When GM Fails Again, What Will it Cost Us This Time?

Rodney Johnson | Tuesday, December 18, 2012 >>


If I sold a car to my wife would the family be any better off? Of course not. I received her money and she received a car. But the money didn’t leave the family bank account and the rolling money pit is still in our driveway.

There is no net benefit, so the transaction makes no sense.

Unless, of course, you are my favorite car company, General Motors (or “Government Motors,” if you prefer).

Since GM went public again in the fall of 2009 there has been a running tally of how many cars are sitting on the lots of the remaining dealers. These lots are the channel by which new GM cars get to market.

In the early days, investors were infuriated to find out that GM had been “stuffing” this channel with cars and marking them as sold. Is a car really “sold” when it has been simply delivered to a dealer? Of course not!

Still, back in late ’09 and early ’10, GM had between 380,000 and 420,000 cars and trucks on the lot. And now that number has moved up… just a little. Last month, GM reported it now has a whopping 788,000 cars and trucks on the lot.

Hmmm…

I’ve got an idea.

Why doesn’t GM produce an extra 10 million cars and trucks, send them to the dealers and declare itself the ruler of the world?!

Oh yeah, because there is that little thing called cash flow that gets in the way of creative accounting.

For all the shenanigans that GM wants to embrace, the company cannot hide from its bank account. Sure, the company makes a profit today. If your debts were wiped away and then someone gave you $50 billion to start anew, I bet you’d make a profit as well. But GM’s actual sales and profits are not as pretty as they used to be. In fact, the company appears to be losing ground even while its competitors are posting very positive, and not artificially bolstered, results.

This is where the economic theory and economic reality merge. Two of the main tenets we harp on are creative destruction and mal-investment. GM is trying to defy both and is failing miserably.

The company should have been allowed to fail in 2009. There should have been a widespread shockwave that flashed through the auto industry, repricing every aspect of the business.

This destruction would have led to a creative rebirth along lines that are sustainable and even stronger than the previous iteration. The process is natural.

But no, our politicians were not content to allow the process to work. They came along and handed GM $50 billion of our taxpayer money, and then told, investors to hit the road, they would be left in the cold.

This propped up a lot of GM’s existing structure in terms of employment as well as model design and rollout. Flaunting the markets to force investments where they don’t belong is an easy example of mal-investment. The outcome is predictable. Mediocrity and then failure.

The question is not if GM is going to reach another breaking point. The question is when. And perhaps more importantly, how much will it cost me and you the next time?

But hey, if you’re in the market for a new car or truck, I hear they have a few on the lot for you to choose from.

Rodney

 

 

Ahead of the Curve with Adam O’Dell

What Can the GM Bulls Muster This Time?

GM emerged from bankruptcy in July 2009. It took another 16 months before investors could buy or sell shares of GM on the New York Stock Exchange.

 

 

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Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.