General Motors announced disappointing earnings results today and issued a warning that first quarter results will underwhelm as well. The reasons behind the earnings’ miss are surely going to be explained away by pundits and proponents of the company still known as Government Motors to many. Sorting through the smoke and mirrors can lead to some important and simple explanations as to what is going on at GM.
Before looking at the reasons why GM has drastically underperformed the broader markets since the Obama-orchestrated bankruptcy process of 2009, let’s take a look at one of the most critical takeaways from the latest earnings announcement. GM is now approaching pre-bankruptcy debt levels with over $36 billion in short and long term debt. The company issued $28 billion of new debt with $20.2 billion of that going to pay down existing debt.
What’s that you say? You thought GM had a “fortress” balance sheet and no debt? If you believe that then you are one of those who have been fooled by the cronies of team Obama as they have portrayed GM as a great success as the president continually campaigned (and still does) on the perceived financial strength of the company.
The fact is GM’s balance sheet is beginning to look eerily similar to the pre-bankruptcy company. A glance back into the past, in the form of a 2008 SEC 10K filing for GM, shows that the company had $24.549 billion in cash and equivalents at the end of 2007 compared to the current $20.021 billion. Short and long term debt totaled $39.431 billion then compared to $36.183 billion now.
So, you thought $20 billion was a lot of cash for an automaker to have on its balance sheet? Wrong again. You would have been deceived about that as well, as the auto industry is highly cyclical and large amounts of liquidity are needed to operate during downturns. It took GM less than two years to burn through their first “cash hoard.”
There is a simple explanation for why GM has performed so poorly. As I have explained many times, the company has not been building cars that offer the most value to mainstream consumers. The proof that this is true can be found by following GM’s financial underperformance. The earnings numbers reflect a global disadvantage when it comes to building the best cars for the least amount of money. Compared to the fourth quarter of 2012, worldwide market share for GM decreased from 11.6% to 11.4% in the latest quarter.
GM can sell a lot of cars (that for the most part are not that bad) by discounting the vehicles to a point where consumers buy the cars instead of other highly competitive models. But that cuts into GM’s profit margins (now under 5% and one of the lowest in the industry), as evidenced in the latest earnings report.
Finally, we get to the question of why GM has not performed better. The simple answer is that the government can not operate a major industrial corporation better than the business world can. You see, capitalists focus on making profits. Politicians focus on making political points. Where the politician might feel it is best to offer perceived earth-saving but money-losing vehicles like the Chevy Volt, capitalists would try to build cars that consumers actually want.
Make no mistake about it, the governmental influence remains at GM. Obama-appointed board members remain and the cronies still can dictate what happens at GM. Former CEO, Dan Akerson, remains in a consultant role, despite the lack of progress during his watch. Appearances are still the most important thing to GM, just as they are to politicians. The recent announcement of a dividend as the company has to issue more debt is just one more example of that. Worse yet, the decision to offer a Cadillac ELR version of the failing Chevy Volt at twice the price confirms that GM still doesn’t have its eye on the prize.
The fact that the team put together by President Obama to oversee the GM restructuring was more focused on protecting UAW interests than upon getting GM to operate as efficiently as possible has put the company at risk. Members of the Auto Task Force had primarily financial backgrounds rather than auto industry expertise. Further confirmation of how well UAW members fared compared to other less politically-favored groups continues with GM UAW workers set to get a bonus of about $7,500 each as a result of the latest GM earnings figures.
The only question that remains is, how long will it take for GM to go bankrupt a second time? That depends on the economy and overall car sales. Judging from the latest results, current GM management focus and growing debt at GM, unless management makes drastic changes, it is now a matter of when GM will go bankrupt again rather than if it will.
Mark Modica is an NLPC Associate Fellow.