Thursday, March 5, 2009

What Ails GM

The Lehmann Letter ©

Today GM reported that its auditors believe the company is circling the drain. It may not survive beyond the end of the month without another substantial cash infusion.

Corporations are affected by secular (long-run) and cyclical (short-run) trends.

The secular trend(s) worked against GM. Many would argue that GM’s secular dynamic can be summarized in two words: Poor Management. For too long the company acted as if the company’s success depended upon its ability to market the vehicles it felt like manufacturing. The company didn’t seem to care what it made as long as it could push the product on consumers. Then along came the imports, and they changed everything.

Since the mid 1990s, however, the cyclical trend(s) worked in GM’s favor. You can see in the chart below that new-vehicle sales reached 15 million at that time and then surged to 17 million in this decade. At a sales pace of 17 million vehicles per year anybody and everybody made money. That was especially true for GM and the other domestic manufacturers who enjoyed success in building and marketing large, profitable vehicles.

New-Vehicle Sales

(Click on chart to enlarge)

Recessions shaded

Then the roof fell in. Last month the industry suffered a 9.1 million sales pace. The outlook for the remainder of the year doesn’t look better.

GM can’t survive a year of under-10-million sales without government assistance. Cyclical circumstances have finally lined up with secular facts, and now the company is on the ropes.

(The chart was taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2009 Michael B. Lehmann

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