Friday, August 17, 2012

Forbes' Defense of GM Is A Steaming Pile of FAIL


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One thing is certain: Forbes will be correct about whether or not GM returns to bankruptcy.

In the wake of all the attention garnered by Forbes contributor Louis Woodhill's piece, General Motors Is Headed For Bankruptcy Again (which I expanded on here), Forbes published a defense of GM by staffer Joann Muller including a headline stating flaly that "No, It Is Not Going Bankrupt."

Does Muller's rebuttal reflect indignation at the baseless slander of a great corporation, or a rear-guard effort to pacify sources (and advertisers)? The world may never know, but given the poor quality of the arguments she puts forth, one might be forgiven for thinking the latter.

Let's grant Ms. Muller that GM is not going bankrupt this week, or even this year. But "going bankrupt," to paraphrase Talleyrand, is a matter of dates. GM need not be on the precipice to be moving inexorably in that direction. And GM is indeed moving in that direction.

Ms. Muller's arguments to the contrary are deeply, almost comically flawed and I, gentle reader, will tell you why.

She asserts that "there’s also a lot going right at GM," but her specific claims don't stand up:

"GM is in an enviable position in China" - Yes, GM has been selling a lot of Buicks in China. The Chinese middle class has grown dramatically, and as long as it continues to do so, GM will reap the benefits. This is a blog post, not a book, so I won't go into excruciating detail on just how precarious the Chinese economy is, I will simply note that China's property bubble dwarfs the U.S. mortgage bubble in scale, and when it bursts, as it may well be starting to now, the economic ruin will sweep all in its path, particularly the Chinese middle class, and with it, Chinese demand for Buicks.

"GM and the UAW have a strong relationship where they tackle problems together rather than butting heads as in the past. Today, GM’s labor costs are just about on par with its Japanese competitors in America" - I'm proud to live in a country where Ms. Muller is allowed to think that. I have no doubt that the leadership of both GM and the UAW claim that, but that doesn't make it so. The UAW has given up nothing more than it was forced to in getting GM through bankruptcy, and while it tolerates labor costs "about on a par with" (which is really just a weaselly way of saying "still higher than") Japanese competitors, there is no reason to anticipate that the UAW's forbearance on wages will persist.

"GM’s vehicles are more competitive than in the past. Cadillac, GMC and Chevrolet quality all ranked above average on the recent J.D. Power Initial Quality Study" - I thought we had agreed that comparisons with GM's pre-bankruptcy past weren't relevant (see: market share)? The relevant question is how GM's vehicles stack up with current competitors, and this is precisely where Woodhill offered an informed view that they stack up very poorly indeed. Muller appeals to the authority of the J.D. Power Initial Quality Study, which only undermines her argument further; pretty much all manufacturers now operate in a tight and low range in terms of initial defects, so rankings don't matter much. More importantly, it is a poor measure of quality; the true measure of vehicle quality is in resale values - how much a vehicle depreciates while you own it - and I'd be very skeptical about GM's prospects of besting Toyota and Honda on that count any time soon.

Muller also is a bit breezy in dismissing the problems she does acknowledge:

Muller is dismissive of GM's market share problems, : While Muller is correct that "comparing its pre-bankruptcy share to current share is unfair," (well, I don't really care about what's fair, I care about what is relevant, and pre-bankruptcy market share is clearly not relevant), she is on much weaker footing in asserting that "Basing an argument for bankruptcy on U.S. market share trends is not logical." Coming out of bankruptcy, GM built a business plan around the assumption of 19% market share. Said board member Stephen Girsky, "The public plan is 19 percent and change. That is what everything is being based on." So GM's board seemed to think that using market share as a barometer of success was pretty logical.

Muller seems clueless on pension math: Muller acknowledges that GM has a big pension problem (though offers no indication that she understands the problem is far larger than GM's financial filings claim), but dismisses the concern with the claim that "the company is finally taking real steps to address it." Baby steps at best; Muller's evidence is the transfer of a large chunk of liabilities to Prudential and a related buy-out of other pensions, but as I detail here, the Prudential transaction doesn't solve GM's pension problem so much as expose the magnitude of the unrecognized rot in GM's balance sheet.

If this is the best case that can be made for GM's survivability, then the company is in much worse shape than I had thought.

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