Summary
GM production volumes need to be reduced to 1.8 to 2.0 million per year assuming they can hold their market share in an 8 million per year market. Planning at the 10 million per year level is based on an historical replacement rate. The economy is not likely going to support that volume level for another two years. Green cars are projected to grow slowly. The consumer is still getting used to the idea and the extra cost. Hybrids are projected to be 15% of the market by 2015. The trend to lower income levels (UAW wages going from $28 per hour to $14 per hour) higher priced cars will be a problem. Detroit owes Washington its gratitude for funding its Chapter 11 filings. GM now has the chance to restructure and become a viable company once again. Washington has to realize that this is just the first step in a long journey. It is far to early to take credit for saving the auto makers. The next five to ten years of operating success will determine if they made the right steps.
Analysis
GM will have to pare production to realistic levels. Plans for 10 million per year sales may be a bit optimistic. With current market share of about 22-24% GM's production plan would be about 2.4 million per year in North America. GM should be planning for break even at 1.8 to 2.0 million per year, or an 8 million per year market. Green car trends are still up to the consumer. Recent estimates are that Hybrids will reach 15% of the US market by 2015. Considering that all the auto makers plan to have Hybid models by then no one will be making much money due to the low volumes. GM's Chapter 11 filing seems to have shocked many people. It's certainly a high risk for the Obama administration. Let's keep in mind that the total investment by the government is "only" $50 billion. They also committed $800 Billion to the "economic stimulus" package and gave $700 billion to the banking industry. While the GM bailout adds risk in terms of government ownership of business. The other $1.5 billion seems to have been handed out with much less concern about return on investment. In the grand scheme of economic recovery actions the GM bailout seems to be more about remaking the auto industry than about saving a company. Certainly GM was knee deep in financial problems. They have significant legacy costs that foreign competitors lack. They have excessive capacity that was held far too long. But, despite the claims from the US Congress and Senate, GM was well on the way to having a world class product line. All of this was compounded by the credit crisis that caused a global industry melt down. Washington has made up its own mind about what GM needs to do. GM had little choice but to listen. It will take some time to see if Washington's approach really works. Despite recent claims that "Chrysler is back on the road to recovery." There is an old saying that "It takes as long to get well as it did to get sick." Washington continues to believe in the "quick fix" for every problem that the country faces. We here in Detroit must appreciate that Washington has made a great effort to keep in auto makers alive. At that same time, Washington must have more patience with the results. Many of us who have worked in this industry are well aware of the extreme patience that that the Asian companies have shown in building their businesses into global powers.
