Jamie LaReau
Automotive News
March 30, 2009 - 2:14 pm ET
President Barack Obama's auto task force says General Motors will be hard-pressed to meet its projections in five key areas without a dramatic restructuring.
In response to the viability plan GM submitted Feb. 17, the task force demanded that GM intensify its restructuring over the next 60 days or face possible bankruptcy.
In a statement released today, the task force criticized GM's assumptions in these areas:
1. Market share
2. Price
3. Brands/dealers
4. Product mix
5. Legacy liabilities
The task force did not dispute that GM is in the early stages of a turnaround, saying it has made "material progress in a number of areas, including purchasing, product design, manufacturing, brand rationalization and its dealer network."
But despite that progress, GM's current plan "contemplates initiatives that will take many years to complete," the task force wrote.
Details on the key areas:
1. Market share
In 2008, GM's North American market share was 21.5 percent, down from 23.8 percent in 2006. In its Feb. 17 viability plan, GM estimated that its market share would be 21.1 percent this year and decline to 19.4 percent in 2012 and 19.1 percent by 2014.
But the task force noted that GM has been losing market share for decades. "Yet its plan assumes only a very moderate decline, despite reducing fleet sales and shuttering brands that represent 1.8 percent of its current market share," the task force wrote.
GM is looking to sell Hummer and Saab and has committed to providing product to Saturn through the 2012 model year. If Saturn can't be spun off, GM will phase out the brand.
Obama's team is pushing GM to move more quickly to make itself competitive.
2. Price
GM's February viability plan did not discuss its expectations on pricing, said GM spokesman Tom Wilkinson. He added that "the task force went through all of this and did their own financial analysis."
And the task force analysis found flaws in GM's assumptions.
"The plan assumes improvement in net price realization despite a severely distressed market, lingering consumer quality perceptions and an increase in smaller vehicles," the task force report noted. It went on to mention how GM historically has struggled to maintain pricing power.
The task force noted that in 2006 and 2007, GM North America achieved a 30.4 percent "contribution margin" -- the sale price minus any variable costs of building the car. GM assumes that margin will increase to 30.8 percent this year and be at 30.7 percent in 2010, 30.9 percent in 2013, and 30.3 percent in 2014, the task force says.
That's despite a distressed market and an increased focus on passenger cars and crossovers, which traditionally have yielded lower margins than big trucks.
3. Brands/dealers
GM is currently "burdened with underperforming brands, nameplates and an excess of dealers," the task force said.
GM said it plans to offer just four core brands -- Chevrolet, Cadillac, Buick and GMC --and a cut-down version of Pontiac. GM also said it would reduce its dealer count from 6,246 in 2008 to 4,100 in 2014.
The task force said those measures are not aggressive enough.
4. Product mix
GM said its restructuring plan would allow it to produce "fewer, better" entries because it will have fewer brands, nameplates and dealers. GM said cutting brands would improve profitability because more than 90 percent of its U.S. profits are derived from the four core brands.
But the task force noted that GM earns a large portion of its profits from high-margin pickups and SUVs, "which are vulnerable to a continuing shift in consumer preference to smaller vehicles."
The report went on to say that while the Chevrolet Volt electric hybrid car "holds promise," it will be too pricey for short-term commercial success.
GM has estimated that the Volt likely would come to market with a $40,000 or more sticker.
5. Legacy liabilities
GM owes $20 billion to its Voluntary Employees' Beneficiary Association plan. It is trying to persuade the UAW to take half of that amount in stock rather than cash.
GM also indicated that the asset values in its pension fund have declined significantly over the past six months. GM's total U.S. qualified pension plans had $84.2 billion in assets at the end of 2008, compared with $104.1 billion in 2007. That has left GM's pension plans only 87 percent funded last year, compared with 124 percent funded the year before.
The task force said that going forward, GM's cash needs associated with legacy liabilities grow "to unsustainable levels, reaching approximately $6 billion per year in 2013 and 2014."
For GM to meet that obligation, it will need to sell 900,000 more vehicles per year. That would leave GM "fighting to maximize volume rather than return on investment," the task force said.
The task force said that GM's progress over the past few years has been "far too slow" in these five areas and that if the company is to survive, its stakeholders must engage in a "substantially more aggressive restructuring plan."
