End of the Line for Generous Motors? by Joseph
A new cap on pensions means the days of big bennies are out.
Can GM Turn Itself Around? by TCC Team (2/20/2006)
Is there enough time, analysts ask?
For General Motors’
Rick Wagoner, March ought to be a good if not a great month. His beloved Duke
Blue Devils are an odds-on favorite to sweep through the NCAA Tournament, and
GM’s retail sales are showing signs of moving in a positive direction after two
years of enormous difficulty.
However, while no one is
predicting that GM’s board of directors has asked Wagoner to prepare a
resignation letter, the gossip around Detroit is that he could be reaching the
end of his tenure as GM’s chairman and chief executive officer.
Until recently, Wagoner had been
viewed as GM’s one indispensable executive. He was the one guy who could keep
everyone inside the company focused on the key objectives of turning around the
struggling giant and fend off the challenge from Toyota, which is threatening to
take away GM’s crown as the world’s top automaker.
Wagoner’s also taken on some of
the toughest jobs over the past year such as overhauling GM’s marketing effort
and meeting directly with union officials to explain the need for
Over the years, Wagoner’s career
was the very definition of American corporate success, starting with his days at
Duke to the Harvard Business School and the fast-track at GM that brought him a
senior management position back in the early 1990s even before he had turned
The mere existence of gossip,
which includes speculation that Kirk Kerkorian’s car guy Jerry York might step
in as chairman, suggests just how far GM’s situation has crumbled over the past
year. “GM really needs another agreement with the UAW,” suggested one analyst
who asked not to be identified.
The positive spin from inside GM
at the moment is that company is on the verge of a breakthrough agreement with
the United Auto Workers that will eliminate the potential for a meltdown at the
bankrupt Delphi, while the new products are beginning to click with consumers.
In fact, Paul Ballew, GM’s
executive director of market and industry analysis, said last week that overall
GM’s February sales performance was very promising. GM’s incentive
spending dropped by $1,000 per vehicle from February 2005, while sales to
corporate and government fleets declined to 25 percent of the company’s total
sales, compared with 30 percent only a year ago, according to one survey.
Himanshu Patel, JPMorgan auto analyst, also said that GM’s results looked
healthier than in recent months because of the drop in fleet sales.
Wagoner has declined to offer
any financial guidance for the rest of the year, and some observers suggest this
actually a pretty shrewd move on the GM CEO’s part because it sets the stage for
a positive upside surprise later in the year.
Meanwhile, GM finally could manage
to break even in Europe and build on its strong position in China, while moving
ever closer to the magic day in late 2008 or 2009 when the actuaries are
predicting that the company’s legacy costs will begin to drop in North
“What is going to be key this year
is if we can continue the successes in new model launches and improving the
bottom line of results in GM Europe,” Wagoner said during an appearance at the
Geneva Motor Show. “Almost two months into the year, results are encouraging,
but are too early to draw any conclusions although progress is pleasing and it
is all going to plan.”
However, Wagoner also has far less
control over what goes on at GM than he did only two years ago. The revolt by
investment fund managers has undermined GM’s credit rating, forcing the
automaker to try and auction off GMAC, one of its most prized assets. Too, the
drive to revise GM’s labor contracts has been moving slowly and there
are few signs of progress.
Darren S. Kimball of Lehman
Brothers said in a research note that potential work stoppages Delphi Corp. and
Tower Automotive Inc. could have a significant impact on GM, Ford, and Chrysler.
“Sliding sales may prove not to be the biggest problem that the domestics have,”
Kimball wrote in a note to investors.
The bankruptcy of Dana Corp. is
also likely “to further unsettle investor sentiment toward the sector,” Kimball
said in his note.
GM’s market share, despite the
positive signs in February, is now hovering around 23 percent. GM does expect to
lose some U.S. market share as it pulls back on sales to rental car agencies.
But GM needs to decrease its rental sales in order to improve the value equation
for retail customers.
Rental cars when they are resold can depress the value of the typical consumer’s used GM model, making it harder for them to trade for another. The limited trade-in value of domestic brands has been a major factor in the growing popularity of Japanese brands such as Toyota and Honda.