $72 billion. The results have been devastating, as the chart to the right shows. GM stock has fallen to 11% of its value in January 2002. The value of the S&P 500 has fallen to only 80% of its value in January 2002, despite the recent financial meltdown. (Note that in the chart I call these “benchmark” values. The stock prices are indexed to their values in January 2002, but I used the term “benchmark” instead of “index” to prevent confusion with the name of the S&P 500 Index itself.)

Even more shocking than the quantity of the loss was the company’s statement about its remaining cash. GM used $6.9 billion during the quarter and reserves are dwindling. The company says that in the first half of next year its “estimated liquidity will fall significantly short” of what it needs to pay for basic operating expenses and that its “estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business.” This is especially troubling for investors and industry observers because GM’s cash position was one of its few strong points over the past few years. Only last year, the company used its cash holdings as an example of how its restructuring efforts were taking root in the wake of financial restatements and the Delphi bankruptcy.

Today, Chairman and CEO Rick Wagoner remains defiant about a possible bankruptcy, stating the painfully obvious:

We’re convinced that the consequences of bankruptcy would be dire. We need to find a way to get through this, and that’s really our focus.

President and Chief Operating Officer Fritz Henderson’s statements echoed Mr. Wagoner’s:

We are cutting to the bone. What we want to do is size the business for this kind of volume level… and frankly, put us in much better shape when the industry improves.

Cost cutting has resulted in a suspension of 401(k) matching, tuition reimbursement and incentive pay. Another round of jobs cuts were also announced – another 1,900 salaried employees on top of 5,100 eliminated last summer.

Causes and Conclusions

The reasons for GM’s sudden collapse are myriad in number and complexity. Some are internal decisions (lackluster products and money-losing incentives) and others are external (fuel prices and foreign competition). Combined, they have created an untenable situation in which General Motors is no longer profitable, competitive, or primed for future growth. Here is a quick rundown of the reasons for GM’s descent prior to this year’s overall financial meltdown:

Internal:

1. Too many brands
2. Outdated designs
3. Expensive employment structure
4. Poor strategy

Many of GM’s internal problems stem from a proliferation of brands and models which increase expenses. When GM was a dominant company across the world it could afford to have brand differentiation. However, as more efficient challengers like Toyota and Hyundai pushed prices lower, GM was left supporting duplicative design teams and production facilities. To make matters worse, GM’s designs became more outdated. Customer confusion was high – what differentiated Chevrolet from Pontiac? Why should an individual choose one brand over the other, when they both offered vehicles with similar price points and features? Even worse, consumers began to jilt both brands in favor of more reliable and lower priced imports.

Complicating GM’s ability to respond to foreign competition is its expensive employment structure. The company’s levels of unionization and expensive pension and health care benefits packages have been well documented. These structures limit the company’s ability to trim (or add) workers. When the workforce is reduced, the company uses incentive packages and buyouts, both of which decrease flexibility but are a necessity due to unionization.

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