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General Motors Scores an Operating Profit but Tough Sledding Lies Ahead

Prof. Peter Morici - 7/27/2006

Today, GM reported a second quarter loss of $3.179 billion dollar, or $5.62 per share. Deducting expenses for restructuring, GM scored an operating profit $1.153 billion or 2.04 per share. GM's North American operations continued to lose money but those loses were cut to $85 million form $1.1 billion a year ago. While the profit on ordinary operations is good news that will please investors, GM's situation remains worrisome.

During the first half of 2006, GM sold fewer cars than in 2005; these sales were at better prices and closer to those commanded by Toyota, significantly improving GM's net.

However, GM made more cars this year than last year, and faces the tough task of clearing out a lot of inventory.

Jan - June 2006
Production - 2,347,312
Sales - 2,037,136
Difference - 310,176


Jan - June 2005

Production - 2,296,518
Sales - 2,321,696
Difference - (25,176)


GM will likely have to cut prices, through incentives, and mark down the value of its inventory. Marking down inventory for clearance sales could well throw GM into the red in the third or fourth quarters.

This illustrates GM's rock and hard place. If GM makes only what it can sell at prices approaching those charged by Toyota, GM's vehicle development costs are spread across too few vehicles and it loses money. If it makes enough cars to cover its vehicle development costs, it must lower prices too much to sell what it makes, and it loses money anyway.

With a $40 dollar an hour labor cost disadvantage vis-a-vis its Japanese rivals producing in North America, GM remains a troubled company. Only by cutting its labor costs can GM make and sell a volume of cars that permit it to cover both its production and vehicle development costs.

Any merger or joint venture that fails to address the labor cost issue will not make this company viable.

The failure of Rick Wagoner and the GM Board to clearly articulate that challenge indicates a crisis in management and corporate governance.