38-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 cannot 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 key 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”.)

Posted 8/4/08

Update:

GM declared bankruptcy in June of 2009.

It appears in 2022 that the Japanese manufacturers continue to enjoy a cost and performance advantage over their American competitors. The Japanese continue to make a higher profit per auto produced, virtual proof of their cost advantages.  These companies are focused on Reliability and quality. Objective reports find Japanese cars to be better engineered, safer, longer-lasting and less expensive to maintain. Hence, their higher profit per automobile sold.  The Japanese then use their higher profits to maintain their quality advantage over their competition. Over time, customers see GM as “failing” in their implied promises to customers. Some of these customers then gradually migrate to the Japanese competition, Increasing their share and consequent economies of scale.

In 2022, GM is again a publicly traded and profitable company. Unfortunately, it’s long-term outlook for competitive labor costs is not good. GM began contract negotiations with its union in 2019 with the hope that it might be able to cut labor costs to bring them closer to the costs of the US factories run today by foreign automakers. This hope vanished as the union went on strike, costing GM $2 billion. GM’s labor costs, and especially its health care costs, exceed those of its worldwide competitors. Over the long-term this is very bad news for the company’s future.

High retiree costs, a cost component which increases the cost of current labor, saddles GM with a significant rate of cost disadvantage against its Asian competition. HERE is an approach to analyze visible cost advantages and disadvantages against competition.

***

THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.