dombey

market share means nothing except in the pride category. Each and every GM shareholder wants but one thing: earnings. Who cares if you sell 50% of the cars in the world if you're losing money?

Part of what will help Gm in the long run will be to offer fewer, better models that command a price over & above what they cost to make & sell... no longer will they be offering 25% off discounts and pushing their cars off the lot - which will probably wind up meaning lower market share.

Props to GM for getting their costs under control so quickly--now let's see if they can pull a "nissan" and make their product lineup exciting and of acceptable build quality.

dombey

yes... the stock price is WAY below their book value..., the market is REALLY handing it to GM & Ford lately...

rockville

But they aren't loosing money on every Malibu they sell. As a stand alone operation I suspect the Malibu is profitable. That is GM's bottom line experiences a net gain for each Malibu that is sold. The problem is legacy costs. Based on last year's numbers, the total legacy cost which is largely a fixed number and would not change regardless of sales volume worked out to be ~$2500/car. If GM sold twice as many cars it would be $1250/car. Conversely if they sold 1/2 as many cars the legacy cost would work out to $5000/car. So lets assume a Malibu nets GM $2000. That is after covering R&D, material, labor, and plant overhead (not legacy costs) each Malibu contributes $2000 to GM's bottom line. Also, assume this year's legacy costs and sales volumes are roughly the same as last year (both are close enough for this illustration). Using these numbers GM would loose on average $500 per Malibu they sold. However, that is not the same thing as saying the Malibu isn't profitable. It is, just not profitable enough. It's that $2500/car (on average) legacy cost that keep GM's American car production from being profitable. I suspect those same types of costs would put most of Honda's cars in the red as well (again on average, not per sale).
The Malibu, like a numbers (but not all) of GM's cars is a decent car. It sells for more than it costs GM to build it and sells in fairly high volumes. However, the profits the car nets is not high enough to cover it's share of the legacy costs.
GM's turn around is coming from several places. One is they are reducing warranty costs by building more reliable cars. Another is figuring out how to reduce manufacturing costs via smarter design. The third, and this is a big one, is attacking the legacy costs them selves. Buy outs are a big hit to the bottom line but they are a one time cost. They reduce that legacy cost next year and every year after that. Changes to the healthcare plans are another. GM has a VERY generous healthcare plan. Changes that make it just "generous" rather than "very generous" save the company lots of money. These are all things that make the $X billion dollar yearly legacy bill get smaller.
Now consider what GM could do with all that extra cash (IIRC around $5B last year). That's money that GM has to pay that Toyota and Honda just don't have to pay. An extra $5B in GM's pocket would allow them to put extra money into the interiors of their cars, into extra QA checks, into extra design. Basically into every area that people say GM is lacking in. To say GM should just build nicer cars is to not understand the nature of the problem.
Either way, I suspect you will find GM has basically shuttered any vehicle line that doesn't net money on a per car basis. The problem is that net is often still smaller than how much that car "owes" to the general legacy cost bill.
I suspect GM's accountants understand this quite well.

MrClean

I'm glad to hear that GM is doing better.

Like many would respond on this forum, there is not a single car in their line-up that I "must have", but they are improving. I really hope they turn things around and become a top player again. Although, there is a part of me that has doubts.

Malloric

Well it depends how you measure how much it costs them to sell a car. Most of their Malibu/Impala type cars see most of their sales at highly discounted fleet rates. They very well may be selling these cars (at fleet sales) for less than the total cost in makeing them, but at the same time they are increasing their total profits by selling these cars at a "loss".

As long as they are selling the fleet sale cars for more than their variable costs, they're increasing profits. The variable cost of a malibu might be $10,000 and the total cost (which includes labor, manufacturing line costs per car, executive salaries, etc) $14,000. If they cut a special deal with PG&E to sell 500 Malibus at $12,000 they lose $2000 on each sale, but their total profits increase by $2000 per car. They've already spent the money on the equipment, executive salaries, and their line workers... in economic speak it's a sunk cost. Obviously you can't rely on the "special" sales too heavily or you'll never cover all your overhead expenses which is the situation GM was in. Also, you have to worry about fleet sales weakening your regular market and costing you sales there (which happened because too many of GMs sales were fleet sales).

Put your self in GM's shoes. You've got decreasing demand from foreign competition and all your capacity is long term. You can't recover much, if anything, from the manufacturing lines you have. All of your labor contracts mean you can't lay off workers without buying them off. In otherwords, you can't cut back on your capacity without losing a TON of money (eg the 4.9 billion Ford lost recently, and GM had huge losses last year), so you just limp along losing 50 million a quarter hoping things will pick up. You've got 3 choices.

1) Discounted fleet sales that don't cover your overhead, but do make some money since you are selling over your variable cost.
2) Let the capacity idle even though you are still paying for it.
3) EXTREMELY costly restructuring.

So long as you can sell vehicles at above variable cost you're going to pick #1 or #3. If you can't even sell the cars at variable cost you have to restructure or just go bankrupt.

Whadya do? Take a loss of several billion one time, or just keep limping along losing a hundred million year after year hopeing things get better? I think GM finally realized that even with a hot new product line they couldn't realistically expect to recapture enough of the market. So they cut off the arm to stop the gangrene from spreading.

AlX Boi

FLUKE!!!

Don't put your kid's college fund into GM stock just yet.

rockville

Good post.

aklucsarits

I sure wish I had had enough balls to put some money in GM earlier this year when all the doomsayers were out in full force. GM's stock is up about 85% since the beginning of 2006. A near double in less than a year sure would have been nice...

Andrew

PathNull

So you can't really judge an automakers profit numbers. They recognize revenue when they ship the car to the dealer, not when people actually buy them. If you want to look at the health of the manufacturers, look at the number of days inventory they have. For instance, GM was selling Tahoe's and Surburbans like it was going out of style (touted for their turnaround)..so why are they slowing down production of those vehicles now? 110 days of inventory is why....By comparison, toyota is running 20-30 days of inventory

Don't forget that if after 3 months they don't sell, GM is obligated to buy them back....In some industries we call that stuffing the channel. Here it's business as usual.

I do have to say I like what they are doing compared to where they were, but I still wouldn't buy anything...