General Motors plans to get its automobile business back on track, management told automobile analysts recently, by focusing on the quality of GM products, lowering sticker prices and reducing its dependence on financial incentives to lure buyers into showrooms.
GM also plans to cut $6 billion in annual costs by shuttering unneeded plants, lowering health care costs and substantially reducing employee headcount. GM’s goal is to reduce structural costs as a percent of revenue to 25% in 2010 from today’s 34%.
Additionally, GM said it expected to announce by the end of January whether it will sell a controlling stake in GMAC, the company’s financing arm, in order to restore GMAC’s credit rating to investment grade. Bondholders of GMAC were reassured by management that their investments are well secured.
More cash flow
Over the next several years, GMAC expects more cash flow from maturing investments than debt coming due. In the longer term, restoration of investment-grade ratings would allow GMAC to borrow and lend at lower rates than currently possible. Even if a sale of GMAC does not take place, it still has access to the whole loan sale market as well as the ability to continue to securitize and sell auto loans in the capital markets.
To further allay investor worries, management indicated that bankruptcy was not under consideration for GM, and that the company’s liquidity remained strong with $19 billion in cash on hand, as well as other financial assets that could be made available if needed.
To be sure, GM’s challenges remain difficult. Public perception has focused over the last year on the company’s financial results, not its products. Market share has slipped as competition from Japanese rivals remains strong, and Delphi’s bankruptcy will require a commitment of GM’s financial resources to be resolved.
Understanding a different market
GM’s plans, as outlined to analysts, are plausible and reflect a company coming to terms with a changed automobile market. At one time, GM was America’s dominant auto producer with a 50% share of the market. GM’s share is half of that now, reflecting the continued globalization that affects most manufacturing based industries, not just automobiles. Although it has taken GM too long to realize the changed nature of its business environment, the strategies outlined last week show management is coming to grips with the need to change.
The steps GM unveiled depict a more focused, brand differentiated, value driven product line. Clearly, these are welcome moves in the right direction. GM’s financial resources should be ample to give it time over the near term to determine if the new strategies are effective. The stakes are high, but GM’s management believes the company will eventually restore its standing with the American consumer.
