A Bunch On Cars

This has been a busy week for news from the automakers. The biggest and baddest of this was obviously the downgrading of Ford and GM's corporate bonds to junk status. Autoguy tells why he thinks Ford's downgrade is based on transient problems, but GM's is deserved; mainly, that Ford has new, non-SUV options it's got near ready for sale.

The market has taken to caning recalcitrant automakers lately. GM's problems are a long time coming, something the Detroit Free Press make clear in a special three part report on the beleaguered company. Business as usual isn't going to work this time; the company can't get much smaller, it's got too many brands and no focus for any of them, and GM's UAW deal on healthcare erodes its margins. Of the three, healthcare gets the most press, but

"It's a smokescreen," said Sean McAlinden, vice president for research and chief economist at the Center for Automotive Research in Ann Arbor. "A lot of what they say is right. That's what makes this a very good smokescreen. ... Health care is a huge problem, but it's not the one that is going to destroy GM."

The real problem, McAlinden said, is that General Motors is using what it calls the "health care cost crisis" to disguise the fact that GM management hasn't designed enough cars people are excited about.

So when Kirk Kirkorian, who with Lee Iacocca once owned a large part of Chrysler before that company merged with Daimler, came around and bought 4% of GM with promises to buy another 5%, speculation ran rampant that Kirkorian might be the stick needed to whip the UAW into line.

GM's financial and product problems are compounded by its heavy bet on hydrogen as the technology of the future. Claiming a new generation of cars will be available by 2010, that may be far too late for the company, which has enormous structural problems to deal with and is tremendously dependent on a few models of SUVs for the bulk of its profits. But as with the other problems GM faces, it's just another case of management reading and believing its own press releases:

"GM's confidence is simply irrational," says Joseph Romm, a former Department of Energy official in the Clinton Administration and author of the book The Hype About Hydrogen. "Nobody in their right mind believes that hydrogen fuel cells could add to the bottom line in the next two decades. It would require like seven miracles, many outside the hands of GM."

Businessweek has come out, guns-a-blazing, with this prophecy:

BusinessWeek's analysis is that within five years GM must become a much smaller company, with fewer brands, fewer models, and reduced legacy costs. It's undeniable that getting to that point will require a drastically different course from the one Wagoner has laid out so far. He is going to have to force a radical restructuring on his workers and the rest of the entrenched GM system, or have it forced on him by outsiders or a bankruptcy court. The only question is whether that reckoning comes in the next year, if models developed by Vice-Chairman Robert A. Lutz fall flat; in 2007, when the union contract comes up for negotiation; or perhaps in five years, when GM may have burned through its substantial cash cushion.

Given oil prices, GM has little choice but to radically change their product line, but when Bob Lutz issues 1984-style denials of his earlier comments about axing a brand, when the company petulantly pulls its Los Angeles Times advertising after that paper's new auto columnist calls for Wagoner's head -- well, the impression is of a company in deep, deep denial. Lo: witness the shameless evasion of actual sales statistics by VP Mark LaNeve on the GM Fastlane Blog. Stubbornly ignoring reality has been a way of life at GM for over a quarter of a century, but it's not something that can continue unchecked; the real possibility of bankruptcy guards the exits.