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The big picture: GM must take tough decision

Last year everything looked peachy. General Motors turned over $193bn. It made $3.7bn profit, selling nine million cars. OK, so the return on sales was just 1.9%, below what many of its UK dealers would expect to make – but it was profit.

This year, however, the world’s largest car company is running on empty. A loss of $2.257bn (£1.3bn) so far this year wiped out profits from its financial services company GMAC (analysts were already asking whether GM is really a carmaker or finance lender).

In America, GM is locked in a seemingly endless spiral of discounting, allegedly giving away an average of $4,000 (£2,287) per car just to get consumers to buy one. And that’s just the tip of the iceberg. Get your mind round this figure: $5.2bn (about £3bn). That’s how much it cost GM last year in health care for its 1.1m employees, retirees and dependents in the US.

For every car and truck made in America, the health care bill alone adds about $1,500 (£860). It’s money that could be invested in the design and development of a lot of new cars. Some action has been taken: a deal cut this week with unions will avert this year’s expected £1bn bill increase.

Now GM has Delphi to contend with. Spun off from GM in 1999, the component supplier’s slide into Chapter 11 bankruptcy protection could cost the carmaker up to $12bn (£7bn) in pensions and provision liability for its 25,000 employees.

So, could GM crash? A few years ago such a question would’ve been unthinkable. But now… It’s still unlikely, but not impossible. Bank of America last week put the odds of GM following Delphi into Chapter 11 at one in three.

What GM needs now is backbone. It must negotiate hard to get out of its binding union agreements so it can downsize plants and staff. Car discounts will have to be cut back, even if this means losing sales.

What needs to emerge is a leaner, smaller GM, with fewer brands and fewer models.

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