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November 21, 2005

Is There Any Scale at Which GM Is Profitable?

Can GM "slim down" and become profitable? Or not?

Economist.com: FOR years General Motors (GM) was the undisputed titan of the world’s car industry.... Now... holed below the water-line, sinking slowly by the bow to the sound of loud shocks and bangs.... The chief executive on the bridge, Rick Wagoner, can rush around and bark orders, but to little effect.

On Monday November 21st... shed 30,000 employees from its key North American operations... shut down 12 plants... cut production capacity by another 1m vehicles, having already cut roughly that amount since 2002....

Exactly how and why things have gone so wrong is a matter of debate. Certainly, the situation was dire 13 years ago.... Jack Smith... signed on Mr Wagoner, then barely 40, as one of his top lieutenants. The new management closed plants, cut the workforce, sold lacklustre component operations and seemingly restored much of the company’s former lustre. By the boom years of the mid-1990s, GM was again rolling up record profits.

Yet, despite a few exceptional years, sales continued to decline.... GM concentrated more on finance and marketing than designing and making cars.... GM paid a lot of attention to the development of its newest, full-sized sport-utility vehicles (SUVs), which will arrive in the showrooms early in 2006. But even the company’s bullish “car tsar”, the vice-chairman, Bob Lutz, admits that the potential market for these vehicles has declined dramatically with higher oil prices....

But products are only part of the problem at GM.... The huge cutbacks of the 1990s saddled GM with nearly three retirees for every active worker.... Then there is the worsening situation at Delphi.... Not everything has gone wrong on Mr Wagoner’s watch.... European operations... Brazil... South Korea’s Daewoo... China....

Mr Wagoner has other schemes... sell off a large stake in the company’s profitable finance subsidiary, General Motors Acceptance Corp. Trying to predict his remaining options has become something of a parlour game in Detroit circles.... GM’s options are steadily diminishing and its still sizeable financial resources are being drained away at a frightening rate. At the current pace, it may not have the momentum to reach a safe port.

I think that GM's biggest problems come from the imbalances in corporate governance that the loading of pension and retiree health benefits onto the auto manufacturing business has created. I see no way of avoiding bankruptcy--not unless the price of oil drops down to $15 a barrel and demand for SUVs revives.

Posted by DeLong at November 21, 2005 08:33 PM