08 July 2008

Saab, Hummer on Block

General Motors is reputedly considering putting some of its eight brands up for sale. The story in the Denver Post references Buick, Saturn, Saab and Hummer as brands with falling sales being considered for spin offs. The proposed sale of Hummer is public, and if insiders are correct that the sale of another brand is contemplated, Saab makes the most sense to sell.

Chrysler has three brands (Dodge, Chrysler and Jeep), while Ford has four (Ford, Mercury, Lincoln, and Volvo), but the sales gap between General Motors and its competitors is shrinking.

The proposed GM sales echo Ford's recent sale of Land Rover and Jaguar to India's Tata Motors, and Chrysler's separation from Daimler. Ford continues to try to sell Volvo. Indeed, one combination that would seem sensible would be to acquire Volvo from Ford and Saab from General Motors, and then to merge the two companies which have similar, but not entirely overlapping market niches. A non-U.S. purchaser would seem to make the most sense, given the weakness of the dollar, although one might imagine the private equity owners of Chrysler trying to buy Hummer from General Motors to integrate into its Jeep brand itself a civilianized military brand.

Saab, itself previously a stand alone company, and Hummer, which is also a recent brand and is based upon General Motors' military division, are less integrated with the other brands, have brand identities distinct from the General Motors brand, and serve niche markets that wouldn't deprive the remaining brands of sales. But neither of these two brands are a large share of the total vehicle production of the company, so they may not impact the bottom line much. Their sales are each on the order of 10% of those of Saturn, and have been hit hard by declining car sales. Selling now might only capture a fire sale price, but to a buyer who believes that gas prices might fall for a while, and that the economy may eventually turn around, the gamble might be worth it.

Buick, because it is so integrated from a design perspective with other General Motors brands doesn't make sense to sell to a third party. If a change is made, Buick seems more likely to follow in the steps of Oldsmobile and be eliminated. It has the most dated and indistinct brand image of the remaining General Motors brands.

Saturn may be barely distinct enough and have enough brand identity to be sold, but why would General Motors spin off a brand that competes directly with its Buick and Chevy divisions? For that matter, why does General Motors have Chevy, Buick and Saturn all competing more or less directly with each other? Given its disappointing sales (down 19% from a year ago), reduced seniority in the company, and competition with existing brands, it could be on the chopping block as well.

Chevy, Pontiac, Cadillac and GMC appear to be secure, despite the fact that rising fuel costs are eating into GMC sales and despite the fact that Cadillac has been trounced by foreign models in the luxury market.

With General Motors at risk of losing $6 billion this year, it needs to change something. It has more brands than other major automakers, but rapidly declining sales, and has made fewer steps towards reform than either Ford or Chrysler. GM is purportedly considering introducing a minicar called the Chevy Beat, which would get 40 mpg and be smaller than everything on the road but a Smart Car, a plug in electric called the Chevy Volt on a limited issue trial basis, and a small fuel efficient pickup based upon one of its Latin American models, but these changes seem like too little too late to save the company. GM currently seems like the most likely of the Big Three automobile companies to go bankrupt, conclusions corroborated by its low share prices and junk bond rating.

Indeed, GM might need a bankruptcy to make it economically viable by allowing it to shed pension and health care obligations to retirees that add $1,000 per vehicle to the price of their cars, and by allowing its to trim compensation payments to current hourly employees who now receive a $60 an hour plus total compensation package (including taxes and benefits as well as ordinary pay) -- perhaps not to the $20 an hour that company officials and some industry analysts have suggested is necessary, but likely quite a bit less than current payrolls. A bankruptcy also might be necessary is GM is to have any hope of shutting down some of its brands without catastrophic transition costs. Brand sales out of bankruptcy, free of legacy liabilities, likewise might be attractive to prospective acquiring companies.

Chrysler and Ford both have smaller legacy costs than GM relative to current sales, more equity relative to their sales, and less of a need to shut down or sell brands. These two companies do have pay scales similar to GM, but wage cuts in the wake of a GM bankruptcy could give Chrysler and Ford leverage to follow suit without filing for bankruptcy, in exchange for the carrot of preserving employee pensions and retiree health benefits that might be eliminated at General Motors.

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