GM in a No Win Position
You have to feel sorry for the beleaguered leaders of General Motors. The company is suffering through a perfect storm. Automobile sales this year will be fourteen million units, down from the sixteen million the company had expected. Down even more are sales of large SUVs and trucks, on which GM had pinned its hopes for profitability and cash flow.
The company is now down to about six months of certain liquidity. After that, there is great uncertainty.
The company has announced new rounds of lay-offs and restructuring to enable the firm to return to profitability. These plans are unlikely to be successful for one simple reason: GM’s problem is not just the current costs of producing an automobile or a truck. The company is hemmed in by fixed costs of servicing a unionized and white collar retiree group with benefits negotiated during a time when GM was a much bigger, and more successful, company. There are various estimates for how much these fixed costs are, ranging from $1000 to $1500 per automobile.
GM can not hope to overcome this disadvantage at its present size. It is competing in a market with very efficient Japanese competitors, unburdened by these high fixed costs of retirees. So, even assuming that GM could reach the same cash costs of producing a world-class automobile as can Toyota and Honda, that still leaves them well short of the amount the company needs to pay for retiree benefits. The company is gradually being dragged under by old promises that even it can no longer meet.
GM is cutting costs where it can save cash today. Inevitably, some costs will go at the expense of customer benefits, in features, reliability or convenience. This can only make worse the first problem GM faces, a value proposition, its performance for price, that customers deem unworthy. (See our July 7, 2008 blog: "Value in Two Hostile Industries".)
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