GM: What's the Point in Being Number One if You Can't Turn a Profit?

Now that GM has announced plans to scale back on its brands, there are concerns that the company risks not only a loss of market share but of surrendering its top spot in the U.S. market to Toyota (TM). The problem with this line of thinking is that it's more sentimental than mathematical, in that there is a greater perceived value in being #1 in the U.S. market than there actually exists from a P/L perspective.

Just think about it: what's the point in worrying about GM losing market share if the alternative is hanging on to money-losing brands? What's the point of GM keeping market share by selling cars at a loss/with huge incentives, dumping cars via low margin fleet sales? Better yet: over the past 10-15 years how has GM benefitted from being #1 in the U.S. market, when you consider GM's profits vs. the profits generated by its allegedly smaller competitors?

Profit per car sold is far more important than market share, and it's the reason why Honda (HMC) can generate a multiple of GM's profits despite having a fraction of their total market share.

Profits per car sold is what will win the day not market share; both GM and the media need to let go of this sentimental focus on GM's share of the market and focus entirely on the efficiency aspect. It's ludicrous to claim that GM is "#1 in the American Market" when Toyota left GM behind years ago as far as profits generated from same.

Yes phasing out Hummer, Saturn and Saab will cost GM some market share, but it will also remove billions worth of losses from their balance sheet. In the end GM will be a stronger and more efficient company despite the loss of market share, so all things considered losing market share is a positive in this instance.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[Mister Jimmy:]

What's the Point in Being Number One If You Can't Turn a Profit? You must be talking about Toyota, the new #1 that is losing money for the first time in 50+ years and had its debt rating lowered.

Feb 19 03:29 PM

[babyray:]

Buy American!!!

Feb 19 09:47 PM

[Markham Lee_:]

Quick Clarification:

1) I don't hate GM or Detroit for that matter, I grew up in a household that only bought GM cars and can probably rebuild one of the 70s era Buick Elektras from scratch if I had to.

My articles are written from the perspective of what they should do to in order to thrive again and/or possibly gain my business.

There is a difference between constructive criticism and pure bashing, my articles are the former.

2) The point of this article is that for the last 10+ years GM has been #1 in market share, and has over the course of that time done nothing but bleed red ink. It's a mathematical fact.

Over that same time period Toyota wasn't #1 yet made more profits as did many smaller car makers, also a mathematical fact.

Therefore profit per car sold can easily trump market share.

3) Toyota (like many automakers) will lose money for a bit as it has to readjust operations to a marketplace that buys fewer cars, and buys lower margin cars. BUT, Toyota will find it's way to profitability relatively quickly, nor does it have the hard road ahead of it that Detroit does.

4) It's not possible to have a productive conversation about the auto industry if we're not going to be objective.

Thanks for reading.


-Markham

Feb 20 01:20 AM

[Thadeus Tho...:]

Based on the number of comments, or lack there of about your position on GM, I don't think many people are paying attention anymore. You don't have me or many others convinced about any altruistic concern you have for GM, and especially the people, dealers, or others all lumped together as "legacy costs" burdening GM. Your philosophy disregards the financial causes and fuel prices that precipitated the current business climate not only for GM, but other businesses as well. These are not "usual times" where a business is faltering due solely to it's management decisions. This problem is systemic, and to expect GM or any other business of this size and scope to recover without special loan provisions [ not bailouts as many keep blasting] is erroneous old school business strategy. One only has to look at how airlines bankrupted themselves several times over in a business climate that wasn't as difficult as this one. If bankruptcy were the answer, it certainly didn't work for them. And what of the employees? Just hapless victims, used up "human resources"?

Again, if you or others wouldn't buy from GM now, for various reasons, why would people buy a car from a bankrupt company if they don't know if it will be there? Watch what happens to Saturn sales that are already bad. As soon as GM indicated it was dropping Oldsmobile, sales went into the dumper and GM ended the Oldsmobile line sooner than it's original end date. So I , and I suspect others, don't think you are seeing the whole big picture when it comes to the auto business.

Feb 20 08:35 AM

[Tony C:]

<<< GM is still bigger then Toyota, Honda, and the rest world wide. Makes you wonder why they live in this country if they like the foreign stuff so much. >>>

Ah Thadeus, we can always count on you to get it wrong.
GM is NOT larger worldwide than Toyota. That is what all this noise is about. I'll type this slowly so you can follow it: Toyota sells more vehicles worldwide than does GM. Got it now?
BTW, Toyota outsold GM in 2007 as well, but GM cheated, claiming in their total a bunch of Chinese trucks made by a company in which they own a minority share.
And as the article states, the race over who is making money in this business was decided years ago.

Feb 20 10:16 AM

[Thadeus Tho...:]

Luxury's rough ride: High-end brands trail overall market
Christine Tierney / The Detroit News

Daimler AG executives may have thought they had escaped the brutal economics of the mainstream auto market when they got rid of Chrysler in the summer of 2007.

But a little over a year later, Daimler and other luxury carmakers are struggling in a downturn that has buffeted the fanciest nameplates as severely as the rest of the industry.

Daimler reported this week that its Mercedes-Benz Cars division lost $460 million in the fourth quarter of 2008 and it forecast lower Mercedes sales for this year. Moody's Investors Service lowered its outlook for Daimler and said it may cut its credit rating for BMW, citing concerns about the companies' profitability.

Feb 20 10:37 AM

[Thadeus Tho...:]

Ahh Tony . . .. or should I say "Markham"....jr.

Feb 20 12:11 PM

[reality chk:]

Markham.

Your article makes sense if you only look at one segment
"The Bottom Line" We all know that literaly hundreds of items influence the Bottom Line. GM is a 100 year old mature company with admitetly bad habits History and Legacy, GM in the US is operating in a Free Market economy and they have done well standing on their own without the bennefits of a National Industrial Policy and without support from the governments (state & federal). On the other hand Toyota and Honda are relatively new to this country. In Japan they have had the backing of the Japanese government through a clearly defined Industrial Policy based on manufacture for export. Their research and developement of so-called new technology were subsidized for years. They also bennefited from a national health care policy. In fact since 1945 the US has supported the Japanese economic developement, health care services, and defense with billions of US tax dollars. They do the research, design ,and developement in Japan under the protection of their government while they design and produce products for export.
Now in the last 25 years starting with Honda, and recently with others these companies have started to establish manufacturing facilities in the US. You need to research the bennefits they get from the various state governments in order to set up in their states and report out on that as a contributing factor to the bottom line. (Tax breaks, Land deals, Construction assistance, Right to work states , Low wages State funded training and more...) and don't forget younger healthier employees, no pensions. (legacy costs) .
Look at their sales and manufacturing data. Domestic vehicles , and Imported vehicles. Look at components domestic components and imported components. Here is my Bottom line: The foreign manufacturers have enjoyed a nurturing and supportive relationship with their home governments while the US Big 3 have done it their way along without any support only with critisism by anyone who has something to say. Your comparison only supports the fact that we need to get more involved if we want robust and successful economy.



On Feb 20 01:20 AM Markham Lee wrote:

> Quick Clarification:
>
> 1) I don't hate GM or Detroit for that matter, I grew up in a household
> that only bought GM cars and can probably rebuild one of the 70s
> era Buick Elektras from scratch if I had to.
>
> My articles are written from the perspective of what they should
> do to in order to thrive again and/or possibly gain my business.
>
>
> There is a difference between constructive criticism and pure bashing,
> my articles are the former.
>
> 2) The point of this article is that for the last 10+ years GM has
> been #1 in market share, and has over the course of that time done
> nothing but bleed red ink. It's a mathematical fact.
>
> Over that same time period Toyota wasn't #1 yet made more profits
> as did many smaller car makers, also a mathematical fact.
>
> Therefore profit per car sold can easily trump market share.
>
> 3) Toyota (like many automakers) will lose money for a bit as it
> has to readjust operations to a marketplace that buys fewer cars,
> and buys lower margin cars. BUT, Toyota will find it's way to profitability
> relatively quickly, nor does it have the hard road ahead of it that
> Detroit does.
>
> 4) It's not possible to have a productive conversation about the
> auto industry if we're not going to be objective.
>
> Thanks for reading.
>
>
> -Markham

Feb 20 01:24 PM

[Ames Tiedeman:]

GM needs to file bankruptcy. They must wipe away their 43 billion in debt and enter all new agreements with the UAW. Paying $20.00 an hour people $80.00 an hour is insane.

Feb 21 10:18 AM

[Tony C:]

<<<The foreign manufacturers have enjoyed a nurturing and supportive relationship with their home governments while the US Big 3 have done it their way along without any support only with critisism by anyone who has something to say. >>>realityche...

I could post a long list of federal tax "gifts" to Detroit over many years, all of which preclude the present socialist mega-gift they are currently begging for. But I suspect things like facts won't do a thing to change your opinion.

Feb 22 01:27 PM

[Tony C:]

<<<Paying $20.00 an hour people $80.00 an hour is insane. >>>ames

It sure would be insane, if anyone had actually done it. But they didn't.
Please do your homework. It's not hard to learn the truth behind those reported $80/hr rates, and they weren't anyone's pay.

Feb 22 01:29 PM