A Few Numbers Tell the Story of GM Loss

It’s a wonder to many people outside and inside the auto industry how fast the industry hit the skids, when auto sales began to fall in the second half of 2008.

Just a few months of a really pronounced sales downturn left Chrysler and GM on their knees, begging for government help. Ford is only a little better off. Japanese manufacturers like Toyota, Nissan and Honda are also tightening their belts, and in Europe, automakers like Peugeot and Fiat want help from their home countries.

GM provides a good example of how this seemingly sudden emergency came about, after a few years of slowly declining sales. GM filed a 75-page report today with the SEC, mirroring its earnings report on Feb. 26. A handful of numbers show that GM earnings have suffered out of all proportion to how much its production and sales have fallen.
 
On the surface, some of the numbers from 2008 don’t look all that bad, especially if you look at the entire 12-month period. GM’s worldwide production volume in 2008 fell 12.3 percent from 2007, to about 8.1 million units. However, worldwide production volume fell a much steeper 30.8 percent in the fourth quarter.

The much-reported credit crisis accelerated the drop in sales starting last fall. That’s true for the auto industry in general and for GM in particular. GM’s former captive finance company, GMAC Financial Services, was already in bad shape, due to big investments in subprime mortgages, one of the first sectors in the financial industry to fall apart.

For all of 2008, GMAC financed only 33 percent of GM’s U.S. sales volume, down from 45 percent in 2007, according to GM’s report. That figure fell to only 5 percent in the fourth quarter of 2008, down from 43 percent in the year-ago quarter. The lack of financing from GMAC made it inconvenient at best for would-be GM buyers. At worst, it may have driven shoppers to other brands, or kept them out of the market entirely.

Another telling number from 2008 is capacity utilization, which measures how many units a car company can build, versus how many it’s actually building. A good rule of thumb is that it’s next to impossible to achieve profitability below 80 percent capacity utilization, said Craig Cather, president and CEO of auto industry consulting firm CSM Worldwide.

GM reported today that despite ongoing efforts to reduce capacity, its capacity utilization in the fourth quarter of 2008 was only 72.1 percent, down from 86.2 percent in the year-ago quarter. For all of 2008, GM was operating at an average of 74.7 percent capacity, down from 88.5 percent in 2007. In contrast, Cather said that Germany’s BMW had 97 percent capacity utilization.

Cather told the International Motor Press Association in New York on Feb. 19 that the root causes for the present U.S. auto industry decline are: uncompetitive wages and benefits; redundant brands and products; too many dealers; excess capacity; and truck-weighted product portfolios.

Still, Cather thought GM can survive, “if all the planets align and they get what they’re asking for,” in terms of U.S. government loans.