Can GM Survive? A Wall Street Analyst’s View
I watched with interest the first round of questioning by Senate Democrats of the Big 3 auto execs yesterday. They’re still dancing around each other but the battle lines have been drawn: Right-to-work red state senators want to destroy Detroit so Toyota and Honda can build beatific non-union plants in their states, while the Big 3 execs assert that all they need is cash to weather the current credit crunch and it will all be beer and skittles again.
We know the first group is full of shit, but how about the second?
I had a very enlightening converation with former Wall Street GM analyst Ron Glantz, who is also a founding partner of Pantera Capital Management, a global macro hedge fund. Ron made the Institutional Investor All America Research team 17 times, and was the number one auto analyst for seven consecutive years.
Although we have a philosophical difference about the situation at hand, his analysis is sobering and deserves serious consideration.
Ron’s message was unambiguous — he believes that Congress should let GM die.
In his 60 Minutes appearance, Obama said that he believed that assistance to the auto industry should be "conditioned on labor, management, suppliers, lenders, all the stakeholders coming together with a plan (for) what does a sustainable U.S. auto industry look like."
Ron didn’t think such a thing was feasible for a variety of reasons I’ll get to later, but I asked him to humor me. Assuming that the government somehow took on responsibility for the healthcare of GM workers, what would such a plan look like?
Ron said that first and foremost, unions would have to accelerate their 2010 concessions and vote to surrender their pensions, which are also a part of the legacy costs — "difficult," he said, "because retirees vote in elections and there are 4 or 5 retirees for every one still working."
Secondly, he said that "bondholders have to agree to trade in their bonds for equity in order to remove the interest payments on the bonds and improve the industry’s balance sheet."
When he was analyzing GM 2 years ago, the outstanding bonds had a $300 billion face value. It’s less now because they sold off part of GMAC, but because a lot of their sales were to blue collar workers who needed financing, the credit crunch means they can’t sell cars. One of the reasons for the October sales collapse was that in September, GMAC stopped auto leasing and raised credit standards.
The overriding problem, however — and the one he thinks is insurmountable — is the legacy of bad product that the US auto makers have in this country.
Right now, it’s harder to sell American cars in America than it is to sell foreign brands. So if Toyota and Chevy make the exact same car, the American car has to be sold for $4000 less (factoring in both American buyer’s nervousness that the brand will go bankrupt, along with bad product legacy). Ron said that American automakers have now developed the same worker productivity that the Japanese automakers had by changing their culture, and can build just as good a car, but consumer trust isn’t there and nobody will buy them at the value they will give for a foreign brand.
"The guy who buys an American car is like the only person at the party who doesn’t get the joke," he said.
His experience tells him that Wagoner represents "genuinely bad management. He likes Bob Lutz (father of the Volt) but thinks that he is "fighting with one and a half hands tied behind his back." He also thinks highly of GM President Fritz Henderson.
He thinks the Volt is largely a PR concern at this point because it doesn’t have a battery and there isn’t the R&D money available for Lutz to work with (though the battery issue seems to have had some resolution). He says the Cruze may be a very good car, but they’re going to build and sell them them in Korea because it costs less to build there. He also believes the Malibu is an excellent car.
For the near future, he thinks that GM has a much brighter possibilities overseas where there is more faith in their brand. Just this month they put cash into a Russian auto plant because they can build Opels there, and it seems that Buicks actually sell quite briskly in China.
Possibly the most interesting thing he said was that Americans are never going to buy low-mileage cars at a price that is going to be profitable to auto manufacturers unless there is a gas tax levied. So what he proposes is that an escalating gas tax be put in place for the future in order to give people time to prepare, such that they know gas will cost $4 a gallon at the end of this year, then $4.25, then $4.50, etc. Otherwise, both demand and profitability are going to lie with gas hogs whenever gas prices are low.
Bottom line — he thinks GM should probably just declare bankruptcy, break the contracts with the unions, close 75% of the plants and sell the rest to the Japanese with the promise to employ some UAW workers. He said GM passed the tipping point years ago and is probably beyond redemption, and that he sees no need for the United States to have an ongoing auto manufacturing interest.
I have a fundamental philosophical belief that the US should not cede domestic auto manufacturing to foreign companies for a variety of reasons — not the least of which is I think it would be demoralizing and economically destabilizing at a difficult time. But after listening to Ron, it because clear that the most daunting task before GM is the rehabilitation of its brand. The $1000 per car legacy costs pale beside the $4000 devaluation due to lack of consumer confidence.
If it’s possible for GM to come back, the hope really does rest with the Volt. Its $40,000 pricetag means it’s not going to be a cheap mass-market car, but much like the "green marketing halo" that the Prius cast over the Toyota brand, the Volt has the potential to reinvigorate GM’s image. Reviews are glowing, and the 100+ mpg it promises put it leagues ahead of anything else from a major manufacturer on the market at the same time.
If GM were making crap cars, not even the Volt could save them. But as Ron notes, they are making cars that are just as good as those produced by Japanese manufacturers. They can deliver the goods.
Day 1 of the auto hearings (liveblogged by emptywheel and he NYT) were very dramatic and compelling. It will be interesting to watch over the next few days to see if the automakers, the unions and the lawmakers try to cobble together the kind of plan Obama has called for, a vision for a "sustainable U.S. auto industry" — if such a thing is possible.