November 1, 2013 Letter from the 'Chairman of GM'-- Update on the Volt--
Editor's note: You'll see today's Friday Digest veers from our normal format. The "Chairman of GM" has penned another in the series of satiric letters we've published over the years. We hope you enjoy it--
Dear shareholders,
As I'm sure you've seen, our stock price jumped higher this week on heavy trading.
We earned lots of applause in the press and even on Wall Street because we reported outstanding operating results. It's true-- on an operating basis-- General Motors is doing better than many people (including me) thought possible.
What explains the quarterly surge in profits? In North America, we launched a new version of our best-selling truck, the Silverado.
This helped drive North American sales and units higher. Units sold increased 6.5% over last year. Our operating income from the automotive business globally was up by 40% over last year's third quarter. On an operating basis, we made more than $2 billion selling cars in the quarter, up from $1.4 billion in last year's third quarter.
Our automotive margins increased, too, from 3.9% "all the way" to 5.5%. I've been crowing publicly about the increase in margins and the strength of our Chevy brand.
But privately-- I've got plenty of concerns.
You see, all of these numbers are presented on an "operating" basis. We make plenty of other "adjustments," too. At the risk of spoiling the surprise in this letter, let me simply summarize by explaining that our real earnings-- the earnings attributable to common-stock holders-- fell by about 50%. Even worse, our market share in North America fell, too ? even in trucks. You'll notice I didn't mention anything about that in the quarterly press release.
Instead, to cover up the real results, we dusted off our bag of accounting tricks.
Just check out the headlines on the slides that accompanied our latest quarterly results press release: "Impact of Special Items," "Consolidated EBIT -- Adjusted," "Adjusted Automotive Free Cash Flow," and my personal favorite: "Operating Income Walk to EBIT-Adjusted."
I challenge any financial analyst outside of GM to explain what "Walk to EBIT- Adjusted" means-- or come up with any sensible explanation for why we would present our results in this way.
At GM, we're doing our best to make sure that no one can possibly understand what's really happening in our company.
But privately, I can tell you what's really going on--
The truth is, we're barely hanging on to the market share we've got. Yes, trucks bolstered our results. And yes, we sold a lot of trucks. But we didn't sell nearly as much as our competition. We actually lost market share in the U.S. truck market.
You must remember that, at GM, we can't compete on brand. We can't compete on quality. And we can't compete on price because of the huge amount of overcapacity in the worldwide car-manufacturing industry. As a result, we must compete on credit: We will lend to just about any potential car buyer.
Lots of Americans have terrible credit. So our lend-no-matter-what strategy can create a lot of business in the short term. In fact, our loan and lease book increased by almost $9 billion over the last year.
But this strategy won't work for long.
Lending to borrowers who aren't creditworthy only pushes today's losses out into the future. After all, if we weren't making these bad loans to customers who can't really afford a new car or truck, what would our results look like?
Sooner or later, these loans will sour. And the profits we're bragging about today will disappear. Losses will soar.
Why would we knowingly pursue a strategy to "pull forward" sales, even though this will surely cost us massive losses in the future?
You might remember in the last letter I wrote to you as the new Chairman of General Motors, I warned that capitalists were no longer operating GM: What's happening with GM is a microcosm of what's happening with the rest of our society. Where once we sought only a fair opportunity for greatness, now we seek the false security of collectivism. I see it happening right in front of me every day.
The people who control GM ? namely the UAW union and its stooges in Washington ? have decided to cash in while they still can.
In the last quarter, we borrowed $6.6 billion from Wall Street. We needed some of this cash to finance our lending and leasing operations-- but the lion's share of this cash was used to repay legacy union obligations.
We bought back a little more than $3 billion worth of preferred shares from the union's health care trust. Expensing this to earnings cost us $800 million in the last quarter. That's why all of the results we've been boasting about are all on an "operating" basis.
If you look at actual net income that was attributable to shareholders, our results were horrific: We only made $700 million, down from $1.5 billion a year ago. On a per-share basis, genuine net income fell from $0.89 a share to $0.45 a share, a decline of 49%.
As I have long warned you, the "bankruptcy" that GM went through in 2009 didn't address the legacy obligations accrued by the "old" GM and owed to its union employees. We left bankruptcy, which was supposed to wipe GM's slate clean, with the union holding almost $7 billion in preferred stock and more than $26 billion in unfunded pension obligations. Paying for these obligations makes it unlikely that our common-stock holders will ever benefit from our operating profits.
Even Steve Rattner, who put this entire catastrophe in motion, must know it's not going to work out. The government itself is bailing out on the deal as quickly as possible, taking a $10 billion loss.
The union is going to sell next, forcing us to buy back its preferred stock. GM will have to borrow again next year (and take more charges against earnings) to afford the rest of this nearly $4 billion, union-owned, preferred stock. Then-- after we're finished buying back the union's stock-- we'll have to begin paying huge sums into the union pension plan.
The point is-- even if we continue to perform on an "operating" basis, it will probably be years, maybe more than a decade, before we are in a position to actually use our cash flows to benefit our actual owners.
In my last letter to you as the new chairman of GM, I made three bold predictions about the likely future problems at our company. In closing today, I'd like to update you on these predictions.
I predicted that all of our profits-- and more-- would end up in the hands of the unions and retired workers.
In the last nine months, we made $8.2 billion in cash selling cars around the world.
We invested $5.7 billion in property and equipment to maintain our production, leaving us with roughly $2.5 billion in free cash flow. We spent $4 billion in direct payments to the union's health care trust, paying dividends, and buying back preferred shares. Not a single cent was spent on common-stock holders. By my calculations, we spent $1.5 billion more than we really earned on the union's legacy claims last quarter.
I predicted that overcapacity would continue to drive profit margins lower and result in declining market share for GM.
While the last quarter saw our margins increase (thanks to the favorable product mix), our key North American market share continued to decline, a presage of future margin declines.
I predicted that we would begin to borrow massively from Wall Street to finance the buyers of our cars and to finance contributions to our pension fund.
In the last quarter, we saw the first long-term borrowing for the "new" GM. We now owe $6.6 billion to bondholders in a debt financing orchestrated by Wall Street. It's incredible when you think about it. Just four years ago, we defaulted on about $30 billion in bonds. And yet-- the world is willing to lend to us again already. What a bunch of fools!
What's really happening at GM is easy to see if you just take the time to wade through our filings. We're making billions in bad loans to car buyers now, so that we can earn enough money (in the short term) to pay off the union's preferred stock and generate "operating results" that make it easy for the government to sell its common shares.
What happens after that isn't really my concern. But it ought to be yours, if you're holding our common stock.
Regards,
The Chairman of General Motors
P.S. You might wonder what ever happened to the Chevy Volt? Former management spent $1 billion to develop a battery-powered car. Thankfully, nobody wanted one. Sales peaked in 2012 at 23,461. We've only sold 16,760 this year. We were lucky. We've been losing about $50,000 each time we sell a Volt. I wish folks had considered President Obama's track record with the car sector before they voted for his health care plan...