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April 19, 2005

UK: Wall Street speculates on General Motors bankruptcy

The speculation on Wall Street last week was how long it would be before General Motors declared bankruptcy.

The speculation on Wall Street last week was how long it would be before General Motors declared bankruptcy.

The adjustments that the company has made to its production schedule in the first two quarters of 2005, and the warnings from credit rating agencies that the company’s huge debt faces downgrading to junk bond status has focused America’s financial markets on the problems of the world’s largest car maker.

Wall Street can over-react both on the upside and on the downside, and the crisis of General Motors is probably not as imminent as investors seem to fear. Two years ago the investment community saw General Motors as an example of how an aggressive price and volume led strategy could solve some of the carmaker’s problems. That was too optimistic but GM is after all still the market leader in the world’s largest vehicle market, and it has a product renewal programme that gives it at least one more shot at stabilising its market share in its core market.

There will be a rebound and the company will claw back perhaps a couple of points of market share as its new models arrive in the next two years.

GM’s falling share price is a reflection of the anticipation of bad news, and when the bad news actually arrives people may start to look again at some of the upside potential of the company.

Small chance of long-term turnaround

But it is difficult to see a long-term turnaround path for the group. The problems of General Motors have been widely known and recognised for at least a decade, but the company seems incapable of taking effective action.

Almost no one outside the company expects GM to reverse its steady long-term secular decline in market share in North America.

The company’s products are widely panned as uninspiring. The discounting and incentives of the last three years have flooded the market with nearly new GM products.

Fully a third of GM’s new vehicle sales are to employees, their relatives or fleet rental buyers, while private new-car buyers are staying away from GM’s profile in droves.

The company is suffering from the liabilities and attitudes that entrenched themselves decades ago when the company dominated the North American market. GM has studied Toyota but not taken any effective action to adapt its own culture to complete.

The company carries a heavy burden of health care costs and pension liabilities that represent a structural disadvantage on every car produced that the company seems powerless to address. The company persists in a confrontational approach to negotiations with suppliers that may have made sense when the company was the leader of an oligopoly and was seeking to extract monopoly rent from suppliers that had nowhere else to go, but which is perverse as a strategy when new domestic assemblers already represent a much more attractive prospect as a customer.

The latest round of negative talk about the company’s future will add to the self-inflicted wounds of poor purchasing and product development strategies and ensure that it sinks further down the list of preferred customers of the more innovative and capable suppliers.

Prospects of leveraged buyout seem slight

Although General Motors is not in any imminent danger of collapse, investors in New York that we talked to were uniformly pessimistic about the company.

There seems to be no mechanism for a renewal of the company short of bankruptcy.

In the past it would have been thought that GM’s size meant that it was practically impossible to envisage an LBO of the company — but the revelation in last Friday’s Financial Times that Deutsche Bank had been approached about an LBO of DaimlerChrysler suggest that size alone is no longer an obstacle, and a few years ago Carl Icahn looked at putting together a buyout of GM. But although some such dramatic change appears to be the only way that GM can achieve the culture change that is necessary – short of bankruptcy – it looks a remote contingency.

Unless GM’s pension and health care liabilities can be addressed the company’s intractable cost position is practically a poison pill to would-be acquirers. And turning the company around would be a lot harder than at DaimlerChrysler, which has shed some of its over-ambitious commitments over the last year such as Mitsubishi, and could probably quite easily shed others such as its Smart brand operations. DaimlerChrysler has created product and productivity momentum in its Chrysler operations in North America, and Mercedes-Benz remains an immensely valuable and only slightly tarnished brand. In addition there is a depth of management talent within the company obviously available to do the job. General Motors has none of those advantages – only marginal businesses such as Cadillac have made any progress in their product positioning of the last years. The company’s overseas operations remain a drag on the group’s performance, and the prospect of a radical cultural change in management approaches or UAW strategies appears very distant.

Despite the severity of General Motors’ situation, last week’s management reshuffle appears to be doing little more than rearranging the deckchairs on the Titanic.

In the meantime, supplier and consumer confidence in the company will ebb further.

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