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General Motors (NYSE: GM) is the biggest of the Big Three, the ponderous American auto manufacturers who have traditionally dominated the North American market. In 2007, the firm generated $181 billion in revenue and $23 million in adjusted net losses, maintaining its position over Toyota Motor (TM) as the #1 auto-manufacturer in the world. Like its fellows Ford and now privately-held Chrysler, however, GM faces impending crisis. With sliding market share in the heavyweight North American market, massive pension and healthcare legacy costs, and rising materials expenditures, GM is hard-pressed to generate meaningful profit--it hasn't done so for years. Furthermore, the U.S. government passed an energy bill in December of 2007 that will push fuel efficiency standards for cars, trucks and SUVs to 35 mpg by 2020, up from 27.5 mpg for cars and 22.5 for trucks and SUVs in 2007. This bill will likely raise production costs for GM. With mounting financial troubles, GM reportedly put a two-year freeze on funding for new research and development (with the exception of the Volt) in October 2008. ^[1]

In September of 2007, however, General Motors and United Auto Workers (UAW) union reached a monumental agreement that will allow GM to shift $51 billion in healthcare liabilities to the UAW. The deal impacts 74,000 of GM's workers and will also allow GM to replace some of its $70/hour employees with far cheaper employees. This signals an essential shift in the cost structure for GM, and now Ford Motor Company (F) and Chrysler, which will allow these US auto manufacturers to better compete with rising Toyota Motor (TM) and Honda Motor Company (HMC). When Japanese automakers first entered the US market their cars required about half as many labor hours to build as their american competitors. By 2008 this gap had essentially closed as Toyota required on average 30.37 hours per vehicle, while GM averaged 32.29.^[2]

Contents 1 Looking for a place to start contributing? 2 History and Products 3 Trends and Concepts 3.1 Rising Commodities Costs 3.2 Fuel Efficiency 3.3 International Presence 3.4 Structural, Labor, and Legacy Costs 3.5 Incentives and Financing 4 Competition 5 References [edit] Looking for a place to start contributing? How does the Auto Workers union impact GM's stock price? Add an annotation to tell us why. GM doesn't have any WikiData. Check out their 10K and add valuable data now. Will GM be the first of the Big Three to crumble? Add a bears reason or post your answer on the discussion page. How has GM performed over the last three years? Add a table to the article comparing revenue and income.

Like Ford and Chrysler, giant GM is trying to survive long enough to shrink to profitability, temporarily sacrificing market share in the hopes of regaining its bottom line. To lower fixed costs and eliminate considerable flab in the form of excess production capacity, GM is shutting down plants and laying off workers; in the first quarter of 2007, GM's efforts successfully dropped costs from USD 10 billion to 7. By July 2008 market deterioration forced the company to accelerate this process by suspending its dividend and announcing plans to raise $4 billion through asset sales and another $2 billion through borrowing.^[3] But GM's survival cannot be assured by cost cuts and capital infusion forever. GM hopes that a few new hit products will raise profits, and is refocusing on crossover-utility vehicles (CUVs) and sedans. Product reviews have been positive so far. Still, it will be challenging for GM's new models to capture attention when all of the Big 3 are using the same strategy and introducing their own new lineups.

The subprime lending crisis also hit GM in 2007, as GMAC, the firm's financial arm that offers loans to car purchasers in competition with traditional banks, lost the firm $1.1 billion in 2007 compared to the $2.2 billion boost it provided in 2006.

GM's overseas industry may be a spot of hope, however. GM Europe is profitable and the company's leading position in the burgeoning Chinese auto market is promising and may contribute to a significant amount of growth in the next few years. About 65% of GM's sales are outside the United States.^[4]

As the financial crisis in the US worsens, GM asked the Treasury department in October 2008 for a $10 billion loan to keep the company operational. The US Treasury denied GM's request and a merge between GM and Chrysler, which would save the two companies billions in redundant expenses, is likely in late 2008. ^[5]

[edit] History and Products

Almost a century old, General Motors has been declining since the 1970s, at the onset of the Asian carmaker invasion of the North American market. By the 1990s, GM was on the brink of extinction when it was saved by the sudden popularity of SUVs and light trucks, high-profit-margin cars in the American automaker's expertise. The recent turn towards lighter, fuel-efficient vehicles has been damaging for GM, however, and the company is once again struggling to stay afloat.

In 2007, GM suffered a record $38.7 billion loss, of which $38.3 billion was due to a one time charge to write down deferred tax assets. Nonetheless, the firm's 23 billion dollar adjust net loss pales in comparison to the adjusted net profit of $2.2 billion in 2006. Adjusted net loss/income excludes charges for the special attrition program; restructuring, plant closure and impairment charges; gains and losses on the sale of business units and business interests; charges associated with the Delphi bankruptcy that continue to be under negotiation; charges associated with changes in estimates and accounting changes; and certain tax related items. A gas guzzling product line has caused the company to lose market share to Toyota Motor (TM) and Honda Motor Company (HMC), while its overseas sales, particularly its strong establishment in the booming Chinese auto market, were the major bright spot. Continued pressures in the subprime mortgage market resulted in G.M.A.C.'s loss of $2.3 billion in 2007, with G.M. absorbing a $1.1 billion loss from its 49 percent stake. A year ago, GMAC contributed $2.2 billion in earnings to GM's bottom line.

The 2007 UAW labor agreement will lower the firm's healthcare and labor costs significantly in 2008. GM has already offered all 74,000 of its employees severance packages that will allow the auto giant to replace its current $28 per hour employees with $16 per hour employees as the 2007 deal stipulates. GM has also been reducing its white collar workforce, with a plan announced in July 2008 to cut 20% of white collar jobs at the company.^[6]

In addition to its primary business targeting individual consumers, GM also sells commercially and in fleets, including stripped-down models to rental car companies. Recent reductions in the latter have succeeded in somewhat bolstering GM's profit per car sold.

GM's cars are sold under a number of different brands and marque. As grouped by primary region of distribution:

• North America: Buick, Cadillac, Chevrolet, GMC, Hummer, Pontiac, Saab, Saturn
• Europe: Corvette (as standalone brand), Opel, Vauxhall
• Asia/Pacific: Buick, Daewoo, Holden, Wuling (joint venture)

Whereas GM management traditionally believed that selling cars under a large number of brands and marques helped increase market share, this thinking has been undermined by recent experience. Despite the billions of dollars of development costs for each new vehicle, new designs under brands such as Buick, Saab, Pontiac, or Saturn rarely attract buyers from other car producers. The best example of this is the Saturn marque, which has been unprofitable for every year of its 20 year existence. Recently GM began addressing this problem by announcing plans to sell its iconic Hummer division during the summer of 2008. Along similar lines, GM offers many low volume models; as more than 25 of GM's 60 models sell less than 3,000 vehicles per month.^[7] These models are usually unprofitable due to high production and engineering costs per vehicle resulting from the small volume of production. Nevertheless, GM continues building many of these unpopular cars because GM dealers still profit from them, and their discontinuation would put further strain on GM's already struggling sales network.^[8]

Today, GM is shifting gears from SUVs and trucks to lighter, more environmentally friendly and fuel-efficient vehicles. After the release of a 2006 documentary reawakened the story of GM's abandonment of its electric car venture three years earlier, GM found itself facing a tide of public disapproval. GM today is trying a new tack, leading the way in developing flex-fuel vehicles which can run on either ethanol or gasoline. Additionally, GM plans to launch the Chevrolet Volt in 2010, which will be the world's first commercially marketed hybrid plug-in electric car with a price tag of around $40,000.^[9] Despite its high price, GM expects to lose money on the first generation of the Volt.^[10]

More substantially GM continues to reduce production of trucks by closing several factories and offer a number of redesigned smaller cars such as the Malibu, Aveo (the Aveo has a 1.4 liter engine which is the smallest GM has ever sold in the US),^[11] and Cruze (scheduled to be released in 2010 and achieve 40 mpg).^[12] Similarly, GM has recently entered the CUV or cross-over market. These are vehicles which though appearing quite similar to trucks, are built like cars (i.e. tighter suspension, lower to the ground), allowing them to handle like a car. This is more attractive to consumers who use their vehicles to commute frequently. Also, and perhaps more importantly, CUV's are much more fuel efficient than regular SUVs. As of July 2008, 18 of GM's next 19 new automobile launches will be either passenger cars or crossovers, rather than trucks or SUVs.^[13] These smaller vehicles offered by GM have been well received by both auto-critics and consumers, nevertheless competition remains fierce as all major automakers seek to downsize their fleets with innovative new products. Also, a massive readjustment of product offerings is not cheap, developing new cars is notoriously expensive as is discontinuing outdated models- GM's expects to pay $1.1 billion to close four truck factories during 2008.^[14]

[edit] Trends and Concepts

[edit] Rising Commodities Costs

As a manufacturer, GM is of course very dependent on the prices of certain raw commodities, the spikes or drops of which are passed along into the company's own bottom line. Especially important are steel and oil (used to manufacture, but also influences consumer buying trends--see Fuel Efficiency below). Currently, GM is suffering from the doubling of steel prices since three years ago.

[edit] Fuel Efficiency

Combined with recent media attention to environmental problems, the consistently high price of gasoline has pushed many consumers toward fuel efficient cars. For May 2008 GM's truck sales were 35% less than a year earlier, resulting in plans to reduce truck production by 300,000 units for 2008.^[15] The government applied additional pressure to gas-guzzling car manufacturers in December of 2007 with a new energy bill that mandates 35 mpg for all cars, SUVs, and small trucks sold in the U.S. Unlike, Toyota Motor (TM), Honda Motor Company (HMC), and Volkswagen (VLKAY), GM is far behind in fuel efficient technology, suggesting that the new bill will increase GM's productions costs as the firm plays catch-up. At the same time, GM may have been wise in putting off investments in alternative fuel cars, thereby allowing other companies to bear the expense of determining which technologies were in fact feasible.

GM has a somewhat tarnished image in fuel efficiency, with its recent electric car controversy and its extensive line of fuel-guzzling SUVs and trucks. However, recent investment in flex-fuel technology and CUVs may pay off for GM as it starts to market a new product lineup to restart profitability and replace tired models. GM hopes to successfully reinvent itself to ride the wave of fuel efficiency. As part of GM's commitment to make half of its vehicles ethanol compatible by 2012, in 2007 and 2008 GM purchased two companies, Mascoma and Coskata, with proprietary patents for technology to make ethanol from materials such as papermill waste, corn stalks, and wood chips. These acquisitions take advantage of incentives for ethanol passed as part of Congress' 2007 Energy Bill.

[edit] International Presence

GM's sales continue to grow rapidly in eastern Europe, but more slowly in Western Europe due to the economic slowdown there. GM is slightly stronger in Latin America and Australia, and its 2002 acquisition of South Korean automaker Daewoo puts it in a strong position for all of Asia, where the well-established automaker also manufactures and designs for export. In 2007, the firm posted record sales in Latin America, Eastern Europe (especially Russia), and Asia. Overall, GM increased market share outside of North America by 0.4% in 2007. These markets could be major sources of growth in the coming years.

GM's greatest overseas hope is China, where it leads all automakers in sales and is poised to take advantage of a booming automobile market. While G.M. posted profits in 2007 in its European, Asian and Latin American auto operations, its North American auto business lost $1.5 billion for the year. Volume sales rose 20% for GM in China compared to 2006 and GM became the first manufacturer to sell 1 million vehicles in China. The Rise of China's Middle Class and trends of increasing luxury consumption combine to promise a lucrative stronghold for GM in China, where brands like Buick are well-regarded and in high demand. GM is also pursuing joint ventures and export manufacturing possibilities in China. Emerging markets provide a good opportunity to continue producing "legacy" products from Europe and the United States and thereby stretch additional revenue from vehicles now obsolete in wealthier markets.

[edit] Structural, Labor, and Legacy Costs

Crippling overcapacity plagues the monolithic company, and GM's turnaround plan includes aggressive measures to cut back on structural (fixed) costs by shutting down under-used plants and laying off a sizable portion of its workforce. Along with this, in the first quarter of 2008 GM undertook a reduction in dealer inventories in order to keep these inventories in line with demand, thereby improving margins. Structural streamlining is not enough, however--GM also has a nightmare in legacy costs. With an estimated two to three retired employees for every active employee, GM must deal with a massive health care benefits burden of about USD 6 billion per year. GM's salaries and benefits are among the most expensive in the industry, with pension and benefit costs making up almost 60% of the company's total labor expenditure.

GM is dominated by the powerful UAW, and after a certain point it can do little but try to convince the union to give important concessions in order to keep the company afloat. The UAW under the leadership of Ron Gettelfinger seems determined not to reverse seventy years of union gains, but Gettelfinger has also been portrayed as becoming increasingly sympathetic to GM's requests. The September 2007 deal reflects the union's growing sympathy and hope that it will avoid the partially union-driven decline of the airline and steel industries. Nevertheless, GM continues to face considerable pressure from the UAW, as seen with a strike at American Axle (a major parts supplier to GM) during the first quarter of 2008 that is estimated to have cost GM $800 million before being settled by a contract agreement in May 2008. A number of local factory specific strikes also continue to occur regularly. Ironically, due to deteriorating demand in North America it appears that GM would have had to severely curtail production at the effected factories anyway had there not been strikes.^[16]

In spite of these ongoing tensions, the September 2007 UAW - GM deal provides a much needed transfer of $51 billion in health care costs to the union and allows GM to replace expensive employees with far cheaper ones. The deal will allow GM to better compete with Toyota Motor (TM) and Honda Motor Company (HMC) in the small, low margin vehicles sold in the U.S. Prior to the deal, GM threatened to lay-off workers and shift much of its production abroad.

[edit] Incentives and Financing

From the late 1990s GM and other US automakers began to offer a number of generous incentives such as interest-free auto loans, "employee pricing," and rebates, amongst others. Throughout this period, interest rates were also generally low and lenders often made loans available to less-creditworthy borrowers than they had in the past. Additionally, the frothy real estate market allowed individuals to easily use a home equity loan to pay for an automobile- nearly 30% of California car buyers borrowed against the value of their home to purchase a new car. All of these factors combined to inflate car sales during the past decade. With the cooling housing market and automakers suffering decreasing margins because of the generous incentives discussed above, the forces driving the prodigious expansion in car sales during the last decade are unraveling. These factors have combined with the broader economic downturn that began in the last quarter of 2007 and rising fuel costs to seriously reduce the sales of US automakers who had relied heavily on incentives and generous lending practices to bolster revenues.

For GM leasing is the least profitable form of financing as the company often has to offer incentives to the leasee and again when selling the vehicle after the lease.^[17] As GM tries to reign in incentive spending, it has stopped financing leases altogether in Canada and plans to reduce leasing by 50% in the US.^[18]

[edit] Competition

In many ways, GM's primary competitor remains Ford. Both companies are similar in size, both targeted the same market (SUVs and trucks), and both will continue to target the same market even after reinvention (CUVs and sedans). However, GM is larger than Ford and even now is in a much less dire situation. Ford must bear substantially heavier legacy costs than GM, and because of a hiring spree in the mid-90s, much of Ford's current workforce is significantly younger than GM's. This will mean a protracting of the legacy cost burden for Ford.

Table 1. Comparison, overall company performance, 2006. Source: Company Data

	GM	Ford	DaimlerChrysler	Toyota	Nissan	Hyundai
Dec 06 YoY Sales Change	-10%	-10%	3%	17%	4%	3%
2007 US Market Share	23.4%	15.6%	12.6%	15.9%	6.5%	3%

Yet the biggest threat is still from foreign companies. The influx of foreign cars into the US market has had huge ramifications for the Big Three. The UAW's old method of keeping the Big Three in check, by demanding steep concessions whenever a clear leader seemed to emerge, worked both to placate workers and to maintain balance in the US auto industry. However, foreign companies now account for more than half of the US auto market. Now, UAW demands do no more than put Big Three companies at a direct and pronounced disadvantage. The September 2007 deal between GM and the UAW regarding health care benefits and lower wages will mitigate these disadvantages; GM will forgo $51 billion in health care costs and be able to replace expensive employees with far cheaper ones.

Foreign companies like Toyota and Nissan are poised to dominate the mainstream, small- to medium-sized car market with their flexibility, cheaper prices, and (in Toyota's case), early investments in fuel efficiency. Cars like the highly successful Toyota Prius are a big challenge for GM's own Saturn hybrids. GM will also have to fight these newcomers in what remains of its highly lucrative gasoline-based SUV/trucks sector.

In 2006, Renault-Nissan, itself the product of an alliance between Japanese Nissan and a French company headed by "le cost killer" Carlos Grosn, announced its interest in an alliance with GM. After several months of talks, however, GM and Renault-Nissan were unable to reach exact agreement and parted ways. The latter has now moved on to Ford, which will likely accept the offer, giving it access to important markets in both Europe and Asia, and also providing a possible anti-union leveraging tool.

In 2007, most expected Toyota Motor (TM) to surpass GM as the worldwide leader in automotive sales, however GM defied these odds, remaining No. 1 and holding Toyota off by about 3,000 vehicles in 2007 by reporting worldwide sales of 9,369,524 cars and trucks, up 3% from a year earlier. Strong growth in Latin America, Asia Pacific and Eastern Europe offset diminishing market share in North America. Unlike Toyota, however, GM posted an adjusted net loss in 2007.

Table 2. Comparison of profitability and key operational metrics, data from 2003-2006.Source: Company Data and Autodata

	Global Unit Sales (USD thousands)	Revenue/Vehicle	Product Redesign/Replacement Rate	Showroom Age (days)	Incentives/Unit sold (USD)	3-yr Retention Rate
General Motors (GM)	9,000	18,000	75%	71	3,600	55% (Chevrolet)
Ford Motor Company (F)	6,800	22,000	60%	74	3,500	53% (Ford)
DAIMLERCHRYSLER AG (DAI) (sold Chrysler Group in 2007)	4,000	32,000	76%	75	3,700	38% (Chrysler)
Toyota Motor (TM)	---	---	83%	53 (Asian average)	1,400 (Asian average)	64% (Toyota)
Renault-Nissan	---	---	77%	53 (Asian average)	1,400 (Asian average)	49% (Nissan)

[edit] References

1. ↑ Seeking Alpha, "Chevy Volt: Can It Survive GM?"
2. ↑ http://www.autoblog.com/2008/06/05/chrysler-ties-toyota-for-most-efficient-manufacturer-in-north-am/
3. ↑ http://news.bbc.co.uk/2/hi/business/7507091.stm
4. ↑ http://seekingalpha.com/article/86523-general-motors-corporation-q2-2008-global-sales-call-transcript?source=feed
5. ↑ CNN Money, "Treasury says no aid for GM, Chrysler"
6. ↑ http://news.bbc.co.uk/2/hi/business/