Tuesday, June 24, 2008

General Motors' Woes
Pickups down - no Pick-Me-Up in sight


The current truck sales slump has hit GM hard, very hard. Sales of its Silverado full-size pick-up are down well over 40% from last year, and it doesn't look like there is a significant improvement over the short term. The company is extending its summer shutdown of truck plants and reducing the shifts at plants that build trucks and pickups.

According to Businessweek.com, the General's stock fell 6% just yesterday. The total value of all of General Motors' stock (market cap) is now about $7.6 billion, well below the market cap of many smaller companies, including Starbucks. It's also well below the PROFIT that Toyota makes in 6 months. Even Ford has a much higher market cap, at $11.8 billion.

According to the Wall Street Journal, if you have a GM 5 year bond, and you want to take out default insurance on it, you'd have to pay 28% of the face value down, and then you'd have to pay 5% per year during the 5 year life of the bond. According to WSJ, that equates to a 70% likelihood that GM will default on its bonds over that period. This type of default insurance is called a credit swap. As bad as parent company General Motors' swaps look, things are even bleaker for Rescap. Rescap is the mortgage lending subsidiary of GMAC. According to Bloomberg.com, a JPMorgan model credit swaps in Rescap reflect a 100% probability of default. If Rescap goes belly-up, GMAC is likely to follow in short order. Even though General Motors only owns 49% of GMAC now, it's hard to see how GM could survive the default of GMAC.

Ironically, to get sales going, GM just announced a 0% 6 year loan program on most of its vehicles. It seems to me that that's about the worst type of promotion GM could offer. GM's cost of credit is high, so to encourage your customer to use your capital for and keep the capital outstanding for as long as possible without paying interest seems suicidal.

GM's chickens are coming home to roost. GM operated for years on a sales model selling trucks to people who didn't really need trucks. GM could get away with this as long as oil prices were (artificially)low. Now that oil prices are rising to where they have to be to discourage excess energy consumption, people are finally starting to conserve and drive vehicles that are more fuel-efficient than full-size trucks and RVs. Since lots of motorists traded in their gas guzzling trucks earlier this year, used trucks have gutted the market. According to CarMax, the nation's biggest seller of used cars, the wholesale price of a fullsize truck has gone down 25% in the past three months. (That's more than a normal year's worth of depreciation.)

For the (relatively) few people who actually NEED a truck, the most cost-effective solution to high oil prices is to just keep your old truck. You can still buy a lot of gasoline for the $600-$1000 per month that you save driving a paid up vehicle versus a new one. If you need to buy a truck, the price of a used truck never looked better. If last year's prices reflected an equilibrium between the value of a new truck and a used one, this year's price-drop for used trucks clearly make used trucks a better deal economically.

General Motors' options in raising capital are limited. They can't borrow much money because their credit rating is low. Their best bet is to undertake a big equity offering, even if it means diluting present shareholders to almost nothing. Nothing is exactly what current shareholders will get if GM doesn't get the capital to wait out this economic cycle and get to a more car-centric line-up.

GM may be able to attract equity by playing up the metaphor of Shel Silverstein's, The Giving Tree. By reminding stakeholders of what GM has given them, perhaps GM can raise enough equity to make it to the next round.

Wednesday, June 11, 2008

Youtube Clip of the Day: Father Guido Sarducci's 5 Minute University

With the problems in the auto industry, and so many auto workers taking buyouts and looking for new fields of employment, perhaps it is time to re-establish Father Guido Sarducci's 5 Minute University. Heck, throw in the One Minute Law School.

Tuesday, June 10, 2008

$4.00 Gas?
Bush: "I hadn't heard that"


Gas hit $4.00 per gallon nationally this week. Looking at the big picture, I don't think that is a bad thing, because it makes us conserve. (Hence the plunging sales of gas guzzling trucks.) Of course, I'd rather that $1-2.00 of that price be going to the government in the form of a gas tax that pays for roads, bridges and conversion to noncarbonbased energy. Nevertheless, the people are up in arms, which makes it reassuring to know that our fearless leader is on top of things.

Wednesday, June 04, 2008

May Sales = Mayday

May sales for the formerly big 3 were stunningly bad. General Motors' sales were down almost 30%. This figure included a 39% drop in truck sales. Even GM's vaunted Lamda crossovers took big sales hits. Fewer than 2000 Hummers of all models left the dealer lots all month. No wonder they're killing the brand.

Chrysler was down 25%. Except for the Jeep Patriot, which was up 82%, all Chrysler models took deep two digit sales hits. Sales of the Durango were down 69% despite cash on the hood and a promise of $2.99 gas. Even the recently restyled minivans were down 25%.

Ford did relatively well with a 16% sales decrease. Fusion sales increased 27%, and the Focus sales went up 53%. On the downside, the F-150 pickup lost its crown as the best selling light vehicle model, a position it has held for 17 years. Second place isn't bad though, right? No it's not, but the F-150 is now in 5th Place, behind the Honda Civic, the Toyota Corolla, Toyota Camry and Honda Accord.

How about some good news? Well, GM's CEO Rick Wagoner got some good news. He took home $14.4 million dollars in a year where GM lost $38.7 billion, and at GM's annual meeting, a shareholder resolution to cut executive pay failed to garner a majority of the votes cast. Apparently the shareholders are as good at pissing away money as the management.

Sources: Autoblog.com, ttac.com, detnews.com, freep.com. Multiple stories
Chrysler's 5% Solution: Demand for 5% Supplier Price Cuts

Chrysler LLC is now demanding that its non-production suppliers cut prices 5%. It seems to me that that group includes UAW Chrysler Legal Services Plan. There are rumors of late supplier payments and suppliers getting stiffed. Robert Farago of thetruthaboutcars.com predicts that Chrysler will file Chapter 11 or break up sometime this summer. Great time to go through contract negotiations, huh?

Tuesday, June 03, 2008

GM Announces (another) Restructuring
Four Truck Assembly Plants to Close Small Car Production to Increase, New Small Car Announced


GM CEO Rick Wagoner held a press conference today announcing a major restructuring. The bad news is that GM plans to close four assembly plants over the next two years. The good news is that GM will be adding capacity to plants that make small and midsized cars. GM will also be adding a brand new (unspecified) small car model. The new small car will (at least at first) share the Lordsville, Ohio plant with the Cobalt and G5. From our perspective more good news would be that of the four plants slated for closing, only one is a UAW-staffed plant, the perpetually on death row SUV factory in Janesville, Wisconsin. Also on the chopping block are a CAW-staffed truck plant in Oshawa Ontario, a Morraine, Ohio SUV plant (GM's only IBEW plant), a truck factory in Toluca, Mexico.

There is a surprising lack of detail regarding the small car that will start production in 2010. All that was said is that it will be built on the Delta platform, and it will be powered by a new 1.4 liter turbocharged 4-cylinder engine, making up to 140 horsepower, yet delivering 40 mpg. This type of engine appears to be the wave of the future. Ford has announced big plans for a similar engine that it calls the Ecoboost. Volkswagen has had an engine on this class on the road in Europe for a couple years now.


Finally, GM said it is considering its options regarding the Hummer brand. The brand might be sold or killed entirely.

As far as I can tell, GM made no announcement concerning May sales numbers. Analysts expect May sales to be at least 20% lower than last year's. According to the Wall Street Journal, GM's market share in the US was 20.5% in April, and poor truck and SUV sales suggest that GM's share may fall below 20% for the first time in modern history. Consider that this 20% share is split between 8 US brands, Buick, Cadillac, Chevrolet, GMC-truck, Hummer, Pontiac, Saab, and Saturn, and it becomes abundantly clear that something has to happen on the branding front, and killing Hummer is the tip of the iceberg.