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The article below speaks for itself.
GM is heading into some very rough times.

GM Headed for Another Reckoning?

Big Q1 losses coming as GM angst continues.

"General Motors said Wednesday that it will lose $855 million in the first quarter and will earn as little as $600 million for the whole year in 2005. That news prompted Wall Street analysts to initiate sell orders on GM stock, driving shares down almost 14 percent to $29.06, a new 52-week low and a level it hasn't seen in 13 years.

GM is beset with further losses at the North American automotive operation, and a market-share decline that is proving resistant to higher incentives, new models, or marketing gimmicks. GM's market share was down more than two points, compared with the same period a year ago, through February to 24.9 percent - its lowest level since a strike shut the company down in 1998. Making matters worse is the fact that about one-third of that share is to rental-car companies and "program" vehicles to employees, retirees, suppliers, and family members of all three groups - sales that bring in little if any real profit. Each one-percent drop in market share is worth about $1 billion in lost profit.

GM said it now sees full-year earnings of about $1.00 to $2.00 per share, excluding special items, down from its previous target of $4.00 to $5.00 a share.

"GM North America is, simply put, our 800-pound gorilla, and today's announcement shows how important it is that we get this business right," chairman and chief executive Rick Wagoner told analysts and reporters on a conference call.

GM executives said it will have negative cash flow of about $2 billion this year (versus the projected positive $2 billion), putting a dent in its nearly $24 billion cash hoard. Morgan Stanley analyst Steve Girsky says, though, that GM has been padding that cash number by paying its bills later than in the past. GM has $24 billion in accounts payable, with an average payment term of 60 days, which is three times longer than Ford's payment schedule. Those delays, says the analyst, has boosted GM's reported cash position by $6 billion over the past three years.

To cope with the worse-than-expected problems (which also include an expected $500 million loss in GM Europe and a $1.5 billion write-down for GM's payoff to Fiat, so the Italian automaker doesn't exercise its put option that would force GM to buy Fiat Auto), GM is reportedly looking for another $2 billion of fixed costs to cut this year. That could come in the form of workforce reductions and plant idlings or outright closings, with a corresponding one-time charge that it would incur to pay off workers.

The crux of GM's problems: too many workers churning out too many vehicles because of the United Auto Workers' stranglehold on GM, namely the inability to close factories and eliminate workers to better match GM's natural market share; the refusal of the union to pay some of its own healthcare premiums; too many brands under the GM roof demanding capital investment in new vehicles and marketing costs. While GM has been improving quality, its poor brand images do not allow it to charge the prices that Toyota, Nissan, and Honda can with their better images.

"We continue to believe GM's products are overpriced (relative to the Japanese brands) by 10 percent to 15 percent due to weak resale values," says Ronald Tadross of Bank of America, who has a "sell" rating on the stock, and lowered his price target on the company to $23 from $27.

As for its new-product turnaround, most of the models designed to attract new customers - the Chevy Cobalt, Pontiac G6, Buick LaCrosse, and GM's new minivans - aren't attracting much attention even with beefy sales incentives. Meantime, GM is suffering from comparisons with Chrysler, which is reaping huge profits from being able to sell a hot Chrysler 300C sedan and Dodge Magnum wagon virtually without incentives.

Meanwhile, Ford said Tuesday that it is reaffirming its guidance for 2005 in the wake of GM's announcement. Ford expects full-year operating cash flow in the range of $1.2-$1.5 billion with a corresponding EPS in 2005 in the range of $1.75-$1.95, with first quarter EPS in the range of $0.25-$0.35.

Aside from tepid sales of new models, GM is also hurt by the falloff in sales of big SUVs, which have supported the otherwise losing proposition of selling passenger cars in North America. "We continue to believe GM is in a precarious position given lower GM North America production volumes, especially related to its highest-profit platform, GMT800 (full-size trucks); the challenging pricing environment; and less profitable mix (more cars/less trucks)," said Joseph Amaturo, analyst for Caylon Securities. "We do not expect modest improvements from automotive operations outside North America to offset these domestic headwinds. Amaturo added, "We remain confident that possible credit rating downgrades and a dividend cut are in the company's near-term future and will only add insult to injury."

GM CEO Rick Wagoner said in January that he is not looking to eliminate another sales division after closing Oldsmobile. Analysts, though, say that GM could eliminate Buick or Saturn and probably Saab, and have a more profitable 20-percent market share, which is the share level that seems to fit the trajectory of the company these days. Wagoner is reluctant to sacrifice the "shelf space" of those brands in the marketplace, nor does he necessarily want to be remembered as the CEO who shrunk GM. That level of share would require the UAW to face the reality that the days of $90,000-plus a year for line workers and paying no healthcare premiums are over. But don't count on any of that without a big fight if GM tries to push any significant reform before the next union contract is negotiated."
 
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