Will the Obama Administration Push Government Motors Into Bankruptcy Once More

That taxpayers are never going to recover their “investment” in Government Motors has been a foregone conclusion for a while. But their losses are mounting beyond what many, including me, had predicted. Last year, top auto analysts had expected GM’s stock prices right now to be around $43 per share. Even that price, I had noted at the time, would represent a $13 to $19 billion loss on the 500 million or so shares (26% of the company equity) that taxpayers still hold in the company.

But, as it turns out, that figure was too rosy! GM stock prices have been hovering around $20 lately – even though the market is at a recent high. This means the losses will be closer to $26 to $38 billion – and that’s not including the $15 billion in tax write offs that the administration illicitly handed GM during bankruptcy.

But the depressing thing is that despite this taxpayer moolah, GM might be headed for yet another bankruptcy. That at least is the claim of Louis Woodhill’s provocative piece in Forbes. And the main reason, says Woodhill, is that GM makes crappy products. He notes:

For the first 7 months of 2012, their [GM vehicles’] market share was 18.0%, down from 20.0% for the same period in 2011.  With a loss of market share comes a loss of relative cost-competitiveness.  There is only so much market share that GM can lose before it would no longer have the resources to attempt to recover.

To help understand why GM keeps losing market share, let’s look at the saga of the Chevy Malibu.

The Malibu is GM’s entry in the automobile market’s “D-Segment”.  The D-Segment comprises mid-size, popularly priced, family sedans, like the Toyota Camry and the Honda Accord.  The D-Segment accounted for 14.7% of the total U.S. vehicle market in 2011, and 21.3% during the first 7 months of 2012.

Because the D-Segment is the highest volume single vehicle class in the U.S., and the U.S. is GM’s home market, it is difficult to imagine how GM could survive long term unless it can profitably develop, manufacture, and market a vehicle that can hold its own in the D-Segment.  This is true not only because of the revenue potential of the D-Segment, but also because of what an also-ran Malibu would say about GM’s ability to execute at this time in its history.

GM is in the process of introducing a totally redesigned 2013 Chevy Malibu.  It will compete in the D-Segment with, among others, the following: the Ford Fusion (totally redesigned for 2013); the Honda Accord (totally redesigned for 2013); the Hyundai Sonata (totally redesigned for 2011); the Nissan Altima (totally redesigned for 2013); the Toyota Camry (refreshed for 2013); and the Volkswagen Passat (totally redesigned for 2012).

Automobile technology is progressing so fast that the best vehicle in a given segment is usually just the newest design in that segment.  Accordingly, if a car company comes out with a new, completely redesigned vehicle, it had better be superior to the older models being offered by its competitors.  If it is not, the company will spend the next five years (the usual time between major redesigns in this segment) losing market share and/or offering costly “incentives” to “move the metal”.

Uh-oh.  At this point, it appears that the 2013 Malibu is not only inferior to the 2012 Volkswagen Passat, it’s not even as good as the car it replaces, the 2012 Chevy Malibu.

 Former GM product czar Bob Lutz, rips Woodhill’s analysis as “chicken-little…fatuous twaddle” that over-emphasizes GM’s lackluster performance in North America and ignores its stellar record in China and other growing markets. Lutz has a point. But Woodhill might be right overall about GM going kaput again, but not necessarily for the reasons he gives.

The reason GM might be heading toward its doom again is that its very savior – the Obama administration – might in fact have set it up for failure.

Here’s how:

The fact is that GM – like other American automakers – has had a hard time competing with its Asian and European rivals in the compact and the mid-size market. That’s because its market incentives have been very different from theirs. Thanks to shorter driving distances, narrower roads and relatively high gas prices, foreign makers’ home consumers are attracted to smaller cars -- making this segment their core strength. Not so in the good ole U.S. of A where the core strength of American carmakers has been large, gas-guzzling trucks and SUVs.

Americans are naturally drawn to these cars for a whole host of reasons including relatively lower gas prices that haven’t made them prohibitively expensive to drive in the U.S. But the other big reason why SUVs are so important to American car makers is government policy, specifically CAFÉ (Corporate Average Fuel Economy) standards. These standards were meant to diminish gas consumption and reduce America’s dependence on Arab oil – the eternal boogeyman of American foreign policy. But they have – and this will come as a complete surprise to H&R readers! -- done the exact opposite!

That’s because when CAFÉ was originally formulated in 1979, it imposed stricter gas mileage standards on cars than on light trucks. So American carmakers did the rational thing and started using the light truck designation for SUVs to escape the CAFÉ noose. The upshot was that in America, the market share of "light trucks" – aka SUVs -- grew steadily from 9.7% in 1979 to 47% in 2001 and remained in the 50% territory till 2011. Given that SUV’s constitute a far bigger share of the American market than the D-segment, it is a bit odd that Woodhill’s analysis focuses mainly on the D-segment, completely ignoring SUVs. This omission is particularly curious given that American carmakers have far greater per vehicle profit margins on SUVs – GM on average makes $5,000 per SUV – than on smaller cars. Indeed, GM for the longest time has relied on sales of its full pickup trucks for a major portion of its US revenues and operating profits.

So the big question is how is the SUV market evolving and how will it affect GM’s survival going forward?

Not well. Just as the original CAFÉ standards created the SUV market, the Obama administration’s new rules might destroy it -- and with it GM’s core strength.

The Bush administration started closing the SUV loophole to prove its commitment to reducing America’s dependence on foreign oil after its Iraq misadventure. In 2007, it mandated national fuel economy standards of 35 mpg --  a 40% increase – by 2025, something that its own estimates suggested would cost the industry $85 billion. It started scrapping the car/light truck distinction, requiring carmakers to post overall gains regardless of vehicle category. In theory this gave American car makers more flexibility to meet the new mandate, but in reality the mandated fuel efficiency increases were so onerous that American automakers couldn’t squeeze them all out of their small cars and had to tinker with their SUV technology, diverting precious R&D dollars from what Americans consumers really want – greater horsepower.

But the Obama administration is now driving a Tahoe through the opening that the Bush administration created. It has upped the 35 mpg to 54.5 mpg by 2025. This is higher than the 50 mpg that the Prius currently delivers. There is no engine anywhere on the horizon that could deliver that kind of gas mileage. So American carmakers are making heroic efforts to redesign the rest of the vehicle to get to that target.

The Wall Street Journal reported recently that Ford is gambling on an all-aluminum body for its iconic F-150 pickup trucks, something that will make the vehicle lighter –not to mention costlier and deadlier – to meet the Obama mandate. (F-150 is the world’s most profitable line today. But whether it will remain so after it switches to aluminum which will jack up per vehicle cost by at least $1,500 is completely uncertain.) Meanwhile, GM is opting to produce two different trucks – one full-sized and high-powered and then, about two years later, a smaller truck. Notes the WSJ, the latter:

won’t be able to haul quite as much gravel or tow as much gear as the bigger model, but GM is counting on it to offer 20% better gas mileage, without the extra cost of heavy use of aluminum parts.

In other words, GM is making one truck line for its customers and another one for the president. If the president could buy all the vehicles produced for him, GM would flourish. But, if he can’t, he might well deliver GM to bankruptcy’s door yet again.

He might have saved GM from its own incompetence just to kill it with his.

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  • Randian||

    55 mpg by 2025?

    These people don't live in reality.

  • WTF||

    Hey, they passed a law! That makes it reality. Just like laws against carrying guns prevent criminals from carrying guns.

  • R C Dean||

    These are the very same people, after all, who refuse to lift a requirement for switchgrass ethanol content in gasoline even though there is not single drop of the stuff being produced, anywhere.

  • John Thacker||

    It's Say's Law for morons.

    Government regulations create their own supply (and demand.)

  • Brutus||

    Clearly the solution to our energy woes is to repeal Ohm's Law. Can you imagine the bounty that will flow when electrons are no longer required to limit their movement in the face of an impedence?

  • Knoss||

    Of course that wouldn't matter if the law of thermodynamics was repealed and replaced with one where resistance produces it's own energy.

  • Bobarian||

    Maybe we could just tweek the laws of gravity, that way I could go downhill everywhere I go.

  • WTF||

    The Wall Street Journal reported recently that Ford is gambling on an all-aluminum body for its iconic F-150 pickup trucks, something that will make the vehicle lighter –not to mention costlier and deadlier – to meet the Obama mandate.

    Gee, I wonder if this will cause light truck owners to just keep maintaining and repairing their older trucks rather than buy a new one in order to avoid the drawbacks of the costlier, deadlier trucks?

  • ||

    Don't worry..."Bucks for Trucks" is right down the road.

  • ||

    Wait wait wait... I can get free automobiles in exchange for male deer? Is this even limited to deer? Can I bring in, say, male rabbits too?

  • OldMexican||

    But, as it turns out, that figure was too rosy! GM stock prices have been hovering around $20 lately – even though the market is at a recent high. This means the losses will be closer to $26 to $38 billion – and that's not including the $15 billion in tax write offs that the administration illicitly handed GM during bankruptcy.


    Remember that scene in Empire Of The Sun where the young lad thought he was bringing a dead woman back to life while giving her CPR? He thinks this because her eyes moved to look at him, and thus feels encouraged to continue pushing on the woman's chest repeatedly.

    Then the doctor tells him: "You just pumped some blood into her brain. Stop it! She's dead."

    The government pumped some blood into GM's dead brain. That was all - nothing was saved. The company was bankrupt and it stayed bankrupt, just like that dead woman in the movie.

  • WTF||

    Actually, this all misses the point. GM is not a car company, it's a jobs/benefits/pension plan for the UAW.

  • Almanian's Evil Twin||

    It's true because it's funny. I mean NOT funny...

  • OldMexican||

    The Wall Street Journal reported recently that Ford is gambling on an all-aluminum body for its iconic F-150 pickup trucks[...]

    Which, in California, can be recycled after fatally crashing one in exchange for your 5 cent deposit.
  • Ken Shultz||

    Thanks to shorter driving distances, narrower roads and relatively high gas prices, foreign makers’ home consumers are attracted to smaller cars -- making this segment their core strength. Not so in the good ole U.S. of A where the core strength of American carmakers has been large, gas-guzzling trucks and SUVs.

    Another problem is that GM's legacy costs from the UAW are so high, that they've been forced to manufacture SUVs, which feature higher profit margins becasue of all the features.

    The competition doesn't have to contend with those high legacy costs, so they can be profitable on compact cars that have low profit margins. Because of GM's legacy costs for UAW workers and their pension obligations, GM simply cannot compete on price in the compact car market and still remain profitable.

    Until somebody does something major about the UAW's contribution to the cost problem, GM isn't about to get any better. And why would anybody do anything about the UAW's bloated pension obligations when GM is majority owned by the UAW itself and their crony, Barack Obama?

  • Ken Shultz||

    It's unbelievable that after the Cold War, we'd be sitting here in 2012 trying to convince our fellow Americans that socialism doesn't work. And if anybody out there doesn't think Obama nationalizing two-thirds of the American auto industry and the government owning GM in conjunction with a labor union doesn't qualify as socialism? Then you're out of your freaking mind.

    This is a case study in why socialism doesn't work. If Obama is reelected, by the way, you can count on him trying to make the government take over the UAW's bloated pension obligations as a solution to the problem, too. I'd bet that's a sharp contrast with what Romney--as a private equity guy--will do. And I'd score that as an excellent reason to vote against Obama and vote for Romney.

  • Auric Demonocles||

    Obama ... socialism

    Racist.

  • Ken Shultz||

    Yeah, I know.

    Somehow nationalizing two-thirds of the American auto industry isn't socialist, but calling out socialism when you see it is racist.

    I guess I'm just a stupid hillbilly.

    If only I weren't brainwashed by the Koch brothers, I'd think Obama squandering my future paychecks on the UAW was great!

  • NYC80||

    Actually, nationalizing the auto industry and then controlling it is not socialist, it's fascist (and maybe a bit socialist since we still own some of it). Fascism as an economic form involves private ownership and public control (the economic part of fascism can be separated from the whole genocide thing). Capitalism is private/private, and socialism public/public. So, no, it wasn't socialist, it was fascist. Does clarifying that make me a racist?

  • Kent Crawford||

    Yes, but fascism is a form of socialism, and one of the evolutionary steps to achieving communism. And, after all, isn't that what Progressives are progressing to?

  • Brutus||

    He's pointing out that Obama is a red, not a black.

  • Ken Shultz||

    Actually, that's more of a Liz Warren thread.

  • Scarecrow Repair||

    Colorist!

  • BakedPenguin||

    I'd score that as an excellent reason to vote against Obama and vote for Romney.

    Okay, that's 1. When you get to 2,755, let me know, because then the balance will tip for me not to vote for Johnson.

  • Ken Shultz||

    Well, I'm not voting for anybody.

    But for any less evolved people out there who still think that change somehow comes through the ballot box?

    If you don't want your future paychecks going to bailing out the UAW pension fund, that's probably a good reason to vote for Romney.

  • Ken Shultz||

    I mean, if he were really guilty of what some people are accusing him of?

    If he'd bought some formerly public company out of bankruptcy, and then, when he realized it wouldn't work, he sold off the assets, let the bankruptcy court figure out what was owed the pensions, and, thus, got himself out of the whole mess?

    Well that's exactly what I want our president to do!

    If he starts with GM, then moves on and does that with the Commerce Department and whatever the hell else in the government needs shutting down? Not only will I vote for him to be reelected, I'll send him a campaign contribution as well.

    Unfortunately, that ain't gonna happen. But Obama will try to put the taxpayer on the hook for the UAW's pension--as sure as the sun will rise tomorrow.

  • Kent Crawford||

    I would give you a list, but I would need the Federal organizational chart to remember them all...there are soooo many!

  • Mo||

    The reason the Germans and Japanese don't have those pension and retiree health care costs is that those have been socialized at a national level. The Japanese and Germans have pretty strong auto unions.

  • GW||

    And most Japanese and German cars that are sold in the USA are made in the USA (by non-union shops) in Mexico (most VWs) or are freakishly expensive luxury cars.

    Generally, they're not competitive.

  • Mo||

    Most American cars aren't made in the US either. They're made in Mexico and Canada.

  • Ken Shultz||

    There's also the productivity factor.

    The Japanese and Germans haven't been so reluctant to employ robots to build cars, but the UAW has.

    In addition, on a straight up productivity basis, one of the reasons that the Germans have been among the most highly paid workers for decades is because they're among the most productive workers on the planet...

    UAW workers highly productive? Not so much.

  • GW||

    Are you kidding? Components for many BMW's are made HERE and shipped to Germany. We outsource to Mexico, Germany outsources to the USA. The reason that the only German cars sold here are all expensive is because they have to bury that high cost, low productivity labor force into expensive materials in order to be cost competitive. VW is the only German manufacturer that builds a car in Germany and sells it for a price an average guy can afford, and that's only a model or two (like the GTI). The rest of VW's inexpensive models are all built in Mexico.

    Other than that, you're looking at Mercedes, BMW, and Audi. All expensive vehicles, and since they're status cars, they don't even have to be built that well, because Americans know there isn't much status in driving an 8 year old German luxury car.

    To say that German auto workers are productive compared to the UAW is a farce. How productive is a workforce that can't be terminated and gets tons of vacation a year?

    Also, the Z4 and the BMW SUVs are built in South Carolina.

  • Mo||

    The A and B classes are affordable Mercs. Of course, they're not sold here.

  • Anonymous Coward||

    The fact is that GM – like other American automakers – has had a hard time competing with its Asian and European rivals in the compact and the mid-size market.

    There's only one obvious solution to this problem: Get the government out of the automobile industry Implement a surcharge on all cars manufactured by foreign companies. That should fix everything.

    Neo-mercantilism FTW!

  • Auric Demonocles||

    How about some sort of bankruptcy insurance that the other car companies have to pay into, that GM can benefit from. If the other companies go bankrupt later, they can collect benefits then too.

    Or we'll just institute a penaltax on not buying a GM car.

  • Doctor Whom||

    Let's go back to the good old days of "voluntary" import quotas. What could possibly go wrong *cough*Lexus*cough*?

  • Doctor Whom||

    Why bother building good cars when your business model is based on failing and getting the federal government to bail you out? It's the wolf you feed. Also, as pointed out in the article, the federal government fueled the SUV craze through perverse incentives, although those incentives extended to safety regulations and tax policy, not just CAFE.

  • OldMexican||

    [The Obama administration] has upped the 35 mpg to 54.5 mpg by 2025. This is higher than the 50 mpg that the Prius currently delivers. There is no engine anywhere on the horizon that could deliver that kind of gas mileage.


    Well, there is, it is just that the kind of car it can move is not something you would want to drive near 18 wheelers and semi's.

  • ||

    But, but, it's the law.

  • Ken Shultz||

    Just to give a sense of the magnitude of the UAW pension problem, GM's outstanding pension obligations are many times bigger than the company's market cap.

    From Reuters:

    "Globally, GM's pension obligations in its plans topped $128 billion at the end of 2010. The plans are underfunded by more than $22 billion, according to the automaker's annual securities filing with U.S. regulators.

    Some analysts said the underfunding could swell to more than $30 billion by the end of 2011 because of the recent drop in interest rates. This would put the shortfall on par with GM's market capitalization of less than $33 billion."

    http://www.reuters.com/article.....WH20110927

    Yeah, that says the shortfall was the same size as GM's market cap, and that was from before GM's stock took its latest nose dive.

  • Ken Shultz||

    Elsewhere from that Reuters link:

    "In the U.S. alone, GM's pension obligations topped $100 billion at the end of last year.

    GM is not a car company. GM is a pension plan that makes cars. Every single market decision they make about model mixes, etc. is driven by the need to service their pension plan. You cannot lose money on every car--because of your legacy pension obligations to the UAW--and still cover your legacy pension costs...

    Again, why would management do anything about the UAW's bloated pension obligations when GM is majority owned by the UAW itself and their crony, Barack Obama? There are only three ways I see that GM, owned by the UAW, could ever slash its pension costs.

    1) The pension plan obligations are taken over by the taxpayers.

    2) The UAW and the government, through expert, Steve Jobs like management, design high profit margin, low cost cars that sell like hotcakes.

    3) A judge in bankruptcy court seizes GM's assets and cashes out the plan--meaning GM stops ceases as a going concern.

    I vote for option 3.

  • Romulus Augustus||

    Or engineer a stock market boom (36,000 DOW wooohoo)so pension assets more than cover obligations. This would probably entail huge inflation, so pension obligations would have to be reined in at current dollar levels.

  • ||

    So let me see.

    Auto manufacturer failing. Government uses my money to save it. Auto manufacturer does well in the short term, but makes no changes to the original business model. Auto manufacturer failing.

    Who'da thunk.

  • Bobarian||

    "makes no changes to the original business model."

    ^^THIS is the real problem.

  • oncogenesis||

    CAFÉ standards

    What's that French-looking accent doing on a sturdy American acronym?

  • MOFO.||

    Its to symbolize the overall fagotization of the auto industry.

  • BofB||

    Oustanding. I laughed for 5 minutes

  • Knoss||

    "The Wall Street Journal reported recently that Ford is gambling on an all-aluminum body for its iconic F-150 pickup trucks, something that will make the vehicle lighter –not to mention costlier and deadlier – to meet the Obama mandate."

    Not only that but how will the body hold up in off road use. A lot of the plastic used to save weight tends to break after going over rough terrain and in cold conditions. A pickup box flexes a great deal over rough terrain and can crack. Also body panels are more likely to be dented so using aluminum that is difficult to weld and more expensive to replace will add to maintenance costs over the initial cost.

  • Almanian's Evil Twin||

    CAPTION!!!!

    "We're gonna smash into that other car just like the economy's smashing into reality!"

  • WTF||

    "I can only go left!"

  • Pi||

    "The bigwigs told me that they contracted with Toyota on the braking system. Let's try it out!"

  • Drake||

    One reason GM is screwed (besides the pensions) - they are losing their European market share rapidly.

    http://www.bloomberg.com/news/.....-loss.html

  • mad libertarian guy||

    I eagerly await the day that GM goes belly up. I need the tears of those teat sucking fuckers to sustain myself.

  • ||

    The new cafe standards are not meant to force automakers to redesign vehicles or build more efficient gasoline engines.

    They are meant to take gasoline-only vehicles off the market in favor of hybrids and electric cars.

  • Drake||

    And the EPA emissions standards are designed to keep European diesels out of the U.S. As protection against foreign competitors I guess. Now the GM is going tits up and Chrysler is owned by Fiat, it seems like a lot of effort to protect Ford.

  • Enjoy Every Sandwich||

    I know this drifts into tinfoil hat territory, but I honestly think that the ultimate goal is to simply make the privately-owned automobile a thing of the past in favor of that big favorite of collectivists--the choo-choo train.

  • Invisible Finger||

    Bingo.

    Why drive a shittily-built-by-the-UAW vehicle when you can ride in a shittily-built train on poorly-maintained track on an inconvenient schedule?

    At least paved roads get votes, nobody votes for maintained train track.

  • Rich||

    fatuous twaddle

    Wasn't he governor of Mississippi during the war?

  • Torontonian||

    Yes, SUVs are more profitable for Ford and GM, but not for the reasons spelled out in the article.

    "Thanks to shorter driving distances, narrower roads and relatively high gas prices, foreign makers’ home consumers are attracted to smaller cars -- making this segment their core strength. Not so in the good ole U.S. of A where the core strength of American carmakers has been large, gas-guzzling trucks and SUVs."

    Do you really believe that Toyota, BMW, or Land Rover can't produce a competitive SUV or pickup truck because of shorter driving distances, narrow roads and high gas prices in their home countries? By that rationale, Japan, Germany and the UK wouldn't be able to competitively make gas-guzzling sport cars either, but the Nissan GT-R, Porsche 911, and the Aston Martin Vantage suggest otherwise.

    No, it's the 25% import tariff on light trucks that hamstrings foreign competition and makes SUVs exceptionally profitable for Detroit.

    Details here: http://en.wikipedia.org/wiki/Chicken_tax

  • NYC80||

    You have clearly forgotten that Obama has a secret weapon with which he can help GM - control of the media. Did you already forget the bogus claims that Toyota's cars had "uncontrolled acceleration" problems that were killing tons of hapless Americans? There was never a shred of statistical evidence to back up that claim, but Obama's cronies launched an investigation, the media launched an all-out assault, and Toyota sales declined while GM sales increased, right at a critical juncture for the post-bailout GM. Did you seriously not see the obviousness of the connection there?

  • Bobarian||

    And then Obama sent a tidal wave to Japan...

  • ||

    Perhaps taxpayers should celebrate. If Government Motors dies through a combination of it's own and the President's incompetence, the price one expects incompetence to pay will have been collected.

    And reducing the number of pigs at the Federal trough would be a boon to taxpayers...

  • Invisible Finger||

    You fail to mention exactly HOW the number of pigs at the trough is reduced by GM failing. I'd expect all UAW employees of GM to remain at the trough, and bring in a few tens of thousand from the affected suppliers, too.

  • cjones1||

    I guess Mr. Obama didn't build that rescue/bail out very well. It is a shame the bondholders were scammed. I think the author makes a clear point that over regulation will destroy American manufacturing.

  • MK11568||

    Please stop calling the Bailout "the GM Bailout" it is clear to everyone that it was the UAW bailout, they were the only ones who benefited, not the bond holders, not the equity holders and not the tax payers. Call it what it was: "The UAW Bailout"

  • Cloudbuster||

    Some of actually *need* real trucks. I pull a horse trailer and a couple tons of horses around every week. My F-150 is marginal. I'm looking at an F-250 for the next truck. I hope it's still a "real" truck then.

    If they want to reduce our dependency on foreign oil, how about letting us drill for our own?

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