GOLDING’S TAKE: Successful sales campaign piles up the losses at GM

By just-auto.com editorial team | 21 July 2005

GM was knocking Ford all over the park in its home market in June. Ford's financial results on Tuesday showed the consequences. They dumped $US1.4 billion of profit in the quarter relative to the same quarter last year.

It was all down to GM's extension of the employee car scheme to the general public. GM was thrilled by the response to its cunning plan, by the additional volume, by the inventory clearance and by the growth of market share.

But now we see GM's side of the story in its Q2 financials. Its profit in North America in the second quarter was …well there wasn't any. GM lost even more than Ford in the quarter relative to the same quarter last year - $1.5 billion. Not such a cunning plan then.

So here we have the two elder statesmen of the auto industry who face the common foe of Japanese competition and the restrictive practices of the UAW, knocking six bells out of each other and to no avail.

The annualised rate at which GM is losing money relative to last year is now almost exactly the same as the annual amount that they have to devote to the cost of employee health care - $6 billion a year.

If GM needs to know what has to be done, the answer lies in a phone call to their boys in Europe where it has matched production to market share, closed unwanted factories and sacked thousands of people. Result? GME is back in profit with a $80 million positive swing.

But instead of sounding more devoted to draconian action, the language yesterday was all about mediation. Where once chief executive Rick Wagoner was talking about going it alone in chopping out health care costs he is now back to merely describing the cost as "an extreme burden on our ability to compete."

At the Q1 briefing, there had been a gentle but confident resistance to talking about future plans for dealing with the labour cost, and then for the first time, a refusal to help with profit forecasts. It felt like the company was poised to act.

Then at the AGM, when the board's resolve was on public display, there was strong language which suggested action was imminent.

The salient quote from Wagoner on that occasion was: "It's clear to us that these efforts are not yielding the progress that we need fast enough. The health care crisis is putting our future at stake…and so we must act now."

Here we are, another billion and a half later, and still nothing. The company made a silly contract with its employees when health care was comparatively cheap and it cannot sustain the position now that health care is expensive.

There does not appear to be any option other than reducing the wage bill by reducing total numbers employed (the 25,000 reduction announced at the AGM is nothing more than normal annual wastage) and then by reducing the cost of those who remain. No amount of posturing about buying more components from China, Korea and India - as they did yesterday - is going to help avoid the plain truth.

Rob Golding