It wasn’t a defense of the unions, it was a mere rebuttal to the statement that the Japanese did better because they had more robots.
And I did some research: GM spent $45 billion on automation just from 1980-1985 alone. From 1986-89 they spent an addition $35 billion. In an April 1986 conference of GM’s top-500 operations people, CFO Alan Smith (no relation to then-chairman Roger Smith) said about the planned $35 billion expenditures “For the same amount of money, we could buy both Toyota and Nissan. This would almost double our worldwide market share. Can we expect to double our worldwide share with this spending program?”
What the fiddle-dee-dee makes you thing that these companies are gonna turn around? Remember GMC? :dubious:
Or that the economy isn’t going to take a big hit?
I suspect that the recent news from North Korea may effect Japanese stocks negatively, & these two events, so close together in time may constitute a “double-wammy”.
The first thing to remember is that GM is actually a bank (GMAC) which makes cars as a sideline.GMAC has always been profitable; the car divisions have been losing money for years. the problem is this: GM has always bought labor peace by giving in to every demand that the UAW has pushed forward. This includes generous medical benefits, work rules, etc. As a class project in a labor relations course I took, we had to analyze the GM-UAW labor agreement for one year-there were 42 different job classifiactions! A metal shop worker cannot work in the trim shop, varous idiocies like that. So, GM has the highest labor costs in the industry. Finally, GM is competing against transplant factories (NISSAN, TOYOTA) who have a younger, better motivated, more productive workforce. I hope Kirk Kerkorian is lucky-if he can force some reform uponGM,it couldcome back big time.If not, I seeGM asbankrupt and gone within 10 years.
Actually, looking at the above-referenced 10-K, GM had a net operating income from its automotive operations of $35 million in 2003 and $93 million in 2002. Net income from their financing division was $2.8 billion.
I didn’t think about this earlier, but last night I realized that if GM’s average interest rate on their downgraded debt rises to just 7% they’ll pay out over $21 billion in carrying charges alone on their $300 billion in debt.
1/ You need to consider where the sales are. It’s all very well to market to the upper classes, but there aren’t that many in them, relatively speaking.
I agree that it probably doesn’t cost very much to load a bunch of cars on a boat and send them across the Pacific, but what about tariffs and other taxes? There is an amusing anecdote about old Isuzu Troopers (in this case, a 1986 Isuzu Trooper II). The back seat easily comes out–it’s just held in place by four bolts. Apparently, the laws at the time were written in such a way that it was cheaper to ship the car without the back seat (replacing the seat at the dealership in America) due to a difference in classification.
Because I find the subject endlessly fascinating (so fascinating I apparently made the same point twice in this thread :rolleyes: ), I’m going to X-post something I wrote in another forum about GM, dealing with the subject of GM and automation:
GM’s goal in the early 1980’s was to “automate away from these assholes”, the assholes being UAW workers. Their efforts to do so remain legendary in business history as possibly the worst example, in the post-war era, of throwing money at a problem.
One of the early automation programs put into place by Roger Smith was a fully automated, “no man on the floor” axle factory in Saginaw Michigan. The fact that the axles would cost 50% more than those made at the already-existent UAW plant was ignored, and the factory was built… lauded, even, as the “Factory of the Future.”
But that was small potatos compared with Hamtramck. Here, GM would be able to show the world its control and mastery of a fully automated manufacturing process, with every day at Hamtramck being a robotic ballet as machines built, whirled, and danced as they pumped out custom-ordered car after custom-ordered car.
It didn’t work out that way. When the plant went online in the fall of 1985, it was supposed to showcase Roger Smiths dream of a 21st century car company, however it became the factory that marked the beginning of the end of Roger Smiths fascination with automation. The factory was supposed to eliminate Toyota’s $2,000/vehicle cost advantage over GM, but instead turned into a horrible parody of what happens if you put GM executives in charge of a “Toyota style” system (which is what they thought they had.) GM spent over a billion dollars on robotics alone, but nobody thought to rearrange the production system, so when the factory opened it had over 5,000 UAW employees on the payroll! And, as is common with new technology, GM had many bugs and problems to work out - usually this isn’t too much of a problem, but with the hundreds of brand-new systems it meant that something was breaking down every day. In addition, not one of the people on the plant were trained in the care of robots or software - GM had to call that specific robots manufacturer to send out a representative so they could repair the robot. Even worse was the operational design that had the entire line shut down if just a single robot broke.
The financial effects were felt immediately. 3Q 1985 results showed that GM suffered the first operating loss in 60 years, $20.9 million, and total cash reserves fell by 40% in 1985. Two years after it opened, the newly automated, “let’s ‘bury’ those assholes” factory in downtown Detroit was putting in a stunning 100 hours of labor for each car, five times as much as GM’s Japanese competitors. Car design didn’t help either: the front and rear bumpers of a Cadillac Seville had more than 460 separate parts and took over 33 minutes of labor to assemble and affix to the car. Each.
Regardless, GM spent an additional $35 billion on automation and “factories of the future” after it became evident that Hamtramck and others like it were colossal failures.
The fact is, seeing what has happened to this company since 1980 makes you realize that Michael Moore was right… but for the wrong reasons. Roger Smith was a horrible CEO, possibly the best example of the wrong person in the wrong place at the wrong time in the history of corporate governance. When this is all said and done, with GM’s name writ in water, people will look back at his reign and say “Yup. That’s where it went irreversibly wrong - somewhere between 1982 and 1989.”
This has been coming for MONTHS; it’s been in the papers for some time. Fund managers knew it.
Surely any decently-managed bond fund which was limited to investment-grade bonds got rid of its GM and Ford holdings well before S&P made it official.
Lots of GM and Ford paper still lives in the portfolios of investment-grade bond portfolio managers, and one of the $64 MM questions (or more) is how much of it is going to get puked out over the next couple of months.
Why would a sane investment grade guy hold this stuff into the downgrade? Well, there’s lots of reasons, some of which are related to each other.
First, most of the damage to the bonds occurred on a single day, March 16, when GM revised their earnings outlook. Someone who believes that the companies are not going bankrupt (and for all the problems, their balance sheets aren’t half bad) might be tempted to say that the damage is done and ride it out.
Second, they might compare themselves to an index. GM and Ford are a not-small part of investment grade indices (the actual amount varies by the inclusion rules of each index). The cost of selling a big part of the index before it actually leaves the index can be very high. Suppose that instead of Kerkorian buying 4% of GM stock and bidding for another 5% the buyer was GE. Or Berkshire Hathaway. And suppose they did it in concert with the company, providing fresh money. Bang! No junk rating and anyone who sold is looking like an idiot. Maybe an unemployed idiot. Both GM and Ford, for all their problems, have been very canny and smart at financing. Having the belief that either or both of the companies would have (or still will) engage in some financial transaction which materially lowers the risk to bondholders is not necessarily a poor strategy. As it happens, so far holding has not worked out, but it hasn’t cost much performance relative to the index or to other index-followers.
By some inclusion rules the companies are out now. By others they won’t leave until the end of the month. By still others they won’t leave until Moody’s and/or Fitch follow S&P (for the record, Moody’s almost certinaly will follow and Fitch almost certainly will for the corporate credit but may leave the finance companies in investment-grade land). An investment grade manager might reasonably want to pay close attention to his relevent index’ inclusion rules when making a decision. There’s a saying in our industry. There are old traders and there are bold traders but there are no old bold traders.
Third, S&P kind of faked out the market by some definitions. There’s a technical, highly-ritualized process ratings agencies generally observe when downgrading an old investment-grade company to junk land. Without going into too much detail S&P skipped a step. Imagine doing the encore before the audience lights their lighers. So while everyone knew (or thought they knew) this was coming, the timing might have surprised some people.
Fourth, an increasing number of investment-grade accounts have a junk “basket.” That is, they have a percentage of their portfolios which need not be investment grade. Looking at GM or Ford’s balance sheets and comparing them to other junk-bond companies, taking into account the bond prices after March 16, it’s not an unreasonable reaction for someone who has the freedom to hold on to say “Fuck you, I’m not selling this guy at 10% to buy some crappy oilfield services company with a worse rating and an 8% yield. I’ll take my lumps with these guys, thanks, and I’ll be vindicated when they pay me back.”
Fifth, derivatives are increasingly important as a portfolio management tool. An investment-grade manager might own GM bonds but also own a credit-default swap (a CDS for short. Don’t ask unless you actually want to know – I’ve actually been prescribed as a sleep aid when I go through what those are). In that case the losses from holding the bonds might be equalled or even exceeded by gains on the CDS.
To be sure, the people who held GM or Ford paper until the downgrade have been losing money – almost every time people thought it couldn’t get worse it did. But the actual downgrade was almost a non-event. The bonds declined sharply (Heh. By investment grade standards.), but not to record lows and they actually snapped back a bit the next day. People who intended to sell the bonds at some point and got surprised by the timing of the downgrade didn’t really get hurt that much by it relative to the pain they’ve already incurred.
What’s next, and should Bosda have sold? Heh. My opinion on that belongs to my employer. I can’t tell you how I think the play ends, but I can say that this is the first act in a 5-act play. There’s a lot of drama yet to come before we know if there’s going to be a happy ending.
Most bonds are fixed interest rates. So the downgrade doesn’t really directly affect GM on the bonds that are already issued. However, it does make it difficult for GM to issue more bonds, and those new bonds will have to be issued with high interest rates.
Ouch. I didn’t realize GM was that incompetent and that badly run over the last few years. For their debt load, they could have bought out every car company worth noting on the planet!
I’ve noticed something else, too: when a dozen strangers on an anonymous webboard can tell you how to run your business right after a few days and a dozen posts, you need a new management team. It’s time to fire the board of directors and the CEo and get fresh people in there. I’m available!
John T is right-GM made an awful hash of automation. They bought a robot machine from a company called “AUTOMATIX”-and the machines broke down frequently. In addition, the programming was so poor, that the bumber-placementy robots frequently damaged the car bodies. it was all a very expensive experiemnt. GM does other weird things: like chiseling suppliers down to the last penny. That is why they had massive engine failures 9on 3.4 liter V6 engines). The vendoe cheapened the head gaskets to save a few pennies-and GM lst millions in repairing irate customer’s cars!
They also still mixed metric and english dimension bolts and screws on their cars-so your mechanic has to have two sets of tools.
Unbeliveable!
In the mid-eighties I was working my first full-time job after graduating from electronics school… working for a company in Oshawa, Ontario, which supplied welding equipment to GM. I saw some of the effects of the aroementioned waste and profligacy.
For a time, I rented a room in a house whose yard backed onto the parking lot of the GM South Plant in Oshawa. When the big model changeover hit in around 1988 or so (after the production of the Pontiac 6000 ceased at that plant), I saw them rip the whole guts out of the plant and layer the entire vast parking lot metres deep in debris and smashed equipment: concrete rubble, structural steel, machines, computers, furniture, entire prefab offices. I understood that for tax reasons the equipment had to be made unusable.
You are exactly right, and that shows me that I should know better than to post ideas that strike me at 8:00am Sunday morning, after a mere 3 hours sleep. I mean, it’s not as if I couldn’t have looked it up. :o
Looking at their latest 10-K (section II-56), GM’s debt repayment schedule shows that $45 billion of their $300 billion is due by the end of this year. The weighted average interest rate for that debt is currently 3.5%, a full 2.5% points below the 7% rate I quoted above (I got that figure from the WSJ, somewhere.) This alone will increase their carrying costs by $1,125,000,000 per year.
In case y’all are interested in the long-term debt structure, here are the rest of the figures: $38 billion is due in 2006, $24 billion due in 2007, $11 billion in 2008, $9.6 billion in 2009, and 2010-and-after $91 billion is due, with the weighted interest rate of all debt payable from 2006 onwards being 4.9%.
Without saying whether I agree with the accuracy of that maturity schedule, it should be noted that long-term unsecured debt is not the only way F and GM have of financing their businesses. Despite the downgrades, both companies continue to access the commercial paper market, which has rates well below the 7% mentioned. Much more importantly, they can access the asset-back security market. Most of the coming debt maturities are secured or can be secured and represent financing of relatively short-term assets such as dealer floorplan financing or auto loans of five years and less. Each company has financing companies which bundle up these loans and sell them in special-purpose subsidiaries which have, even now, AAA credit ratings. Additionally, both companies have massive unused bank facilities, tons of cash on the balance sheet and retained auto loans which will be amortizing. Finally, Ford will be basically cash-flow breakeven on an operating basis if their summer model launches go well.
GM has said in public that they don’t intend to access the unsecured markets at current rates (which, for the record, are well above 7% for long-term paper --more like north of 10%). I’d be seriously surprised if Ford borrowed in the unsecured market either.
I wouldn’t expect the cost of financing in 2005 to be materially higher for either company because of the downgrade (rates are a different story). Obviously, the problem will start to get worse as time passes if they can’t get their problems under control.
Heh. Hey, the boss has to get something for this high-speed connection, yes?
