04 May 2007

General Motors: Almost Non-Profit

General Motors made a $62 million profit in the first quarter of 2007. This may seem like nothing to sniff at, until you realize that they had to sell 2.26 million vehicles to produce this profit. That's right, shareholder pick up just $27.43 per vehicle that is sold by the biggest of the big three automakers.

As the link above explains, there is a lot that goes into the General Motors bottom line -- extraordinary transactions like a partial divestment of the GMAC financing business (hit hard by the subprime residential mortgage crash), the sale of its equity ownership of Suzuki Motors at a profit, and a restructuring of its European and Asian divisions, all skew the figures. But, even excluding "special items" the automaker still made only $94 million (i.e. $41.59 per vehicle).

General Motors is worse at home than abroad. GM's North American operations "still lost an adjusted $85 million on its core operations. A year ago, GM reported an adjusted loss of $251 million in North America." GM increased the per vehicle sales price by about $1,000 in North America, a move that was accompanied by a 192,000 vehicle drop in North American production. Less than half of GM's vehicle sales are in the North American market; while I don't have exact North American sales for the first quarter at hand, it looks like GM loses more than $85 per vehicle sold in North America. This isn't too surprising. MSRP has become a joke at GM dealerships, with even marquee "high profit" products like its redesigned pickup trucks "discounted $2,453 on average and are sitting on dealer lots 81 days."

General Motors is still selling cars and trucks at under cost. It loses money selling vehicles, and makes back the loss from its 49% stake in GMAC which, while losing money on its subprime mortgages, still rakes in considerable dough financing vehicles. This is a dubious business model.

This does beat the losses of many prior years. GM lost $2 billion in 2006 and $10 billion in 2005. But, an automotive manufacturer is supposed to have something more than 0.1% to 0.2% profit margin. They are not a non-profit venture.

Even excluding "special items," General Motors is returning just 17 cents a share this quarter (that would be 68 cents a share on an annualized basis) on shares whose price dropped to $30.69 each after the announcement. Earnings of just 2% of stock price aren't impressive. General Motors investors, collectively, would have been better off if the company had sold the assets for the price placed on the business by the stock market and invested the proceeds in Treasury bonds.

Simply put, until GM gets a handle on product quality and fuel efficiency, competitors like Toyota are going to keep eating it for breakfast. The real question is, which will happen first? The bankruptcy, or even discontinuation of operations, of one of the big three American automakers (Daimler Chrysler appears to be eyeing a divestment from Chrysler) or a turn around in product quality for all three American automakers.

It isn't obvious to me that it is easier to turn around any of the existing big three automakers, than it would be to simply start over from scratch with a new American automobile maker: one unburdened by legacy costs for laid off employees which results from declining market share, outdated and overcapacity manufacturing plants, and a stagnant corporate culture. The foreign competition beats the big three automakers even when the competition is also making its vehicles in the United States with American workers.


The assessment above has very real implications for America's most beleaguered city, Detroit. If my guess is right, the motor city is going to see things get worse before they get better. A further collapse in the American auto industry that seems written on the wall right now, may take two to five years to play out, and Detroit's health is probably a lagging indicator of the automobile industry's health. It is a reasonably safe bet that Detroit's population and fortunes more generally will decline from 2000 to 2010, and again from 2010 to 2020. Maybe, Detroit can finally hit bottom after many decades of painful contraction by the twenty-teens, but the future of Motown does not look bright at this juncture.

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