General Misery
GM's earnings warning sinks its stock--and the market
This was the year that General Motors was supposed to reverse course. A decade-long revitalization plan has greatly streamlined the company's assembly lines. A crash effort to revamp its aging car lineup, led by Vice Chairman Robert Lutz, has produced respectable new vehicles like the Buick LaCrosse and the Pontiac G6--the Camry-killer meant to prove that GM can build exciting, reliable cars and seize back turf that has been relentlessly poached by Japanese competitors. "If the G6 doesn't work," Lutz has reportedly told colleagues, "I'm out of tricks."
GM may need a new magician. Dealers are already discounting the G6 by 20 percent, according to Edmunds.com --a sure sign that consumers are underwhelmed. The LaCrosse and other new cars are barely doing better. Market share this year is barely above 25 percent--the lowest point since 1998--and GM has cut production by 12 percent. Last week, GM announced that instead of its previous expectation of a modest first-quarter profit, it would instead post a loss of about $1.50 per share. Full-year earnings in 2005 will be less than half of earlier estimates. "Clearly, we have significant challenges in North America," Chief Executive Officer Rick Wagoner said in a statement.
Wall Street responded with sell recommendations, and Standard & Poor's changed its rating outlook on GM, which has $301 billion in outstanding debt, from "stable" to "negative." S&P warned that GM bonds might sink to junk status if there's any more bad news.
Too much. The problem at the world's biggest automaker isn't necessarily its cars. "GM has good stuff," says Morgan Stanley analyst Stephen Girsky. "They just seem to overproduce everything." Since GM's 111,000 unionized workers earn 95 percent of their base pay if they get laid off, GM keeps its assembly lines running as long as it's not losing money on them. But as dealer lots swell with cars, discounts follow, brand image sags, and profits evaporate. GM also faces $5 billion this year in costs for retiree healthcare--the biggest such burden of any global company. It's little wonder that GM' s operating margin is the third lowest among 16 big automakers, according to Morgan Stanley.
The solution, most analysts agree, is for GM to get smaller. The question is how fast. Unions hope for a gradual drift-down, but dire financial news may give GM more leverage to negotiate plant closures and job cuts--especially if a lower debt rating raises borrowing costs. And there may be worse news ahead, if interest rates rise and car sales fall even further. One way or another, it will be a good year to get a bargain on a Buick or a Pontiac.
This story appears in the March 28, 2005 print edition of U.S. News & World Report.
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