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GM's non-starter

Editorial Staff

The announcement that General Motors wanted to buy Chrysler raised a few eyebrows. First, why would the venture capital company that only recently bought it from Daimler-Benz want out so soon; would competition authorities agree; but most of all, where would the money come from?

Suddenly, it all made sense, but not in the way General Motors wanted. The doubters were right, and in the event regulatory hurdles and the question of price were irrelevant. What mattered was the simple truth that GM hasn't any money. Not just hasn't any money to buy Chrysler, but hasn't any money.

General Motors published its results yesterday and it doesn't make pretty reading. If sales don't pick up, it has an estimated nine months left before it can't pay the bills. But that nine months is illusory: it has enough cash to meet its bills for that long but only because it is in so much debt. One breach of banking covenants and it's all over for what was often the world's biggest car maker.

GM is pleading poverty but the reality is that it has misread the market far too often. Who in their right minds would introduce a new SUV? The Daewoo / Chevrolet division has. And in a market where high quality cars are being heavily discounted, the Windstorm / Captiva is roundly derided for poor build quality. The car is also being marketed under the Holden, Vauxhall, Saturn and Opel brands. It's been introduced gradually around the world but GM put all its hopes into it.

It needed to: having somehow managed to completely undermine the SAAB brand by a series of incomprehensible (to all but accountants, one assumes) product line decisions, the once prestige brand is now a widely seen as badge-engineered Anglo-German-US pap instead of a Swedish thoroughbred. Last year it reportedly sold just 1,200 cars in the USA. In the marque's heyday, entire families in the UK would have one each, and airport car parks were populated with the faster models waiting for pilots to park their planes and fly home in a SAAB. And no, GM, you can't take that line for your marketing unless you pay us for it. And you can't afford to.

It is instructive to analyse General Motors' present position.

1. We are out of money. The government has rescued the banks, so it should rescue us.

2. We are making cars no one want to buy. So what we need is for the government to make sure that easy and cheap credit is available so people can buy the cars we are making.

Duh! Isn't that how we got where we are today? Cheap and plentiful credit on ill-advised purchases that depreciate?

GM has been here before: then it did a clever thing. It created a separate company and sold the cars to that company which then sold them to consumers on a hire-purchase scheme. Time was that almost all of GM's profits (it did used to make some) came from the finance division - and the rest came from the parts division. But someone had the not-so-bright idea that GM could increase its capital by divesting itself of the profitable bits. That would have been fine if it could have lived off the interest but instead it passed the results of the sale to shareholders, paid off some debt and then used the rest of the capital to support cash-flow, a cash-flow that went deep into negative territory and resulted in massive debts - again.

As the price of fuel has gone up, GMC and Hummer's sales have fallen to tiny numbers. Saturn remains a mass market car with a blue collar reputation. And as both Obama and McCain repeatedly pointed out by omission, the USA has no blue collars any more, everyone is middle class. But they are not middle class enough to buy a SAAB or a Buick, they are not flash enough to buy a Pontiac and most are not brash enough to buy a Cadilac.

The truth is that there is almost no money in making cars. And even if there was, selling just 2.1 million cars worldwide in Q3 this year isn't enough to support the company. GM is selling its 2009 9-3 Aero Convertible - a seriously desirable car now that SAAB are having more say in its design - for just USD48,500. Incredibly, it is selling the same car (no options) in the UK for the same price. This is important because UK cars are generally hugely overpriced compared to cars in the USA.

In Europe, the Astra / Vauxhall range has recently been updated and has produced a vastly improved range as against a decade ago. Indeed, driving a Vauxhall Vectra 2.2 recently was a revelation - the equivalent car a decade ago almost ended up wrapped around a tree at just 30mph in the dry due to its poor roadholding.

Holden has produced its new Ute range, and some seriously good super-cars in family car bodies. One of them exported to the UK sold in tiny quantities - but that may be more due to the UK's horrible system of car taxes which made an otherwise extremely good value for money car extremely expensive to run.

So, ironically, GM has actually got its act together in some divisions.

But it is too little, too late.

For workers in Korea, Germany, UK and Australia there is just the wait: GM like all international companies, will almost certainly cut operations far from home first. Detroit, which is at the heart of the company's collapse will be the last place to close, if history repeats itself.

GM has no divisions it can sell as discrete units, with the possible exception of SAAB.

Some years ago, it bought Lotus for it technology strengths. Then it sold it to the fledgeling Proton. This week Lotus posted its full year results. It made a profit of GBP2 million. Not a lot, one might think. But against losing around USD750 million per day as GM is doing, Lotus - and Proton - are the ones that are smiling.