Friday, November 21, 2008

A $25 Billion Bet With your Money

The NYT has an article about the Chevy Volt, which is GM's upcoming hybrid vehicle. It's the vehicle that GM is claiming makes the automaker worth saving. And I think it is a perfect example of what's wrong with this company.

A GM executive says that people are ready for it, saying that people are used to plugging in things like PDA's and cell phones now, and so it shouldn't be a problem getting people to buy it. This is laughable, and a classic straw man argument. The issue with electric cars has not been that people are uncomfortable with the idea of plugging things in. Americans have been plugging in lights and record players and vacuum cleaners and all sorts of things for the last 100 years or so. The issue is that the car costs $40,000. And the average car buyer just can't afford that. If, in times of $2 gasoline, they would even want it is an another question entirely.

I also have serious doubts that GM is going to make any money on these cars, either. They are going to have to sell them at razor thin margins since they are already relatively expensive, and they aren't going to sell many of them. They sure as hell aren't going to sell enough of them to make a dent in their out-of-control cost structure. They are talking about selling 10,000 of them in the first year, which, as the article notes, is the number of Priuses that Toyota sold in October alone. If they made $10,000 on each one (which is a pipe dream, for reasons addressed below) they would net $100 million, or 1/250th of what they are currently asking Congress for. 

Furthermore, they are making a number of claims which, frankly, we should ignore. 

First, they say that the car will be ready in 2010. This means that the technology is not yet complete. If it was, they would be selling it sooner. Because it's not, the car could easily be pushed back, or never actually produced. This happens all the time. It has been delayed already, and GM's track record here is awful.

Second, they claim it will sell for $40,000. This is a guess on their part, since the technology and logistics aren't worked out, and the costs always find a way to change. Predicting the cost of building a car that will come out in 2 years, especially in this economic environment (and more so with a car that hasn't been completely designed yet), is pure folly. And asking for a $25 billion loan from struggling taxpayers on the basis of that guess is insulting. 

It is telling, as the Times states, that GM "has not said if or when it plans to make money off the Volt." And you better believe, when GM is begging Congress for money, that they are painting the rosiest possible picture for potential sales, profit, cost, and technology that can be imagined, if not outright lying about it.

More from the Times piece:

G.M. reportedly spent about $1 billion in the 1990s to develop the EV1, which it dropped after saying it could not make money on the cars. The EV1, which was available only in lease deals, sold for the equivalent of up to $44,000 but cost G.M. about $80,000 apiece to make........

In 2004, G.M. displayed a hydrogen-powered concept vehicle, the Hy-wire, at the Paris Motor Show, making similar promises that it would revolutionize the industry. Thus far, the Hy-Wire has not become reality.

Is there anything about the history of GM which would lead you to believe that they are capable of making money from this car? In a bankruptcy proceeding, the technology will not be lost. The division that is designing the Volt could be spun off as a separate entity, if in fact it were viable. So bailing them out so that the Volt can come and save the American economy and environment is ludicrous. There may be good reasons to bail out Detroit (although I have yet to hear one.) But the Chevy Volt is not one of them.

Tuesday, November 18, 2008

And Now GM

GM, which is burning through billions of dollars a month, believes that the government should give it another $20 billion or so to throw down the sinkhole with the rest of its shareholder's money. It says, with a straight face, that it just needs some money to get it through this rough patch. This from a company which has been steadily losing market share for years, is saddled with terrible products, redundant models, impossible labor contracts, and most importantly, has a management group that got it into this mess by being good at only one thing: asking the government for help. 

Its CEO is a man who gambled away the future of the company on gas-guzzling trucks, refuses to consider the possibility of resigning (believing that he is the only one who is capable of solving their problems), and likewise refuses to contemplate the possibility of a Chapter 11 bankruptcy filing, which is the only hope the company has without a government bailout (and, in all likelihood, even with one.)

It's management says that bankruptcy will hurt sales even more, as people will be unsure if the warranties on their cars will be honored (as if those warranties can't be insured), and they say this as if the sales numbers that have gone over a cliff don't point to a loss of confidence already. 

Its union, which has secured paychecks for over 8,000 people who don't go to work (!), and whose members make over 50% more than Americans who work at foreign-owned factories in the US and have benefits packages that average Americans can only dream about, complains that the hardship that their employees will suffer is so great that taxpayers making far less should be required to pay billions to support a company that is losing money so that they don't lose the jobs they believe they are entitled to.

GM is no longer a financially viable company. It must go through bankruptcy. Its shareholders must be wiped out. Its management must be replaced. Its debt must be restructured. Its labor contracts, more than anything, must be abandoned. None of this can happen without Chapter 11, and we should not contemplate government help in any form until the company agrees to all of these things.