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GM smiles through the apocalypse
Last year was not great for the automaker, but it's counting on a relatively rosy future.
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| 2007 was better than the previous two years, and GM is counting on increased revenues and decreased costs in the near future. |
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| GM's new hybrid system trades lower fuel economy gains for lower up front costs. |
(Fortune) -- Buried deep in the slide deck that General Motors distributed to analysts and journalists today with its 2007 financial results is a page that, better than anything else, helps describe the unusual mindset at GM these days. It is a chart that the company has never published before, and it could be the source of comfort to observers and investors - or dismay.
The heading of the chart is "Mid-Term Outlook - 2010-11." A more appropriate title might be "Silver Linings." It represents what GM believes will be the payoff from all the pain it has suffered over the past few years, from layoffs and bruising labor negotiations to hefty losses at its finance arm, GMAC, and huge write-downs for tax benefits.
Nobody can take much comfort from GM's performance in 2007. Despite blowout results in the rest of the world, GM Europe just barely broke even and North America recorded an adjusted $1.5 billion loss. That came on top of a $1.6 billion loss in North America in 2006 and a $7.4 billion loss in 2005. Overall, the company recorded a small, adjusted annual loss.
With that kind of earnings history, it is no wonder that GM wants to look ahead. So what does it see three to four years from now? On the one hand, GM sees its costs going down. By 2010 and 2011, GM expects to be saving between $4 billion to $5 billion in labor costs as the result of the UAW contract it negotiated last year. That will come from replacing expensive older workers with younger, cheaper ones; more flexibility in manning its plants; and shifting health care costs onto a union-controlled trust.
It also figures to save another half a billion dollars as it further untangles itself from Delphi, its old captive parts supplier. And it expects to drive parts costs lower through new technology and smarter production methods. Independent parts suppliers will be doing the heavy lifting on that one.
On the revenue side of the income statement, GM expects industry sales to head back into the 17-million-unit-a-year range in the next few years, up from around 16 million expected in 2008, driven by pent-up demand and growth of the population. GM expects to profit from that growth by demanding higher prices for its stronger brands like Chevrolet, Cadillac, and Hummer. And it expects that GMAC, its financial operation, will have worked through the billion-dollar losses it is experiencing in its residential mortgage business.
GM's Mid-Term Outlook is an appealing scenario but one that will be difficult to achieve. As Fritz Henderson, GM's vice chairman and chief financial officer, points out, buyers are shifting out of big, high-profit pickup trucks and SUVs into lower-margin passenger cars, with a consequent impact on GM's bottom line. Regulatory costs, such as meeting strict 2020 fuel economy regulations, are increasing. Some GM'ers believe 35 mile-per-gallon rules will cost as much as $4,000 to $5,000 a car.
And market pressures will not let up. By 2011, the first cars made by Chinese manufacturers will likely be, fighting for low-end sales in the U.S., and Alfa Romeo and others may return to compete for high-end business. "The competitive environment is not going to get any easier," said Henderson.
So the future looks brighter than the recent past at GM North America. The present isn't looking too buoyant either. Henderson hates speculative questions but he has included some speculative thinking on the downside in GM's 2008 forecast. He's already figured out that if sales slip into the 15-million-unit range, it is going to cost GM $2 billion to $3 billion in net liquidity. As a demonstration of his concern, he says that GM is taking a month-at-a-time approach to this year's results.
There are some other numbers in the GM deck that contain more good news for North America. GM now makes 54% of its unit sales, and gets 40% of its revenues, outside of its home market. Assuming international results continue to grow, their impact will make results in North America less and less important to GM's financial performance. For GM, that may be the best silver lining of all. 
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