President Obama announced today that General Motors had failed to meet the government’s request for a viable turnaround plan, but failed to go into details during his brief speech. However, the Obama administration’ auto task force has since elaborated on the subject, revealing five weak points in GM’s plan
The first sticking point revolved around GM’s rather optimistic market share prediction. GM predicted its market share would slip to 21.1 percent this year – down from 21.5 percent last year — before decreasing to 19.1 percent by 2014, according to Automotive News. However, the auto task force expects the shuttering of several GM brands to account for at least a 1.8 percent decrease in market share, meaning GM’s share of the market will likely slip to well below 20 percent by 2012. Further reductions in fleet sales will also take a toll on GM’s overall market share.
President Obama’s auto task force also disagreed with GM’s pricing. According to Automotive News, GM realized a 30.4 percent contribution margin – a car’s sales price minus and variable costs to actually build the car – in 2006 and 2007 and expects that figure to rise to 30.9 percent by 2013. But, according to the auto task force, GM’s calculations do not account for a “severely distressed market, lingering consumer quality perceptions and an increase in smaller vehicles.” GM has historically made larger profits on its largest trucks and SUVs, but the market has since shifted to smaller cars and crossovers.
Thirdly, GM’s plan to shed brands and dealers wasn’t aggressive enough for the Obama administration. GM’s current plan calls for the refocusing on Chevrolet , Cadillac , Buick and GMC , with Pontiac remaining as a niche brand. However, the auto task force is likely looking for further brand shedding, which could mean Buick, GMC and Pontiac are on the chopping block.
On a similar note, the auto task forced voiced its concerns over GM’s product mix. Although details of the report were not given, it sounds as if GM’s future plans still rely heavily on trucks and SUVs. The auto task force acknowledged the upcoming Chevrolet Volt “holds promise”, but was dubious on the EV’s short-term potential.
Lastly, the auto task force said it was wary of GM’s growing legacy costs. Despite a plan to fund half Voluntary Employees’ Beneficiary Association’s plan with stock, the auto task force expects GM’s legacy liabilities to grow “to unsustainable levels, reaching approximately $6 billion per year in 2013 and 2014.” At that rate, GM would have to sell an additional 900,000 vehicles a year just to meet those costs.
The U.S. government gave GM 60 days to come up with a more aggressive viability plan but, with all the information that has come to light, it looks as though GM might be facing an impossible journey. GM has already failed to meet its objectives with a four month lead time, leaving little hope that GM will be able to side step bankruptcy with just two months left on the clock.
