General Motors admits to ‘crisis’

GENERAL Motors’ regional boss has admitted that the world’s largest automaker is in “crisis” and is unable to halt its slump in market share.

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By  David Robinson Published  April 17, 2005

GENERAL Motors’ regional boss has admitted that the world’s largest automaker is in “crisis” and is unable to halt its slump in market share. The company shocked investors last month by projecting a first quarter net loss of nearly US$850 million. “Without doubt it is a very serious time,” said Terry Johnsson, General Motors (GM) managing director for Africa and the Middle East, who agreed with estimates that the automobile giant is losing US$1,000 to US$2,000 per vehicle. GM has slashed its forecast for first quarter and full-year earnings, and forecast negative cashflow of US$2 billion for the year, not including the US$2 billion it has agreed to pay Italy’s Fiat to resolve a dispute over a soured relationship between GM and Fiat. Moreover, the negative cash-flow figure doesn’t include costs related to a broad restructuring of GM Europe and previously announced plant closings in North America. GM’s troubles have prompted debt-rating agency Standard and Poor’s to change the outlook on the carmaker’s debt rating to negative from stable. The agency has signalled that it could downgrade its rating on GM’s debt to junk status at any time. The carmaker blames the crisis on slumping performance in its big North American automotive unit, which accounts for the bulk of its revenue and worldwide vehicle sales. Despite the launch of several new models within the past year, GM’s US market share has tumbled to around 25% for the first two months of the year, down from 27.5% for 2004 and well below the company’s previous target of 29%. “Can you halt [the slump] immediately, no, have we found the answer? Clearly not,” Johnsson said. The long-term picture looks even bleaker, 25 years ago GM’s share of the US market was over 50%. Ten years ago, they had 33%, compared with today’s share of just 25%. “Are we talking about a global crisis or a local crisis? I think we’re talking more about a local crisis. However that local crisis happens to be our home base,” Johnsson said. “It’s nothing to be sanguine about, but it’s also not at the level where it’s starting to affect our ability to manoeuvre and invest in this region.” Johnsson was quick to point out that in the Middle East the company saw a 35% increase in sales over the equivalent period in 2004. However, the fact remains the Middle East made up just 1% of GM’s overall global market last year, while the troubled US market accounted for a massive 63% of the company’s business. GM chief executive Rick Wagoner has promised sweeping measures to stop the rot. GM expects to shed up to 2,000 white-collar jobs this year, trim retirement contributions and cancel merit raises. “Wagoner’s attitude is the buck stops here,” Johnsson said. “It’s an indication of how serious the mood is.” Meanwhile, rival carmaker DaimlerChrysler is also facing difficulties, which could impact upon Dubai. At the company’s AGM last week, chief executive Juergen Schrempp admitted the automobile manufacturer faced major problems with its luxury Mercedes car and the tiny smart car which would hurt 2005 earnings. Earlier this year, Dubai Holidngs — the investment arm of the Dubai government, took a 2% stake in the car firm for US$1 billion, making it the group’s third largest shareholder. Meanwhile, Schrempp described developments at the smart division as being “totally unacceptable”. Regarding Mercedes, which has been hit by quality control problems and a drop in popularity among the motoring public, he said the quality problems had to be dealt with comprehensively, generously and as quickly as possible. The costs of this would be high, he admitted. But they would be an “investment in our most valuable commodity, the Mercedes-Benz brand,” said Schrempp. He added that operating profits in 2005 would show only a slight rise from last year’s US$7.5 billion amid the costs for revamping the smart car. Dubai Holdings had been hoping to see the value of its investment rise steadily. The shares are trading 50% below the value of four years ago, but the latest setback means any mark up in the price may not come until 2006.

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