Detroit’s Unusually Fuzzy Logic (GM)(TM)(F)

December 3, 2008 by Douglas A. McIntyre

Batmobile512The Big Three restructuring plans submitted to Congress make good bedtime reading. The programs are full of assumptions which, taken as a whole, indicate that the entire US car industry will be in exceptionally good shape in under three years.

The trouble with the plans is that most of the assumptions cannot be supported by any available facts, making them pure speculation about how the corporations which were once a pillar of American business can be made healthy again.

The GM (GM) plan is especially rich in fantastic detail. The largest of the American car companies wants $12 billion in loans which it says it can pay back by 2011.

GM says it is discussing "alternatives" with its Saturn retailers. It does not say whether those conversations will yield anything concrete. The dealers involved may decide to push GM’s plans for the division back in its face. GM is also trying to dump Hummer, but it may have no takers.

On the balance sheet side of the program "GM plans to engage current lenders, bond holders and its unions to negotiate the needed changes" Those lenders, knowing that the firm is getting government loans, may simply say they want their money back. Banks are funny that way. The UAW may take a similar position

Of course, GM says it will build more energy-efficient cars. It does not have a specific forecast for how those will sell or whether it knows that electric cars, like the ones it is creating, will be more appealing than hybrids like the Toyota (TM) Prius.

Perhaps the biggest stretch in the GM plan is that the company will reduce costs so that it can be profitable in a market where domestic vehicles sales are between 12.5 million and 13 million a year. The firm gives no assumptions about what happens if its share of the total market drops from 21% to 16% over the next two or three years. Since its piece of US car sales has been diving, that is not an unfair way to look at GM’s prospects.

Put another way, the GM plan and those from its peers are based on a view of the future which cannot be sustained by any real data and consequently that means Congress will have to hand them money based on a long shot.

Douglas A. McIntyre