New GM Just Like Old GM
After the government bailout in 2008, everything was supposed to get better for GM. New cars, higher sales, and more jobs. Some of these goals were reached—for a while. Now GM’s past is coming back to haunt it.
In its latest announcement, GM added another 2.4 million cars to its 2014 recall tally, now up to 13.6 million in the United States alone. The recalls already cost GM $1.3 billion in the first quarter and will cost the company at least another $200 million in Q2.
Analysts and investors, however, are not worried. Yes, the stock is down 19 percent this year, but Citigroup, for example, chose “Q1 Lifts Confidence Despite the Controversy” as the title of one report published at the end of April. It has a target price of $48 for GM, 45 percent higher than Tuesday’s closing price of $33.
The stock was also the most popular one with hedge funds at the end of 2013, with 196 funds owning it, even more than Apple with 183. Some of them surely have sold out, but we won’t know that until June.
Investors are not concerned with all the recall costs because they are nonrecurring in accounting terms and therefore don’t influence operating profit, the most followed measure of profitability. The problem with GM: The charges are in reality recurring rather frequently.
Apart from the charges and the paltry $35 million dollar fine, there are bigger problems of an ethical and legal nature.
The faulty models were made from 2004 to 2014 and therefore cannot be exclusively blamed on previous mismanagement before the bailout. Furthermore, the company, for whatever reason, did not notice the faults for a lengthy period of time, so it’s not surprising Congress accused it of a cover-up.
The infamous recall formula from the 1999 movie “Fight Club” comes to mind: Multiply the number of vehicles in the field by the probability of an accident due to a faulty part. Multiply the result by the average cost of an out of court settlement. If the total is lower than the cost of a recall, you don’t do the recall. Very simple mathematics.
It will be up to the many inquiries and probes set up by regulators and federal prosecutors, as well as scores of class-action lawsuits, to find out whether GM deliberately applied this formula clandestinely over the last decade.
It is of course suspicious that GM is only now kitchen-sinking every possible recall in 2014—after the whole scandal came out. Given the sheer volume of the vehicles and the timeframe involved, it is hard to believe nobody knew about these problems before.
Moving beyond the possible legal consequences and ethical issues, the current scandal proves nothing has changed for GM: The cars are still bad.
And GM car sales are already taking a hit. Even bullish Citigroup pencils in a decline in sales of 4.8 percent to $145 billion in 2014.
Other indicators show GM dealers are having trouble selling their inventory.
The month-end inventory for GM dealers hit an all-time high of 826,000 in April, after hitting an interim low of 629,000 in August 2013. The inventory represents vehicles GM sold to dealers but dealers can’t sell to customers.
The uptick in inventory coincides in time with the recalls. While GM can still force dealers to take its cars, the consumer doesn’t want them anymore.
Even if GM is now much more profitable than before the bailout, two important drivers of the future viability of GM as a company have not changed for the better: The quality of the product and the culture of the company.