GM (GM) Finally Looks In The Mirror

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For all of the restructuring work that GM (GM) has done, all the layoffs, and negotiations with the UAW and creditors, it has never admitted that the domestic car market may not rebound for years. Each of the turnaround plans it has given to Congress and the Treasury assumes that American light vehicle sales will be about 12 million per year. The run-rate for 2009 is under 10 million. GM’s forecasts for revenue have been much too high.

Now that a bankruptcy may be only a month or so away, GM management has decided to base its restructuring on the world as it is rather than the world that it hopes will be. To accomplish this, the firm will have to make another series of unprecedented cuts. According to Bloomberg, “GM executives will meet with advisers to the U.S. auto task force, probably through the weekend, to cut costs faster and deeper than a proposal rejected last month by the Obama administration.” To get to that point GM will have to jettison plants, workers, brands, and dealers at a rate that it could not even imagine when it first started to work on its 2009 and 2010 budgets.

The GM program to keep itself out of court is a trap which the company cannot avoid walking into. Once GM has made such deep cuts it will be nearly impossible for it to ramp up production quickly when the car markets do eventually recover. Even if its can see that event on the horizon, it still may be on the government’s leash and very low on cash.

GM’s Japanese competition won’t have a big problem matching their production to a resurrection of the domestic car business. Toyota (TM) and Honda (HMC) may be wounded, but they do not have creditor problems or legacy labor issues. They have the balance sheets to keep most of their facilities open, even if they work, for the time, being, at less than full capacity.

The government may save GM but it is going to throttle its future prospects.

Douglas A. McIntyre

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