Monday 11 December 2017

Remodelled GM has problems under hood but keeps on motoring

A customer prepares to test drive a used General Motors Co. Chevrolet Corvette
A customer prepares to test drive a used General Motors Co. Chevrolet Corvette

Dr John Lynch

The magnificent hubris of General Motors (GM) has always been its weakness. No other major corporation threw quite so many hostages to fortune. This was, after all, the company whose president, Charles E Wilson, said in 1953 that what was good for America was good for GM and vice versa.

It got its comeuppance in 2007 when it had to be rescued from bankruptcy by the US government, which it once deemed its own equal.

But has GM learned humility? I wouldn't be so sure. I've even greater doubts having read a book called 'Shenanigans, Lifting the Hood on GM', by the former GM man in Ireland Arnold O'Byrne. Arnold tells in amusing detail his own interactions with the powers-that-be in the American corporation and he also brings the GM story up to date with reference to a recent series of mechanical problems relating to faulty ignition switches that have resulted in 12 people losing their lives.

The investigation showed that GM engineers and lawyers failed to act on the fault for a decade. The top road safety official in the US administration described the whole affair as 'deeply disturbing' – a conclusion that is hard to argue with.

The listed company General Motors that we now know, is a new company formed in 2009 and which acquired most of the assets and some of the liabilities of the old GM. It was floated on the New York exchange at the end of 2010. Old GM, once Detroit's Finest, is now referred to as the Motors Liquidation Company.

Today the new GM is still a significant company and valued at $54bn (€40bn).

It has facilities in each of the world's continents, producing 10 million vehicles last year, with revenues of $155bn, earnings of $8.6bn and employs 212,000 people, half in the US. However, as you read this, the company is facing a $35m fine and has to recall 2.4 million cars and light trucks for safety reasons.

Globally, the company has recalled 50 million vehicles and has 35 ongoing product investigations as it works to show its newfound responsibility.

All of these problems stem from the company's lack of attention to the solving its faulty vehicles, a problem some suggest could have been solved for less than $1 per car.

The problem for GM is that it will take a lot to extricate the firm from regulatory troubles by simply writing a cheque. The fine of $35m is peanuts in relation to GM revenue.

However, the car producer was pressured into signing an oversight agreement with the US Highway and Safety administration. This agreement required that safety issues be elevated quickly to the highest level, and other significant changes.

Some of the changes are legally binding – requiring the shake-up of GM and its culture; the same culture that prized cost savings above all other considerations, including safety. GM now has 'new rules being enforced by a new sheriff'.

The company is divided into five divisions: GM North America, GM Europe, GM South America, GM International and GM Finance. Its biggest contributor to earnings last year was North America, the 10 Chinese joint ventures and GM finance. South America was profitable, with Europe reducing its losses and hoping to break even next year. North America had record earnings ($7bn last year) with one-third of the group's global car sales. Europe (Opel/Vauxhall) showed its first market rise in 14 years and reduced its losses to $0.8bn.

The international division, including China, is the largest in terms of car output but delivered a disappointing $330m to group earnings.

The current share price at $37 is close to the floatation price five years ago, despite the raging bull market of the past four years. However, the company has a crisis of consumer and investor confidence, as a result its share declined 17pc. It doesn't help that it is also distrusted by the US authorities. On the positive side, investor concerns relating to victim compensation and product recall costs appear to be subsiding.

Some analysts claim GM has only one way to go and that's up; it is unlikely to be rescued a second time.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy or sell any of the shares mentioned

Irish Independent

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