Tell 'em Tom
Thursday, July 27, 2006
Detroit Free Press
It is good news ... well, kind of
You know these are strange days in Detroit when a second-quarter net LOSS of $3.2 billion at General Motors Corp. is cause for celebration.
That's right, GM wowed Wall Street and saw its stock price jump 4% to $32 after reporting this whopping loss Wednesday, because if we forget about the $3.7 billion in payoffs -- er, accelerated attrition special charges -- to rid the bloated payrolls of excess workers, then GM would have made a profit.
Well, hip, hip hoo ...
Nah. Let's not get too excited yet.
Chairman Rick Wagoner and his cost-cutting cavalry have done a fine job this year of aligning plant capacity and future employment levels to match GM's shrunken share of U.S. vehicle sales, which has dropped to 24% from about 45% in 1980.
But that won't be nearly enough to placate maverick shareholder Kirk Kerkorian or other GM critics. Not yet, anyway. Here's why:
Start by looking at the so-called adjusted net profit of $1.2 billion -- excluding special charges -- that GM reported for the second quarter. Virtually all of the profit came from the red-hot Chinese market and the GMAC finance subsidiary, which soon will be a mere 49% shadow of its former self on GM's books, because the embattled parent decided to sell 51% of the finance unit to raise cash and buy time to fix the company.
GM's adjusted net loss of $85 million in North America during the second quarter looks good only when stacked up against the horrific $1.1-billion loss a year earlier.
Like most Detroiters who realize the importance of a healthy GM to our community, I really want to believe Wagoner when he says, as he did Wednesday, "Our turnaround has not just gained traction, it's accelerating into high gear."
But then a skeptical inner voice asks, "Isn't GM just like that 'Groundhog Day' movie, repeating the same cycle over and over? Lose market share, then restructure and close plants and cut jobs. Then lose more market share, close more plants, cut more jobs. And again. And again ..."
To calm my inner voice, not to mention the impatient Kerkorian, Wagoner and Co. must come up with a convincing strategy to stabilize car and truck sales on GM's home turf.
GM need not recapture 30% or 40% of today's fiercely competitive U.S. market, or even hang onto 24% of it. GM is a handsomely profitable market leader in China with only 12% of that crowded market. What it needs is a coherent, transparent product and sales strategy that supports well-defined brands with enough financial muscle to keep the model lineups fresh and innovative. Sustainable U.S. market share might be 20%, or 22% or 25%.
Whatever the exact numbers, GM must set sales and profitability targets that give its shareholders -- yes, Kerkorian, too -- some reasonable idea of what the company is worth.
Absent a convincing plan for the revenue side of the business, Wagoner and Co. will continue to be second-guessed.
You can hear it already.
Sure, GM cut billions of dollars in costs. And sure, it beat Wall Street profit expectations for a couple quarters. But it also sold off 51% of a crown jewel, GMAC, which made more than $1.5 billion in profits during the first half of 2006. Based on foregone future profits from the 51% of GMAC that GM will no longer own once the sale is closed, the second guesser might reasonably conclude that GM unloaded an asset with potential value of $18 or $20 a share, or more. Was it worth it?
If you want a definitive answer to whether GM's comeback is for real, settle in for a long wait -- well beyond the 90-day window for evaluating the GM-Renault-Nissan alliance idea that is merely the latest twist in this tale.
Contact TOM WALSH at 313-223-4430 or firstname.lastname@example.org.