Is the new GM viable?
Filed under: Company News
Sunday night, a New York bankruptcy judge approved the sale of selected assets to "New GM." Assuming that bondholders and others don't appeal the judge's decision, the New GM could be born this Friday. As expected, it will consist of GM's most popular brands: Chevrolet, Cadillac, Buick, and GMC. But will the New GM be viable?
Before addressing this question, let's not forget the old GM, which includes the likes of Pontiac, Saab, Hummer and Saturn. With the help of $1.18 billion in taxpayer money, the old GM will try to sell itself to the highest bidder -- if any emerges. And the U.S. -- which will soon have put up a total of $50 billion -- will end up owning 61 percent of New GM; the UAW will get 17.5 percent; the Canadian government will take 11.7 percent; 10 percent will go to bondholders; and the common shareholders will be wiped out.
The New GM could be viable. It all boils down to whether enough people will buy its cars. Already demand in the U.S. is way down: in 2007 16 million vehicles were sold and it looks like 2009 will be lucky to see 9.7 million in sales. GM's market share without those old GM brands is 16.4 percent. I am guessing that if GM can somehow gain market share and the overall market grows, then its odds of being viable improve.
On the positive side, the New GM will have lower costs because it has shed 21,000 union workers, closed 12 to 20 factories; and will shutter 40 percent of its 6,000 dealers. But it boils down to whether all this cost cutting will enable GM to actually make a profit on every car it sells.
I have not seen any financial projections for the New GM so there is no way for me to know whether it could be viable. But I am certain such projections exist somewhere and that they are based on many assumptions -- most of which were probably chosen to help persuade the U.S. to give GM $50 billion.
As I've posted, in order for the U.S. to get back its investment, the total market value of the New GM will need to be 20 percent above its previous all-time high. Repaying our investment is not the key test for viability but it would be nice if we got our money back.
In the next year, I think I would settle for a company that can pay its own bills.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.
The goofy Galleon gang: Wacky hedgies play cops and robbers...with real cash!
Windows 7 is off to a strong start: Will corporate buyers follow suit?
Jobless rate at 10.2 percent, and it's likely to stay high for months to come
Reader Comments (Page 1 of 4)
7-06-2009 @ 10:40AM
T said...
Is anyone going to ask the question.... Who, exactly, is buying the new GM corp.
Reply
7-06-2009 @ 1:45PM
mickey said...
I'm totally distraught about Obama, whom I voted for, buying GM and running it as a government car company and then denying that the government wants to be in the car business. Most importantly, he gave GM $50+ billion of our taxpayer money when he should have given that to the citizens. Now on top of that, he wants the citizens who continue to be raped by every entity known to man, he wants us to buy a car?? This is almost totally insane. I'm helpless. I'm trying to buy toilet paper with my $25 reduced withholding tax windfall that I get on my paycheck. WILL SOMEBODY WHO HAS THE POWER PLEASE DO SOMETHING ABOUT THIS!
7-06-2009 @ 10:40AM
dan said...
Uncle Sam would have been better off if they'd used the 50 Billion Dollars to start an all new car company from scratch. Today after huge investment from US, Canada, and the UAW, there has been no progress.
Reply
7-06-2009 @ 11:05AM
Charles Carter said...
Obama ignored good advice and nation's immediate needs to foster his ego agenda. He deceived the Democrats with scare tactics and forced the idiots into voting in a disgraceful bill without responsibly reading and discussing it. If our nation goes into a deep depression even before October, it will all be the baby of Obama and Democrats and they can't say they inherited it.
Reply
7-06-2009 @ 11:16AM
Charles Carter said...
All that valuable time and money wasted on bailouts that contributed nothing to nation's economy, unemployed or housing problem. Apparently, Obama not only has no practical knowledge of economics, but is lacking in prioritizing and appointing the right people for the right jobs.
Reply
7-06-2009 @ 11:28AM
Proud American said...
I'll never purchase another automobile that was assembled by the UAW, nor will I buy from any Obama owned car company. If the old OR new GM disappear I could care less. And I'm a fiercely proud American who loves his country and can't stand watching it be destroyed by liberals.
Reply
7-06-2009 @ 11:42AM
pbear said...
GM after conceding lifetime incomes to UAW workers... loses money on every car they sell. Compare cost of cars sold with income from cars sold--- they lose money--- it ain't that complicated. You can't make a profit if manufacturing costs exceed selling price. Unless tax payers make up the difference. But why would taxpayers underwrite a business that has can't make money?
Reply
7-06-2009 @ 12:14PM
OINKJOHNSON2 said...
pbear, you hit the nail on the head! If you lose money on each car you sell, the obvious solution is to make it up on volume. Produce more cars which will stack up on dealers' lots and require lots of incentives for them to be unloaded on the public.
7-06-2009 @ 12:10PM
Phil said...
Here we go once more! The news ANAL-YST on fox and all the business ANAL-YST and most of the American people for over a yr now wanted bankruptcy? WHY? Because all the anti union people in this country and all the anti union REPUBLICANS wanted bankruptcy for GM and Chrysler thinking that it will get rid of the UAW? LOL LOL Well people as you see BK does not always go the way you want! The BK Judge rules ! People cry about bondholders who bought their bonds at 2-20 cents on the dollar and now want the US tax payer to pay them 100%? LOL Another joke ! Who ever invested in these companies in the last two yrs is STUPID! So to all the whining little people out there who think its a joke ? The joke is truly on you people! So my advise is to buy American ! Buy GM and Chrysler if you want jobs and your money !~ Because as you see as the American auto industries go so does the American economy! IDIOTS!!! Thats why the government saved them!.. Its time to TOYOTASIZE America. Like GM and Chrysler did! YOU ALL WANTED IT NOW YOU ALL HAVE IT ENJOY !
Reply
7-06-2009 @ 12:14PM
v.j.demarco said...
Cancer cannot be cured by feeding it. The cancer that destroyed GM &Chrysler,called the UAW is alive,healthy,and feeding again. It is only a matter of time when either the cancer will be destroyed,or the United States will be destroyed. Even the Treasury cannot print money fast enough to satisfy the demands of the UAW. The UAW bought the election for the Democrats,the pay back will result in total chaos for the country.
Reply
7-06-2009 @ 12:32PM
smartshoppingguy said...
The UAW didn't design ugly cars like the Pontiac Aztec. The workers build the cars that are designed by a design team chosen by executives and approved by them. We weren't able to compete with imports that had better designs and were more reliable. I know that doesn't fit in with the ring wing mythology that blames the unions for everything, but that what really happened.
7-06-2009 @ 7:16PM
Das said...
Obviously you have never been a UAW member you sound under paid, (would you like some cheese to go with your whine). Let me try and help you understand how it works, I'll go slow: Designer= the product off of the paper; UAW= assembly of the product; Management= speaks for its self; Broke Hater= you.
The UAW does not make the decisions for the coporation, as such the corporations CEO's ect. do.
And one more thing, the UAW is partly responsible for your forty hour week. see A. Phillip Randoff.Please in the future get your facts right loser, before you and this other idiots open your mouths and engage your pea sized brain. We didn;t cause this, its you foriegn lovin' tin box car drivers. BUY& Build UAW, hopes this helps you idiot.
7-06-2009 @ 9:18PM
Tony said...
As usual, the UAW calls anyone who disagrees with them an idiot. They say (as always) they didn't design some certain car that looks bad. But if they could count, or tell the truth, they would admit that they take so much of their car makers money that the car maker cannot affort good designers or good anybody else at non-assembly jobs. The UAW is the biggest reason GM and their ilk has been destroyed. No, I'm not an underpaid whiner and I make sure my income does not derive from any labor union influence. There is no choice for the destination of their dues, those millions go to the democrats and they are in bed together, screwing the rest of the nation. They do not care about America. They care only about what they can get out of it by using laws that favor them in return for payoff to the democrat law writers.
7-06-2009 @ 12:22PM
Allen said...
I believe both Chrysler and GM will remain in business. The car companies are so lame. Skip pollution, we have a limited amount of oil in the ground. Build cars that run on hydrogen or electricity. I want my next car to be a GM vehicle, but I will not buy a new car until there are hydrogen, electric, even compressed natural gas cars to choose from. Until then, it's a situation where I drive my current car into the ground and then I will be forced to buy a Prius, an Insight, or a Honda Fit. I might consider a Chevy Aveo. Why can't we in the U.S. take the lead and put an end to cars that run on foreign oil? What is wrong with us here in the U.S.A.? Our national pride should have risen in 1973 so we would not have been sending billions of dollars overseas every day to backwards countries that deprive women of basic rights and repress freedom. We either wake up now and confront this, finally, or go suffer economic peril far worse than we have experienced so far.
Reply
7-06-2009 @ 12:24PM
Ed W said...
Phil, you speak like a man with a paper bag for a brain. Look at who will own the "new GM" Canada will have 11 per cent, the union 17 per cent and the US Gov will have 60 percent. Show me one gov program that makes money? The new GM will eventually go away. It is indeed sad that this will occur but I do not see it surviviing.
Reply
7-06-2009 @ 12:30PM
Ed Wq said...
Phil, you make the comment that anyone who invested in GM over the past 2 years is stupid. Do you understand that these investments help companies grow. It is unfortunate that the senior management at GM was not forward thinking as they should have been, but to say folks were ignorant for investing in GM is just not right. And now for those investors to lose everything is also not right. Yes they did take a chance on investing but to not pay them back something for their money is just wrong.
Reply
7-06-2009 @ 1:35PM
Phil said...
Well i do say one thing? Why is it when republicans talk freedom it costs the USA two wars and trillions of dollars ? Thats ok ? But try to spend money on America and Americans YOU same republicans call that socialism? To the bondholders who invested 2cents on the dollar and 20 cents on the dollar is a JOKE! They knew the risk like the sub prime mess ! They on wall street knew the risk and LOST and so did a lot of Americans 401ks? With the madoffs and stanfords of wall sttreet ? They are all a joke ! And any Americans who want to invest in this place they call wall street go ahead ! It just make me laugh when republicans want something for nothing like the GM and Chrysler bondholders who now want 100% of a 2 cent investment!
7-06-2009 @ 12:37PM
algon said...
So, if the govt owns over 60 percent of GM, then the union will go on strike in approx. one year, and demand 100 dollars per hour per worker, and the govt. will be forced to give in to those demands, or the economy will be thown into further chaos.
Reply
7-06-2009 @ 12:45PM
Sam said...
Hopefully the Bondholders appeal this decision as they have been treated unfairly by Ricky Hussein Obama and his Adminstration. As with a bankruptcy, the bondholders should be at the front of the line for compensation. Obama placated his voting group by placing the UAW on the frontend. Most of the bondholders were 10 to 25 years old and supporting pensions and retirement funding. In turn, they support GM with funding when they needed the cash. I have always purchased true American made vehicles from the Big 3, however, in the future I will not buy any General Motors products. As for Phil he needs a lesson in economics, as bonds that were purchased many years ago with maturity dates 15 to 25 years out were not bought for 2 - 20 cents on the dollar.
Reply
7-06-2009 @ 12:55PM
Tech said...
America is run by globalist bankers headed by the Rockefeller family who control the private FED, credit markets, interest rates, money supply and Wall St. along with big oil and the blue chips. GM is also a global company and I worked down at GM Brazil back in the late 80's. GM China is booming and so is Brazil. Right now the bankers are breaking the USA down hard along with unions and the middle class and the dollar. As the country is downsized they have the "government"using Americans as the soldier police all over the globe to enforce their New World Order. This provides "jobs" and keeps millions out of the USA and under military control while the homefront is broken. The 911 "incident" and "appointment" of Bush/Cheney 2000 was their big move. Their banks have taken out the opposition, whole industries,unions, housing, dropped the dollar, and invaded Iraqistan for oil and the Caspian gas-India needs the energy. Chindia will have ten times the people of the USA and the market potential is enormous. Goldman Sachs and Nick Rockefeller have been over backing their rapid rise and trained them at Harvard Business school. Smart traders like Jim Rogers got out of NYC and moved to places like Singapore the banking capital of Asia which is protected by US military agreements. Trade using charts and trendlines up and down. Oil backs the dollar and the US military backs oil by occupying the oil fields-permanently! Gold basically trades opposite the dollar as do most commodities. Until the US dollar has dropped to an even keel with the yuan etc. business costs are simply too high in the USA so the only companies that I would consider investing in would global companies with overseas operations. Remember oil, the dollar, gold, etc. trade up and down-just follow the trends using stops and profit with the moves like the big boys. Ignore all the baloney in the "news", from Washington, Cramer, etc.
Reply