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Is GM really in better shape?

Old 8/4/06, 09:18 AM
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Is GM really in better shape?

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Is GM really in better shape?

August 1st, 2006 Let’s consider a recent article posted on the Edmunds website, and consider what evidences are advanced, and what facts are overlooked, in this suddenly rosy outlook for GM…..
“GM Makes Headlines, but Ford’s the One in Trouble”
First there’s some pretty shoddy research (for cryin’ out loud, I do this for free in my spare time, and I can at least be bothered to get my facts straight–by and large).
“Ford recently announced a second-quarter loss of $123 million. The quarterly deficit brings Ford’s red ink so far this year to more than $1 billion (it lost $1.6 billion in all of 2005).”
Ford did not LOSE $1.6 billion in “all of 2005″, Ford EARNED $1.6 billion in “all of 2005″. Also the numbers reported are not consistent. Ford’s operating loss for the second quarter was $48 million, their operating profit for the first quarter was $458 million, giving them–for the year–an operating profit of $410 million. Now operating profit is a pretty useless way of measuring results, it’s generally refered to as “profit, before all the bad stuff”, but if we’re going to use it, we should at least use it consistently.
“Without those charges, GM earned a net profit of $1.2 billion, confirming that its restructuring plan is yielding results.”
See why we made such a big deal about OPERATING profit? Because our author has decided to compare Ford’s losses including one-time charges, with GM’s profits excluding one-time charges.
It’s the only way her argument makes sense. If you compare OPERATING profits on both accounts, you get $1.1 billion at GM for the year, and $415 million at Ford. A difference, to be sure, but hardly one that validates the theory that GM’s turnaround is gaining traction. If you go by the total losses on both accounts, Ford has lost about $1.3 billion, GM oh, about $2.9 billion. [edit] Ford restated earnings yesterday, and added about $200 million in one-time charges related to pension expense, for the year Ford’s total losses are now in excess of $1.5 billion, still well short of GM’s nearly $3 billion worth of red ink.
Now let’s take a look at those numbers. Right off the bat, we have to knock $200 million from the operating profit cited in the article (GM restated their 2nd quarter earnings today). Now let’s look at GM’s much trumpeted reduction in costs. No small amount of this is due to buyouts that eliminate future pension obligations. GM also began a new retiree and employee health care program on June 1 that substantially reduced their healthcare costs (if GM’s estimate of $3 billion a year in savings is correct, they stood to pick up $250 million in savings just in the month of June). Why bring these things out? Because they are similar to programs that are in place at Ford. Ford, to be sure is reducing headcount more gradually, and they stand to benefit less from their implementation of GM’s model healthcare plan, but as you will see below, that is in a large part because the situation is more urgent at GM.
Now to the source of 66% of GM’s $1 billion operating profit. GMAC. Since GMAC will be only 49% owned by GM next year, we can expect that GM will receive a much smaller benefit from this unit next year. One hopes that they really get their automotive costs in line, because their financial services unit is not going to be very helpful next year.
A huge part of GM’s turnaround plan, people, involves selling off a major profit generator. Ford sold Hertz which was at best an indifferent contributor of profits, and not really integrated into the rest of their operations. GM, on the other hand, took GMAC down to the pawnshop in order to pay next month’s bills, so to speak.
Going back to the article,
“Ford has backed off on its goal for the number of hybrids planned by decade’s end, a shift Bill Ford blames on his concession to Ford’s middle managers and senior executives, who wanted more trucks and sport-utilities.”
Documentation is entirely absent for this accusation. Did the author not learn, back in journalism school, that you need sources before you can print stuff like this? Or is the author simply reinterpreting a few morsels of questionable accuracy in a subsequently refurbished New York Times piece published a few Sundays ago?
“Confusion is caused by such things as introducing the all-new Ford Freestyle and then shortly after its launch announcing it will be eliminated in a few years, but then resurrecting it.”
No one at Ford ever ‘announced’ or even confirmed widespread rumors that the Freestyle was going to be cancelled. I would suggest that the author look for even a single sentence, on the record, from a named Ford executive suggesting that the Freestyle was going to be cancelled.
“Already, sales of Ford’s stalwart F-150 pickup truck, the best-selling vehicle in America for more than two decades, will be under attack from General Motors’ completely redesigned Chevrolet Silverado and GMC Sierra this fall, as well as Toyota, with its new Tundra. Toyota doubles Tundra capacity via its new plant in Texas.”
The upcoming GM trucks do not in any way exceed the capacities of the Ford F150. The ‘coolest’ new feature that will be widely available is a rear access door that swings wide (very useful in parking lots). As to the Tundra, and the new plant, well, last time I checked having an abundance of capacity was not an asset in this market. Toyota has no proven demand for the number of Tundras it sold last year, let alone a number twice that high.
“For all of its missteps, at least GM is beginning to capitalize, to some degree, on its vast global network for sharing products. Ford, instead, continues to operate with largely distinct geographic chimneys.”
The absurdity of this statement knows no bounds. In the U.S. alone Ford sells no less than 20 models that are built on global architectures, or with substantial component sharing among a global product range.
“For starters, numerous management changes and departures have occurred during Bill Ford’s watch”
Okay, let’s look at this from a totally different point of view: Who got Ford into the mess they’re in? Management. Should Bill Ford, then endeavor to keep management personnel that did little to upset the ossified structure of Ford’s product development unit, despite a decade’s worth of missteps?
Should there not be turmoil, and a struggle over the direction of this company? Quite obviously there were many who were content to watch Ford march off into oblivion. If those people find themselves unwelcome at this Ford Motor, should we lament their disappearance? If people like Greg Smith, a great guy by all accounts, are not capable of handling the responsibilities of running a unit in crisis, should they be kept there?
In short, should we expect stability and tranquility as five decades of plaque are scraped off the walls of this company?
————-
Now let’s look at some ugly truths about GM.
1) GM lost $10 billion in 2005. Granted, some of that was asset writedowns and the like. However, a substantial part of it was also cash burn. $5 billion worth of cash burn. They have burned through a further $8 billion in cash this year. This is why they’re selling a stake in GMAC. They really need the cash. Now.
2) GMAC continues to have a higher cost of capital than Ford Credit (at the most recent reporting, 5.8% to 5.5%), and lower margins.
3) Ford’s cash reserve is higher than GM’s and Ford overall has a better debt to equity ratio, leaving Ford with more stockholder equity than GM, $3 billion more.
4) GM continues to bear risk of a strike, or other unfavorable developments at Delphi. Their failure to prevent a bankruptcy filing at Delphi stands in stark contrast with the efforts that Ford has been able to expend on behalf of Visteon (which, managed to turn a small profit last quarter).
5) GM is far more dependent on the U.S. market, and on the health of its U.S. operations. Last quarter, 48% of Ford’s automotive revenue came from operations outside North America. For GM the figure is closer to 36%.
6) GM has lost market share in North America in the passenger car and fullsize truck segments this year, and they have seen sales slide in all categories (cars, trucks, MPVs). While Ford has seen sales fall in trucks and MPVs, they have seen growth in the passenger car market that has outpaced growth in the overall industry.
7) Instead of holding to a policy of reduced incentive spending and more realistic pricing, GM spent well over $4,000 per vehicle on incentives in July (according to Edmunds.com). There are apparently over 100 days of inventory for the new Tahoe, Yukon, and Escalade.
8) While much has been made of Ford’s decision to slash dividend payments, a credit facility restructuring at GM has excited little notice. GM has offered up the following as collateral on a $5.6 billion dollar credit facility:
* Certain North American accounts receivables
* Vehicle inventories from GM, its Saturn unit and its Canadian operating unit.
* Certain plants and property owned by GM of Canada.
* 65 percent of the stock of the holding company for the company’s indirect Mexican subsidiary, GM de Mexico
Now stop me if I’m crazy, but any time a company needs a line of credit badly enough that they’ll offer collateral that includes plants, stock, and receivables, they’re not in the best of shape.
While GM’s efforts to cut costs are commendable, and have been pursued with a zeal that has been absent at Ford, it is clear that Ford remains the healthier company from a financial standpoint. It also remains clear that Ford has a more diversified operating base, by virtue not only of its stronger credit subsidiary, but also less reliance on North American operations.
Where GM appears to have an advantage, in upcoming product, it seems there are some illusions. Ford’s product plans are not clearly known. However, it is known that Ford picked up passenger car market share in 2005, and that they appear poised to pick up passenger car market share in 2006 as well. It is also known that the new GM pickups do not appear to greatly exceed the Ford F-Series in any meaningful benchmark of performance, limiting their impact on F-Series sales.
Therefore, one should hesitate before concluding that Ford’s future plans are in disarray, or that they will be unable to sustain a trend of increasing passenger car retail market share (overall car market share could decline with cancellation of the Taurus), increasing residual values, and a more desirable product range.
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Old 8/4/06, 01:43 PM
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I just want to say thank you for posting this. It seems that the media has grown tired of beating up GM and now has its sights trained on Ford. They have sensationalized the problems Ford and GM have been having.

Yes, Ford and GM are in a low spot in their histories right now finanically, there's no denying that, and these "journalists" who are making things sound worse than they really by not getting their facts straight aren't making things any better. If you were in the market for a car and heard this half-true "news" about Ford, it sure wouldn't give you any more reasons to buy a Ford car or truck.

It's funny how Daimler-Chyrsler has problems too, but they aren't being beat up by the press-- I guess "Dr. Z" being German and all makes everything okay....
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Old 8/5/06, 01:25 AM
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while obviously not a completely objective source, they certainly do their research and back up their arguments very well, as opposed to Edmunds' whose only support is their name.
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