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19 November 2010

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The Decline and Fall

of General Motors

Once the world’s largest company,

GM has shrunk to a shadow of its former size

At its peak, in 1962, General Motors sold one out of every two cars and trucks in the United States. Now it's struggling to survive.

On March 5, 2009, The Globe and Mail reported the company’s “auditors have raised ‘substantial doubt’ about the troubled automaker’s ability to continue operations.” How could the giant have been brought so low?

It’s a story that’s been developing for decades and was told at length in August 2008 by The Detroit News. Put simply, the company made vehicles people don’t want in an industry that produced more units than it could sell. Billy Durant (below) might understand this rise and fall in fortunes.

The Rise and Fall of Billy Durant

Having become rich making buggies, Durant bought the ailing Buick Motor Car Company in 1904. In 1908, he folded Buick into another company and called the result General Motors. But, within two years, the company was in financial trouble.

The banks took over and booted Durant out. Quickly, he and Louis Chevrolet started up the Chevrolet Company.

Billy Durant organized a merger with his old company and, in 1915, he was back in charge of General Motors.

But, it all turned sour again for the colourful Billy Durant; in 1920, GM said goodbye to him for the final time. The self-made, and then unmade, multi-millionaire died in poverty in 1947.

The General Motors Company Expands

World War II was good to GM. The company made a lot of the weaponry for the allies; it also made warplanes and trucks for Nazi Germany.

Writing in The Washington Post (November 30, 1998), Michael Dobbs pointed out the irony: “When American [soldiers] invaded Europe in June 1944, they did so in jeeps, trucks, and tanks manufactured by the Big Three motor companies (GM, Ford, and Chrysler)…It came as an unpleasant surprise to discover that the enemy was also driving trucks manufactured by Ford and Opel — a 100 percent GM-owned subsidiary — and flying Opel-built warplanes.”

By the mid-1950s, General Motors was the biggest company in the U.S. and the world’s single largest employer.

The First Oil Price Shock

Then came the oil shock of 1973. In its October 2006 issue, the magazine Canada and the World reported “Very suddenly, drivers wanted fuel-efficient cars and GM was trying to sell them eight-cylinder models such as Cadillac Eldorados, Chevrolet Monte Carlos, and Buick LeSabres.

“Meanwhile, in Japan and Europe car companies were already making small cars. Their crowded countries with narrow roads meant that North American-sized cars simply wouldn’t fit. Canadians and Americans looking to save money started snapping up small cars, particularly Japanese ones.”

GM’s market share steadily declined; from about 45 percent in 1981 to about 35 percent in 1989. Between 1980 and 1992, GM racked up losses of almost $30 billion. And still, the highly paid executives didn’t catch on.

Old Thinking in the Executive Suite

By the start of the new century, GM and its fellow North American manufacturers only dominated one sector of the market – the big sport-utility vehicles.

The profit-margin on these huge cars is high, so GM focused most of its attention on the sport utility vehicle (SUV). U.S. automakers could earn $10,000 or more in profit from the sale of a big SUV, compared with a few hundred dollars when they sell a compact car. So, GM followed the money.

Once again, the company was blind-sided by gasoline prices. In 2005 and 2006, sales of SUVs dropped by up to a third. Fewer people were willing to pay the more than $100 it cost to fill up a Chevrolet Tahoe.

Sales in 2008 went into free-fall. Bloomberg News reported that in February 2009 the company’s sales were 53% down from 2008, and its market share was now only 18%.

On March 6, 2009 GM shares trade at a low of $1.27 US. According to the Centre for Research in Security Prices at the University of Chicago this is the lowest price for the stock since May 4, 1933.

Billy Durant Image Courtesy of General Motors

Thomas Doerfer

Hummer H2, symbol of a failed business strategy

Between 1886 and 1898, about 300 cars were built and sold. A century later, worldwide car production was more than 53 million.

BAILOUT

When the financial crisis hit in late 2007, GM was in bad shape.

Free market economics dictates that businesses in this kind of trouble should

be allowed to go under. Politics says such an outcome is unthinkable.

About 9,000 people work for General Motors Canada (GM), almost all of them in House-of-Commons-seat-rich southern Ontario. For each GM worker another nine or so rely on the company for employment. These include workers in auto-parts factories that supply GM, caterers, bank tellers, and a host of other support services.

By Ontario Premier Dalton McGuinty’s count shutting down GM Canada would mean losing a total of 85,000 jobs. Add Chrysler, which was also in dire straights, and the total is more than 140,000 lost jobs. And, those support jobs provide work for yet others. Letting the two car manufacturers fold might cause a cascade of bankruptcies and factory closures on a disastrous scale.

So, the federal and provincial governments, between them, put in $10.6 billion of taxpayers’ money to prop up General Motors.

In April 2010, GM’s Chairman was seen in television ads saying “I’m here to announce we have repaid our government loans, in full, with interest – five years ahead of the original schedule.”

However, as Derek DeCloet points out in The Globe and Mail (April 24, 2010) that claim isn’t all it appears to be. U.S. And Canadian governments still own $50 billion worth of General Motors stock as part of the bailout package. Will the public every get its investment back?

DeCloet writes: “...here’s the dirty little (not so) secret about the car-making business: as far as investors are concerned, it’s toxic...It’s very hard to make a consistent profit.”

DeCloet calculates GM needs to sell $190 billion worth of vehicles to make enough Canadians to get their money back.

In 2009, the company’s sales were $105 billion.

“Where the big Detroit auto-makers have clung to the idea that [showy] power and size, ideally at a low price, are what sells cars to Americans, the competition’s realized that style is ultra important in a world where cars are fashion items…

“A quarter of a century ago, 80 percent of new cars were bought because the old one had died. Fifteen years ago, that figure had fallen to 60 percent.”

BBC News