Facing reality at GM
Belatedly, the automaker is coming to terms with the weak economy and the soggy car market.
(Fortune) -- Truly determined optimists purported to divine good news amidst the wreckage of General Motors' $3.25 billion first-quarter loss. To be sure, the financial results were better than some had expected, GM made money everywhere except in North America, and the automaker is doing better controlling its costs.
But what was notable about the earnings announcement, as well as the subsequent conference call with analysts and journalists, was how difficult the quarter really was in North America -- and how hard GM (GM, Fortune 500) is finding it to face up to that reality.
The big news came when newly named president Fritz Henderson more or less admitted that GM markets and distributes cars under too many brands - but can't cut the underperformers because doing so would cost too much.
GM has argued for years that with eight brands of cars and trucks in North America, it can slice and dice the customer base better than anyone, and provide buyers with more choice. Ever since it killed Oldsmobile at the end of 2000, it has resolutely rejected the need to shutter any more divisions, even as it moved to shunt Buick, Pontiac, and GMC into the same dealerships, and created a premium division by joining together Cadillac, Hummer, and Saab in a shotgun marriage.
On Wednesday, Henderson let the cat out of the bag, in effect saying that it wasn't the strength of the brands that kept them in business, but the cost of getting rid of them. As a business proposition, the cost of doing away with a brand is too rich for GM, he said, adding: "Oldsmobile was pretty painful." GM's approach since then, he explained, was that "instead of ending the brand," it decided to slam them together into single distribution points and shrink their model lineups.
He admitted that doing away with a laggard brand (you can insert Buick, Pontiac, Hummer, or Saturn here) would cause a big splash and might feel good. But it wouldn't be cost-effective, in his view. GM spent nearly $1 billion on Oldsmobile in 2001 alone buying out dealers and shutting down operations.
More confessions were forthcoming from Henderson and chief financial officer Ray Young:
- They admitted that their U.S. sales projections for 2008 have been too rosy. GM had been expecting more than 16 million vehicles, including trucks and buses, to be sold this year. In fact, the adjusted selling rate for the first quarter of the year points to 15.6 million. That's a significant shortfall when you are trying to manage production and inventory.
- They expected parts-maker Delphi to emerge from bankruptcy in April. Since its financing fell through, however, it didn't, and GM has agreed to cough up another $650 million. At a time when GM is scraping together pocket change, Delphi (DPHIQ, Fortune 500) has been an expensive obligation. GM has taken $8.3 billion in Delphi-related charges over the past few years.
- They didn't forecast $120-a-barrel oil. Of course, nobody else did either, but higher gasoline prices are accelerating the shift out of highly profitable SUVs and pickup trucks into less-profitable crossovers and passenger cars -- all to GM's disadvantage. Said Henderson: "The change in market mix has accelerated faster than we thought."
Several other first-quarter events made a mess out of any immediate plans to return GM North America to profitability. The big one was GMAC, its once-dependably profitable finance arm, which lobbed losses of $276 million onto GM's operating statement, and added to the injury with a $1.5 billion non-cash impairment charge.
Henderson complained a bit about the overall economy, saying, "If we'd been dealt a better hand with the market, we'd be doing better." But being more of a realist than an optimist, he added, "We have to adjust. We have to learn how to make more money in cars and crossovers and tighten our belts with regard to cost expenditures."
As Henderson would be the first to admit, GM doesn't have all day to get this done. But he should at least be happy that he doesn't have a retired CEO like Jack Welch looking over his shoulder. If he did, his faulty first-quarter forecasts might have gotten him thrown under the bus.