Monday, June 30, 2008


General Motors Update!

Hey, guess what? America’s stupidest company, General Motors, decided this month that maybe it was time to make some really good fuel-efficient cars. So, with great aplomb, they announced that they are going to begin development of two new small cars.

Way to go, guys! 26 years after the well-made Honda Civic hit the US, you’ve figured out that over the long run gas might get expensive and you will need to build a decent small car. Sure, GM has (outside of the relatively teeny Saturn division) three small cars, but two of them (the Pontiac Vibe and the Chevy Aveo) are made by others, and the third, the Chevy Cobalt, is one of the crappiest cars manufactured today (believe me, I have driven Cobalts, and they are terrible). For the past two decades GM has focused its engineering primarily on huge SUVs that now are selling (if at all) at huge discounts.

After three decades of blaming labor for its problems, it’s becoming apparent to everyone, even investors, that GM’s problem is an utter failure of long-term decision making. Setting aside the damage this has done to communities like Detroit and Flint, consider the incredible loss of value these boneheads have created. GM bonds trade at six levels below investment grade (at B-), meaning that they are so far into junk bond status that raising money to build a decent small car is going to be very expensive, so they will have to burn through cash reserves. GM stock now is worth less than it was in the 1950’s—so if you bought GM in 1958, say, and held it, you would lose money selling it now.

In fact, GM’s market capitalization (the total value of its stock) is now about $6 billion. That sounds like a lot, but it is a pittance compared to every other component of the Dow Jones Industrial Average. The next smallest is Alcoa, at about $29 billion, and ExxonMobil has a market cap of about $460 billion. Toyota’s market cap is about $150 billion, meaning that Toyota is worth about 25 times as much as GM.

Toyota is worth 25 times as much as GM. Guys, do you still think that it must all be the fault of the people who actually build the cars? GM isn't exactly a whiz at marketing either. We all know what a Civic and an Accord are, because those names don't change. However, GM's marketing gurus constantly change the identities of their products, making establishment of a brand very difficult.

Actually, GM can engineer and build good, innovative cars. The Cadillac CTS and Chevy Malibu are good cars. And, of course, GM spent $1 billion to develop the technologically successful EV-1 electric car. Those who got the cars loved them. GM, naturally, then decided to kill the program and shred the remaining cars. That was five years ago.

Do you think there would be interest in an electric car today? Sure there is, and in several years GM plans to produce one. Sigh.

If this seems personal, it is because I grew up around GM executives, who over a few drinks would uniformly blame working people for whatever problems the company had. I have never, never, heard a GM executive or former executive actually accept responsibility for what has happened. Yet, the proof of their failures is in the numbers.

GM built the EV-1 using federal subsidy.
Well, then, by dumping the program and shredding the cars (essentially making the technology unavailable for later analysis), that makes it even worse.
Can I sue you for defaming my big trial client?
Oh no-- the damages will probably include forcing me to drive a Cimmaron again.
For years, my "conservative" friends (including my father) blamed ALL of GM's (and Ford's) woes on the godless unions. They could not conceive of the fact that the $20 million a year CEOs and boards were some how out of touch with the American people, that cost-cutting efforts (including skilled labor) wouldn't someday hurt, that expensive ads don't replace quality and innovation.
Finally, after years of Enron ("The smartest guys in the room"), Qualcomm, and all the rest, my dad is STILL blaming the unions!
I drive a Mazda and can't stand GM vehicles, big or small. This company could be on its way out.

First, congrats on the victory o' Spain!

Second, the incredible thing about Mazda is that they build cars in Detroit (actually Flat Rock, just to the South), including the well-regarded Mazda6, using the same labor pool GM has access to. (Mazda has a long-term affiliation with, but is not majority-owned by, Ford).
Even Toyota thought continued truck and
SUV sales were a safe bet, investing $1 billion dollars to build "full
size" trucks in Texas and $1.25 billion to build SUVs in Mississippi.
Hindsight is always 20/20 and there is a lot of that going around
today. Gas was getting more expensive, but so were most products. Until a year ago US gas prices in constant dollars weres about the same as the mid 70s.
Even the most bold of predictions could not have seen oil rising so far so fast and the sea-change that would bring in consumers

If your comparison was valid, Toyota would not be worth 25 times as much as GM.

Toyota did start building a big truck, the Tundra. But at the same time they developed the Prius and the Yaris, which are both cutting-edge fuel-efficient cars. In the Cobalt's segment they offer the Corolla, which is a very good car. They lead the world in developing hybrid technology. And that foresight is paying off.

No one could foresee gas prices spiking? Are you kidding? Toyota and Honda have acted for two decades on exactly that expectation. They are now reaping the benefits.

Your unwillingness to see that GM's shortsightedness isn't universal is pretty typical up there. That's the cry now, isn't it-- "No one ever thought gas prices would rise!" Please-- everyone knew that a commodity with limited supply and increasing demand was going to get more expensive. Even I learned that much in college econ.

So far, so fast is the key. Prices when up, people stil bought trucks and suvs. The current rise is both eye-opening and transformative.

GM has also offered competitive, economical cars. GM actually leads or is very close to the leaders in most segments. (despite your rant, the Cobalt is actually a very capable, quality built, nicely priced vehicle, and is rated 36 MPG highway) But millions of people chose the trucks and suvs from all manufacturers for many years. So wouldn't you have criticised GM if say 10 years ago, while truck/suv sales were going through the roof, they had announced they were discontinuing development of the nex generations of those vehicles to concentrate on small economical cars? Remember this would have been at a time Toyota, Nissan, and Honda were salivating at the possibilities in the US market, but constantly missing the mark.

I will admit that the rapid pace of change puts GM in a bad spot. If they can survive, they have some very good products now and more in the near future.
George- it's not just me but the financial markets that think GM has made terrible decisions. They did not pay attention to important market segments and got caught short while focusing on high-profit SUV's. Their competitors made different, better choices. You seem to assume that a company can't both make a good mass-market truck, SUV,and a good small car at the same time, but Honda, Toyota, and Ford have done exactly that.

About the Cobalt, anyone who drives one and a Corolla or Civic is going to be able to tell the difference. The market reflects that.
It might be worth noting that Toyota chooses to place their U.S. plants in places like Texas, where they don't have to have unions. This is not to say that GM management is not very culpable for the current state of affairs for their company, but it should also indicate that the unions do not help the situation. Trying to blame everything on one group while totally acquitting the other is a mistake.
In 2005 GM's CEO reported worker and retiree benefit costs at $1500 per vehicle. With additional overhead included, the US manufacturers were at a $2500 per vehicle disadvantage compared to their Asian competitors. According to a 2005 LA Times article, GM "has 2.5 retirees for each active worker, faces legacy costs of $87 billion in pension obligations and $60 billion for retiree healthcare." While management may be partly to blame (although $20m in salary is a pittance in comparison to these costs) for the current demise of GM, one cannot discount the enormity of the whole the company has dug itself into. Past moves have been nothing more than rearranging the deck chairs on the Titanic; current moves may be more of the same or, maybe, steps in the right direction. If I were a betting man, I'd say the company, like Chrysler, will go private and use that vehicle to make the necessary changes.
What good small car does Ford make? Focus is ugly, underpowered and has terrible ergonomcs.

And what good full size truck does Toyota make? Don't believe the commercials, the Tundra is no where near the Ford and GM competetion in terms of actual payload, power, and interiors. Drive and compare and you'll see Plus, beleive it or not, while no truck is great, the GMs beat Tundra in gas mileage.

Conventional wisdom out the door.

I believe GM is a much better company than you give it credit for. The market often overreacts both ways. Last October when the stock shot from $29 to $43 in a month did that mean the company had made all the right decisions? They really haven't changed anything since then except to announce the shift in product development away from trucks. Is this what made thier stock tank? Of course not. The game changed, for everyone. Not hard to see energy as a future issue, just impossible to time it exactly. And no one did.

I believe the stock is oversold. Time to sell was in October when it was $42/share. $11 looks mighty tasty.
Anon. 2:31--

The market does often over-react to things in the short term. It then corrects. The trend on GM is very long-term though- a loss on stock bought in 1958! Obviously, management decisions are to blame. Don't forget, signing those union contracts was a management decision, too, one which turned out to lack foresight (though it was made in common with many other companies at the time).

I'm not talking about a short-term change in oil prices and stock value, but the very long-term problems of a company that failed to learn the lessons of the oil shocks of the 1970's, failed to focus on quality when it faced quality Japanese competition, and that somehow managed to simultaneously fail to have quality products in some segments at the same time it marketed too many cars in those same segments.


The legacy costs are not the main reason GM isn't selling product and has lost market share; the problem is their products. Still, what could have really helped GM was passage of universal health care under the Hillary Clinton plan in 1993-- it would have relieved GM of a significant portion of those costs. Yet, for some reason, GM's management did not support or lobby for that change. Whether universal health care is right or wrong for the country (it's debatable), it would have been great for GM, and they failed to act.
Consumer Reports says the Focus is much better than the Cobalt. I'll believe that over you, Mr I Own Lots Of GM Stock Guy.
Prof - from what deep pocket was GM to develop those small cars ? The same one that it used to develop the large SUVs that have supported it until recently. The problem here is that, with high legacy costs, the company could not have its cake and eat it too. It chose short-term cash flow via what the market demanded, SUVs and pick-ups, because it could not choose the long-term "invest in small cars because gas will likely go higher" option. To be sure, it may cost them dearly, but I submit that had they chosen small cars back at that SUV/Small Car fork in the road, they would not be here today for us to argue over. Again, legacy costs cost them the ability to diversify and make what could have arguably been both short- and long-term decisions that would have capitalized on the existing market and mitigated the impact of future changes in the energy market.
Actually, GM easily could have afforded to do both. In 2005, it was sitting on $45 billion in cash reserves which it could have spent to develop several vehicles at the same time. Instead, it sat on that money and now market share is frittering away.

They chose not to use their liquid cash assets to develop new fuel-efficient hybrids or continue working on the EV-1 (which burned only $1 billion). Toyota made a different choice, and they won big.

Why is there such reluctance to holding executives to ANY kind of accountability for making such wrong choices? Yet, you GM people seem to find it very easy to blame GM's workers for... well, having health care benefits.
$45 bil. is very deep pockets.
anon 3:27

I actually own no GM stock. Yet.

And I've driven both Focus and Cobalt. Comparable cars, but the Focus felt smaller and cheaper inside, and ugly (subjective for sure), noisy and underpowered. And Ford thinks SYNC is the most outstanding feature, they hardly push anything else. I personally am not in love with the idea of MS anywhere near my car.
Gotta love CR. They haven't actually tested the Cobalt since 2005, but still somehow manage to rate it low? THat's what happens when you get a bunch of eggheads tsting cars instead of car people.
Slick move, Osler. Look what happened to GM stock right after your post hit the internet this morning at 9:
Ouch. The Razor cuts deep.
What they did to Flint is despicable. I know Moore's movies are hated here. However, he isn't TOO far off the mark with his movie about Flint. I'd rather drive through Highland Park than Flint. At least in Highland Park, I know how much trouble I'm in by being there.

I like this more than Brian talking about couches,
"If your comparison was valid, Toyota would not be worth 25 times as much as GM." Ouch!

Haha, I'm sure you saw that Moore movie, my favorite is the lady talking about colors and seasons.
You're missing the most dramatic turn in the story. GM is making a bold - many say fool-hardy - move with the Volt. They've set crazy-ambitious goals for this car and if it fails, GM might be done.

Atlantic Monthly has a very interesting article on the who effort.
GM is trying to make some better decisions. They are looking to nix the Hummer (it looks like they will either sell it to someone else [UNLIKELY in this market] or stop making it all together). They are trying to come to an agreement with all of their authorized dealerships and once they do that, bye bye gas guzzler. (Although, to be fair, the Hummer doesn't do quite as poorly on gas mileage as most people think, averaging somewhere around 17mpg, according to my dealer source.)
It looks like there is still demand for big SUV's, if it is a Toyota: click here
WHY DID they kill the Electric car, Anyway?????

That movie was amazing. It was so sad at the end and we could have been SO FAR AHEAD right now if they would have really started making them.

I would buy an electric car in a second if there was one under 50K that could drive more than like 35 MPH. I would buy a PRIUS if I could afford that, but I can barely afford appliances from Craig's list for my new house right now.

Toyota often gets a bad rap for simply SUCCEEDING where GM never could. They did not invent the car, but they reinvented and made it excellent, and sold the heck out of theirs and now they are the bad guys? Meanwhile Detroit is selling a lot of unimaginative bad quality cookie cutter crap.

If you just look at the pathetic loser execs in Roger and Me, wow. They are SCARY.

not as scary as The Rabbit Lady - Remember her? "Pets or Meat?"

AND HOW COULD THEY NOT HAVE ANTICIPATED that gas prices would go up. it takes a car company roughly three years to get a car from concept drawing board to market. That is enough time since the war started etc. The war started like 6 or 7 YEARS ago. THEY COULD HAVE BUILT MORE ELECTRIC CARS in this time. But then, Toyota has not done that either.
Is it just me, or could GM have spent a lot less time making copies of one car under different brands? You know, like having an Oldsmobile and a Cadillac with the same body style, or a Pontiac and a Chevrolet and an Oldsmobile that all look exactly alike. How about picking one brand per car and expanding the available options there?

The company that makes Dodge ditched Plymouth? years ago. This should've been a sign, IMHO.

To GM's credit, they did do that. Few of their cars cross over all the brands. The minivans did, and didn't sell anywhere, and that may have been the final straw.

However, backing away from that strategy may have kept them from using more of the advantages they built up in the Saturn brand, which did do a good job with small cars.

I've always wondered why rental fleets have tons of crappy Cobalts but no decent Saturns. Seriously, nothing has soured me on GM's products so much as renting them, driving them, and hating them.
That Toyota Sequoia sales were up in May probably reflects three things. Toyota is offering higher incentives to move them, people in the price category are less affected by gas prices, and those who do consider gas prices probably assume that because it is a Toyota it is more efficient. OF course this is false; the highly rated Chevy Tahoe actually gets better gas mileage by 1 MPG city and highway.
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