DETROIT – Despite the meltdown in the sub-prime housing market, General Motors Corp.’s chief financial officer struck a cautious optimistic tone that the United States would avoid a recession in 2008 but that the U. S. auto industry will be down slightly in 2008. He also conceded that GM was not the world’s largest car company in terms of finances.
Fritz Henderson, who began his GM career in the corporation’s Treasurer’s Office 24 years ago, spoke January 29, 2008, before the Automotive Press Association at the Detroit Athletic Club. He offered few hints about the GM’s 2007 financial results, which will be released on February 12.
The automaker had posted an astonishing $38 billion loss during the first three-quarters of 2007—mostly due to special charges—but Henderson noted that GM has “improved a lot from 2005,” which he noted was “a disaster,” when the company ended the year with $10.4 billion in red ink.
In the aftermath of 2005, GM had sold off half of its stake in General Motors Acceptance Corp. (GMAC), its shares in Fuji Heavy Industries, and got out of a deal that would have forced it to purchase the resurging Italian automaker Fiat. It also launched a restructuring program that included plant closings and the elimination of 30,000 jobs by the end of 2008.
“I think we’ve shown consistent improvement (since 2005),” Henderson said, as he laid out his views on the risks for the U.S. economy, the automaker’s financial turnaround strategy, and noted that GM was not the world’s largest automaker in terms of profits. When Toyota and General Motors released their 2007 global vehicle sales results earlier in January, GM led Toyota by barely 3,000 units. GM had sold 9.369 million vehicles to Toyota’s 9.366 million.
“I don’t spend too much time trying to figure out who is the largest automaker (in terms of production and vehicle sales),” Henderson said, responding to a reporter’s question. “I just know this… (in terms of) profit, cash flow, market cap(italization), we are not the world’s largest automaker.”
Although GM sees a fair amount of risk in the American economy for the next 12 to 18 months, Henderson said that a recession “is not our baseline expectation.”
“We are encouraged by the fact that policymakers view that something’s got to be done or else we could find ourselves in much more difficult circumstances in the United States,” Henderson said.
The troubles in the sub-prime housing market seem to have rippled through the economy relatively quickly when compared to the savings and thrift troubles of the late 1980s that took three to four years to work through, he explained. However, the problems of the housing industry have negatively impacted GMAC, which in turn added to the automaker’s earlier reported losses in 2007.
GMAC, which is also partially owned by the private equity company Cerberus, the owner of Chrysler LLC, has been forced to “shrink its risks” because it had been “losing way too much money,” Henderson said.
The automaker will be coordinating its sales and marketing efforts, possibly running a few automotive retail and lease programs in 2008, to put GMAC in a better financial condition, Henderson said.
Good news for the U.S. economy, and the American auto industry, is that American exports have seen an uptick due to the strengthening of the Japanese yen and Euro versus the American dollar.
“We see the export sector reacting potentially well… even industries like ours where we run a trade deficient (with other countries),” Henderson said. “We see (exports) growing because the U.S. is becoming more competitive… The real economy is much healthier than the financial markets.”
General Motors’ CFO seemed upbeat about the overall shape of the American automotive industry.
“We ended ’07 in not too bad a shape, really,” Henderson said. “The U.S. industry by December ran at 16.7 million units… In general, our forecasts have been that the U.S. automotive industry will be down slightly in ’08.”
It should be noted that other analysts have offered different conclusions about the U.S. market, though maintaining a more positive outlook for the second half of 2008.
David Cole, chairman of the Ann Arbor, Mich.-based Center for Automotive Research, has said that at least the early half of 2008 will be tough for the auto industry. Meanwhile, Mike Jackson, chairman of AutoNation, America’s largest automotive retailer with 325 new car stores, had said that the automotive industry has been in a downturn for the past two years.
“A lot of people missed the level of downturn in the automobile industry because they were too focused on the top line industry numbers,” Jackson had said during an address before the Society of Automotive Analysts, two weeks before Henderson’s talk to the press. “For those two years, the total industry volume is down five percent, but the structure of the sales is much weaker today than it was two years ago. At retail, sales have declined 11 percent and fleet was up 50 percent of business, masking how serious the situation has been.”
With the downturn in housing, banks cutting back on credit for loans, and high gasoline prices, Jackson had said that the nation is in a “housing depression and an automotive recession” and that the auto industry will be down in 2008.
Cole thought the economy might recover during the later half of 2008, while Jackson’s estimate was by 2009.
During 2007, there were major shifts in vehicle segments with the “rebirth of passenger cars” in America, Henderson said, and the growth of small “crossover vehicles” – SUV-like vehicles that have more car-like ride characteristics and are lighter and more fuel-efficient. Instead of being built in a traditional body-on-frame fashion, such as pickup trucks, crossovers have unibody designs like modern passenger cars where essentially where the body is the frame.
There are opportunities for auto companies that execute the right product mix for the North American market, he said.
“I remember the discussions about the (Buick) Enclave or the (GMC) Acadia (two large crossover vehicles) three to four years ago whether or not it was the right product or if we needed another product for that segment, but we made the right call there,” Henderson said. “Other places we didn’t make the right call, but it does show you that you can be richly rewarded.”
Besides the rise of crossovers as a viable market segment, another auto industry trend has been the rise of the average transaction price of vehicles in the United States and other developed countries, including Europe.
“The premium segments have continued to grow and that combined with the U.S. phenomena of trucks, (full-size SUVs and crossovers) that achieve a very high transaction values … the consumer wants more things in their vehicles. As their incomes grow, they are prepared to pay for more of those things so the average transaction prices tend to grow,” Henderson said.
Higher vehicle transaction prices, combined with GM’s efforts to reduce its over manufacturing capacity, are beginning to show up on the bottom line. For example, the average transaction price of a Cadillac CTS has risen to $37,000 versus approximately $29,000 in 2005.
Reducing manufacturing capacity means factory closings since GM no longer needs as many production plants as its North American market share has fallen from 35.3 percent in 1990, to 28.1 percent in 2000, and then down to a low of 24.5 percent in 2006.
The contract allows GM to sell or close a stamping plant in Indianapolis, an engine plant in the Detroit area, and a foundry in New York, affecting nearly 1,500 workers in addition to the previous program to trim 30,000 employees from the company’s payroll. The Orion Assembly Plant, near Pontiac, Mich., the Flint (Mich.) Metal Center, Wilmington Assembly in Delaware, and the Parma powertrain plant near Cleveland—employing a total of 6,000 workers—are endangered because no new products are scheduled for them.
Importantly, the new U.S. labor contract provides GM “with much better flexibility,” Henderson observed. “What has changed is our ability to move people, our ability to adjust, our ability to adjust volumes… If have a plant and people you can’t do anything about, there is enormous pressure to keep building and throw more money into the market.”
General Motors’ priorities for recovery are not revolutionary. Rather it is aimed at trying to create “great cars and trucks, growing in emerging markets, managing costs and risks, improving quality, reliability and durability,” Henderson said. The company has focused on these “very simple principals” and will execute its business plans “again, and again, better and better.”
Another goal is to reestablish GM’s technology leadership while seeking sustainable, profitable growth and cash flow in North America, Europe, and in the emerging markets. Its executives are seeking to manage the corporation as one organization—instead of several regional companies as it has historically operated—and leveraging its engineering and design centers around the world.
Outside of the U.S., GM forecasts continued, “breathtaking” growth in the auto industry, the GM executive continued. About 71 million units (new vehicles) were sold around the world. Though U.S. sales represent only about 22 percent of all global new car sales, North America, Germany and other developed car markets are financially important to the health of companies such as General Motors.
“Five years ago, we sold less than 5,000 units in Russia,” Henderson said. “Last year, we sold over 250,000 units. China has joined our over 1 million unit club. This shows you, that as I look at these emerging markets, what’s going to happen five to seven years from now, I guarantee you, is going to be fundamentally different from what we’ve seen today.
The emerging markets will not sustain GM. The corporation needs stable, sustainable growth in all of its markets, especially in North America and Europe, Henderson added.
Europe is a tough market because it is fragmented into a number of different countries, but competitively, the United States is also difficult.
“U.S. is the most open (single largest) market in the world,” Henderson said. Many major manufacturers compete here… (The U.S.) offers manufactures one of the best profit opportunities in many ways because this is one of the lowest taxed markets in the world.”
The automotive industry in the rest of the world also is growing in China and Russia, but also smaller countries to the point where an estimated 73 million vehicles will be sold globally in 2008. The increase of vehicles, contributing to pollution and fuel consumption, has made the need for sustainable growth strategies and fuel saving technologies a burning issue. In Europe and the U.S., fuel economy and environmental regulations have become extremely important to its citizens.
“The companies that can set themselves up properly can take advantage of the circumstances,” Henderson said. Providing answers to fuel economy and “greenhouse gas” emissions will require “very sophisticated, technological ways to address it in terms of feasibility, and time, and costs. So, therefore, that’s where our efforts are.
“The manufacturers who actually get down the costs the fastest (on advanced vehicle technologies) can potentially win,” he added. “If you think about the internal combustion engine, it’s a marvelous thing, but it’s been honed over 100 years. The question is with these new technologies, how can you hone down the costs faster.”
Some initial technologies that GM and other automakers could use now, and make an immediate impact, to improve fuel mileage include the use of direct-injection gasoline engines and six-speed automatic transmissions. Although these technologies are expensive, they cost less than hybrid vehicles.
Another challenge to GM and the auto industry in general is the rise in commodity prices for all metals – including steel, nonferrous, and precious – and petrochemicals. For nearly a decade, U.S. vehicle prices have remained essentially flat due to intense competition, but cost pressures could foreshadow the coming of higher prices, Henderson noted.
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