Novice Investing - GM Fires 30,000 Bullets

Date: Monday 01st 2008f December 2008 03:55:36 PM

GM Fires 30,000 Bullets - 11/21/2005

By: Novice Investing Staff

On Monday, General Motors Corp. (GM) unveils the first step to help it back to profitability. It lays off 30,000 jobs and closes 9 plants in North America. This move will save it $ 7 Billion a year by 2008. That is good. For the first 9 months of 2005, GM already lost $ 4 Billion. This gives it a run rate of a loss of $ 5.33 Billion for 2005.

Some of you might think that this move might be enough to restore profitability at GM. We beg to differ. Sure, $ 7 Billion in annual saving is greater than $ 5.33 Billion of annual lost. But that includes the profit from its mortgage operation, GMAC's division. Overall, GM's North American Auto division never consistently make profit even in good years. There are rumors saying that GM is planning to sell off its GMAC division. If it does that, GM would incur a much higher loss.

Furthermore, GM has been struggling for years to compete with the Japanese automakers. While cutting labor cost now might improve its profitability, sooner or later, it has to face the problems of its product line. GM's average selling price is $ 3,500 of Toyota, which signals how low the demand for GM cars are. GM has been losing market share for decades now. Cutting cost might help but if revenue continues to decline then the company will struggle to produce any future profits. Furthermore, an article here states that GM might be on the hook for $ 12 Billion of pension liability from its bankrupt supplier, Delphi Corporation. It will take a lot more than $ 7 Billion to turn this ship around.

There are a lot of differing opinions regarding GM's survival. One article from Forbes here gives you five reasons why GM Won't Declare Bankruptcy. While it may have a valid point, we feel that GM still has a lot of things to do before things turn around.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding General Motor Corp. (GM) or other securities.

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