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.
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.