THE WEEK THAT WAS: About that GM loss...

By just-auto.com editorial team | 15 February 2008

In a week in which several major western automakers - GM, PSA and Renault - announced their 2007 financial results, it was GM that got the banner headlines, especially at home.

'Record $US38.7bn loss as automaker offers 74,000 workers buyouts' pretty much summarises the headlines we saw in print and on screen after GM's announcement on Tuesday. But, as ever, the devil was in the details and said details weren't as bad as some of the daily blahs would have had their readers believe.

As we pointed out at the time, GM said the loss was almost entirely attributable to a non-cash $38.3bn special tax charge in the third quarter. Let us paraphrase a US-based industry commentator on that one: "The company earlier booked a tax credit in anticipation of events that would entitle it to same. Things didn't pan out so the credit had to come back off the books [in the third quarter]. It's only a book entry, paper money, no cash actually left the automaker's treasury."

Not that the results were necessarily all good, even after that pesky tax charge has been accounted for. For starters, GM Europe, which had in recent reporting periods looked like being finally well on the up thanks to its nice product line even the mother ship has started importing (ref. Saturn Astra now on sale in the US and planned imports of the next-generation Corsa due in 2012).

But then it tanked in full-year 2007 with earnings before tax of $55m, down significantly from earnings before tax of $357m in 2006. The fourth quarter was about as grim.

GM, not unreasonably, blamed a "markedly softer" German market (thanks to the government's Janauary VAT rate increase which had drawn a lot of potential 2007 sales forward into the back end of '06) as well as unfavourable exchange rates.

But there were higher points: GME sales were up 8.9% in 2007 to a record 2.2m units. The parent's core automotive business generated record revenue of $178bn in 2007, a $7bn improvement over 2006, aided by what it called "explosive" growth in emerging markets - and "favourable" foreign exchange against the ever-weaker greenback.

Better yet, the global automotive operations actually posted pre-tax earnings of $553m in 2007 (helped not a little by profits in the Latin America/Middle East and Asia-Pacific divisions) compared to the pre-tax loss of $339m in '06. Inevitably the 'special charges' et al kicked in to write that headline-grabbing record net loss in red ink, and losses at (now only part-owned) finance unit GMAC added to the woe, but it wasn't all bad, and there were encouraging signs that, even with the new, 74,000-worker buyout offer placed on the table this week, that Rick Wagoner's cost-cutting and restructuring is actually starting to bear fruit.

Speaking of that (and there was also talk this week of another 9,000 cuts at Ford), we recently heard an interesting take on such 'voluntary separation programmes'. This particular industry commentator argued that the cuts, though costly initially (GM's latest offer will cost roughly $US45,000 to $120,000 a head plus benefits depending on the worker's age and seniority), would eventually benefit the car makers - once they'd booked the severance costs, of course - because, from then on, they'd be paying many of their remaining workers only about half the current UAW-scale wage as well as lower health and retirement benefits (under the UAW deal agreed last year).

On top of that, there are likely to be productivity gains from a younger and healthier workforce (many UAW-scale people are close to retirement and the latest GM offers seem generous enough to prompt many early exits). Morale would also likely improve, it was argued, because most of the new hires would be on the same lower rate, as the incentives would have encouraged many of the old hands to retire or go retrain elsewhere.

It's an interesting theory, at least, and we shall see.

Today's confirmation that Ford would keep the Fiesta name for the next-generation model due out later this year - and again sell the car in the US after almost 30 years - was intriguing for what it didn't say: no mention of South American production, though North American output was promised.

We're still waiting to hear from the Blue Oval about a planned successor (if any) to the current Brazilian-made line (essentially lightly restyled variants of the German-designed originals). Our Man in Sao Paulo, Fernando Calmon, could not get Ford's local unit to comment but today's news prompted him to recall two stillborn projects from a few years back - there once were plans to build a Fiesta-derived small sedan and/or a little SUV to sell in the States - neither happened. So there's a certain irony in today's announcement that North America will again see a Fiesta and, unlike the last one sold there from '78-'80, this one will be a sedan, as previewed last month at Detroit in the form of the Verve 'concept'.

Finally, our very own emerging markets specialist, Mark 'Coolbear' Bursa has run an experienced eye over China's Geely, and we published his report today. It appears that the Chinese auto industry has finally become a little more realistic about exports to established western markets in general, and the US in particular, and there is much less hype and a lot more caution in its predictions these days.

One statistic in Mark's report caught this news editor's eye: "...2015, by which time China could be building upwards of 15m cars a year..." That's a lot of cars by any country's standards. And by this industry's standards, 2015 is little more than one model generation away.

Enjoy the weekend,

Graeme Roberts
News Editor