Tuesday, April 26, 2005

Automatic For the People

Stronach gets into it with da Big 3.
AURORA, ONT. -- Frank Stronach fears that U.S. and European auto makers -- his company's biggest customers -- may be in the grip of a downward spiral that could cause massive job losses and from which they will be unable to recover.
Where to start? The big 3 (GM in particular), are relying on SUV's to be saviours for their individual companies, with the huge margins on the Escalades and the Expeditions....This means a huge chunk of any contribution margin will be generated by cars that have an exploding variable cost (to run) in terms of oil prices.

This is not going to work in the long run. GM is particulary uncompetitive in many markets, and has not made an operating profit in a long time. In fact, the only area that is keeping GM's head above water has been their financing division, which consistently turns in huge profits on the leasing side of the deals.

This dependence on retail leasing or credit, is not unlike the strategy of many department stores (HBC, Sears), which decided to start making some cash on fat interest rates and feisty A/R collection tactics. The problem is that the losses for GM in operations are just too big to overcome.

One additional problem: Most of the big 3, including GM have vastly understated their pension obligations. The long term sensitivity to actuarial assumptions and interest rates, means that even a slight manipulation of the rates used by actuaries will mean a far lower pension liability. Currently, GM's assumptions are way out......

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