Interview: Ray Young, CFO of the new General Motors
Filed under: Company News, Technology, Investing
General Motors Company was (re)born today. The new, streamlined company will sell four product lines, with the following year-to-date market share: Buick (one percent), Cadillac (one percent) , Chevrolet (12.3 percent) and GMC (2.4 percent).
In total, this represents a 16.4 percent market share. This is significantly less than the old GM, whose Hummer, Pontiac, Saab, and Saturn brands represented a further 3.9 percent of market share. However, these brands have been discarded, and the new GM wants to cut dealers from 6,000 to 3,600 and slash its U.S. employee base from 91,000 to 64,000.
And, of course, we Americans own 61 percent of it.
Times are tough. New auto purchases are down 37 percent this year, and the seasonally adjusted annual rate now stands at 9.91 million vehicles. This is still too small a market for American carmakers to break even, making it unclear if the U.S. get its $50 billion back from the new GM.
I asked the new GM's Chief Financial Officer (CFO) Ray Young this and other questions this afternoon. He believes that the reorganization will lower GM's break-even point by about 40 percent and will reduce its fixed costs by 26 percent. He is excited about several new GM product introductions, believes that the company will pay back its $6.7 billion loan in less than six years, and hopes for an IPO in 2010. For more details, read on.
How do you feel about the rebirth of GM? I feel great for America and Canada. To go into bankruptcy and get out of it in 40 days has exceeded our expectations. It happened because of great planning ahead of time and we are pleased about that.
Now we can focus on cars and trucks and on our customers. The last six months has been spent on contingency planning, which is not value added. Based on how I've spent my career, I am happy to get back to focusing on our products.
How will the new GM be different for vehicle consumers? The first thing consumers will see is that we are communicating with them both through advertising and through seeing senior management. We will be spending time with dealers and customers and getting feedback.
And we have a new website called Tell Fritz. It will be a way for our CEO to interact directly with the public, which is very different than our previously insular style.
Another thing that will be different is that senior management will spend time on the product. We will spend more time actually running the business instead of on contingency planning.
What will the revenues and profits for the new GM be in 2009 and 2010? We have not published these numbers, and we plan to finalize them and review them once the new GM board is in place. The new board will consist of the five current members plus Fritz Henderson (CEO), Ed Whiteacre (Chair), and the UAW's Steve Girsky. There will also be four other new members from the U.S. and one from Canada.
At what level of revenues can GM break even? GM can break even on an earnings before interest and depreciation (EBIT) basis, assuming 10 million units are sold in the U.S. market -- which is a cyclical low. We think this is an accomplishment that we have lowered our break-even point to the cyclical low.
We will achieve this by executing our plan to idle excess manufacturing capacity; reduce the salaried and hourly workforce; and focus our brands which will let us make more efficient use of our marketing and engineering resources.
Our break-even before bankruptcy was a U.S. industry of between 16 and 17 million vehicles and by 2010 we will have brought it down to 10 million. And in 2010 our fixed costs will drop to $23 billion from $31 billion in 2008. This will get us to break-even on an EBIT basis with market share of between 18 percent and 19 percent.
When do you think the new GM will be able to pay back the $50 billion provided by the government? There are different elements to the $50 billion. The $6.7 billion loan is due in six years and we hope to pay that back sooner.
The other elements -- common and preferred shares -- we hope to pay back through an initial public offering (IPO) in 2010. The earliest we could do that would be the second quarter of 2010 because that is the soonest that we could prepare the financial statements.
But being able to do that will depend on three factors. First, the equity markets will need to become much more eager to buy IPO shares than they are now. Second, the industry will need to have risen off what we think is its current cyclical bottom.
And finally, we will need to become cash flow positive by focusing on operating cash flow. To do that we must get our cost structure down by idling facilities and pursuing the other cost cutting measures I mentioned earlier.
Second, we will need to drive the revenue line. We are planning to introduce great new products including a Chevy Camaro, Chevy Equinox, GMC Terrain, Cadillac SRX, Cadillac CTS, and Buick Lacrosse. We will have to make these cars with exceptional quality.
Finally, we must regain the confidence of the American consumer. Bob Lutz will bring the creativity to that task both in the product and in marketing communications.
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.
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Reader Comments (Page 1 of 2)
7-10-2009 @ 8:48PM
REDINER said...
GM. CHRYS. FORD BUILTS JUNK
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7-10-2009 @ 8:15PM
Keith said...
It's "builds" moron, not "builts" and no they don't. Most people who say they got a "bad" car from the Big 3 are just bad drivers that abuse their vehicles.
7-11-2009 @ 7:20AM
goldengolfball said...
They builts junk??? Ya you show-em ace
7-10-2009 @ 8:15PM
stryyder56 said...
If anyone thinks GM will come back and PAYBACK that amount of money with a 13 percent market share they are really dreaming. This company is toast and should just die on the vine. It is really a shame that the once mighty GM is now just a shell of its former self. Really too bad............
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7-11-2009 @ 1:38PM
MJR said...
I PUT MY MONEY ON YOUING AND GM
7-10-2009 @ 8:19PM
michael said...
Why would Mr.Young think any one will invest in a company
that bank-rupt prior investors and bond holders. Gm and
Chrys with help from the congress and president changed
all the bankrupt laws and the courts turn thair heads.
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7-10-2009 @ 9:26PM
Cheeze said...
American cars are much better than Americans give them credit for. Why not put an American to work? Sending your money to Japan is the most stupid thing an American can do. Support your own country. The Japanese Government is supporting the Japanese auto industry FYI.
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7-11-2009 @ 12:34PM
johnnybe said...
Idiot, I do believe that Japanese cars are built in the US also and employ Americans that need to make a living. Face it, true Americans are fed up with all of the wasteful spending by both parties and want it to stop. Bailing out the auto industry is a waste, they haven't figured out how to make a profit and never will. I also feel American made vehicles are of less quality than some foreign auto's.
7-13-2009 @ 3:18AM
Claude Petty said...
GM builds some great cars and some average cars. So do the Asians. There cost basis is much lower and when they see a good vehicle they are quick to knock off a similar one. That's a tough business. All these people so down on American cars and trucks should look at their own job and explain how they can perform better and cheaper than someone in China. I just got my 2010 Camaro SS and it drives better than my wife's BMW for a lot less. It's easy to mouth off when you don't own one.
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7-10-2009 @ 10:13PM
Dick said...
Right-on Keith, Rediner must drive a foreign car. If he was American, he could probably spell better.
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7-11-2009 @ 1:16PM
philemon said...
if you think gm is great,and will be a winner,then buy the new stock,IPO,should be at least 80 dollars,look at all the great ,people running it,never sold a car in their life.good luck,buy gm i am sure its resell will be strong.
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7-11-2009 @ 1:17PM
philemon said...
who cares
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7-11-2009 @ 1:37AM
Duke said...
Um, um, GM can't repay the $50 billion back. The Volt will not do it, the new Camaro can't do it. The new Cruze coming soon, can't do it. The old GM's assets aren't worth but a few pennies on the dollar. That should be given back to the taxpayer after any sale of any old GM assets and debts. GM's market share can not result in a profit nor money to pay the taxpayers back. Young may be optimistic but he lives in an ivory tower.
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7-11-2009 @ 2:35AM
Anderson said...
I think your full of it.
7-11-2009 @ 5:31AM
ROB said...
What GM needs is design and quality control engineers plus marketing pros who understand the consumers wants.
The problem with GM is that it been run by too many financial/accounting types. I am a retired S&P 500 financial officer and have seen the problem first hand.
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7-11-2009 @ 6:52AM
bike said...
GM MUST be willing to back up their product with a solid 100,000 mile 10 year Warranty. The purchase for many families is a major one and can't take the chance on getting bit by the (car dealer shark)... Those days are gone and they need to make a product that stands up for the money. think all companys need to approach this or fail. I know I won't buy in if not protected!!
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7-11-2009 @ 7:33AM
Gloria said...
I've had three La Sabre's, and I've loved every one of them. Will GM now have places to get repairs? I currently have to go to Pontiac Dealers.
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7-11-2009 @ 8:05AM
thnkugal said...
For a corporation to have been as brazenly ignorant as GM (add Chrysler) has proven to be historically, any hope for some magic 'rising from the ashes' is just that- hope. Watched the ABC Prime Time special last nite on the very subject. Boy oh boy- what an eyeopener. And a downer. GM still obsessed with the wrong engineering paradigm. Still insistent on designing overwrought, excessively fussy product. The 'Volt'- ? An oversized, overpriced failure to be. They started ten years too late. Everything they've got in going in the vehicle 'pipeline'- is more whacked out fancy pancy SUV type excess. Too big. Too pricey, too steroidal. No, GM can only remain as a niche auto maker. Not mainstream- at all. Hope thats good enough to remain viable. We seriously doubt it. Will NEVER buy a product from a co. who threw all their bondholders under the bus anyway. The lost us- for good.
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7-11-2009 @ 10:16AM
donald said...
Those who said foreign name cars' profit will go overseas and Big three profit's will go....... Where? Many parts in any cars are built somewhere cheap and only some final assembly done locally. GM is still built by UNION and their contract is always hidden from the public (only some are shown), their so called concessions are merely a show with no significant changes. Some of the biggest cost in US manufacturing are Labor and Insurances (and liability insurance is one of the major insurance against law suits)
In most industrial countries liability (or law suits) are Not a major concerns, unlike in the US. These are cost that the consumers in America have to pay and even more if the products are made in the USA. So as long as these major cost are restructured then we will still have to pay or get a lesser products.
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7-25-2009 @ 9:19AM
Vickie Boden said...
I have been taken my Chevy. I have always owned a GM vehicle but I vow to NEVER buy another. I have gotten bitten this past time by both the deal and now the local dealer in Florida where I now live. I am so disappointed and frustrated I cant even stand it. I would like to take this car and park it at the new CEO of GM's home. I would like to add that I will get rid of this vehicle and will never buy another GM product as long as I live. Everyone saw a woman coming both when I bought the car and now when I want the car fixed. Well this woman is divorcing GM. I can spend my well earned money for a new vehicle anywhere else and will do so from here on out.
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