GM'S Grand Dilemma

The news coming out of General Motors Corp. these days is going from bad to worse. And it's likely to get a lot worse before it gets better.

In January, GM forecast it would earn $4 to $5 a share and generate $2 billion in cash flow for the year. It predicted $10 a share in 2007. Then, 60 days later, GM threw out that rosy assessment, forecasting $1 to $2 a share this year and a negative $2 billion in cash flow. Wall Street went ballistic. How could things go so wrong in only 60 days?

GM responded with management changes, culminating in Chairman Rick Wagoner taking over North American operations, moving GM North America President Gary Cowger and Vice Chairman Bob Lutz to other duties and lesser titles. Wagoner has got his work cut out for him because he faces a fairly limited set of options.

One would think he merely could look at what other car companies did in a time of crisis and copy them. Ford in 1981, Nissan in 1999 and Chrysler in 2001 offer textbook examples of slash-and-burn tactics that later led to growth and strong profits. But GM is a very different company that will prove tough to untangle.

For years, I've been pointing out GM's legacy costs include too many brands for its market share in the U.S.: Eight brands for 26%. By comparison Toyota only has three brands for 13% — headed to 16%.

Yet I fully understand the reluctance to get rid of any brands. Could fewer brands keep the same production volume? Not for now. And with so many platforms and component sets being shared these days, dropping a brand would drive up costs on the remaining products.

One of GM's greatest strengths is its dealer body. Most dealers are dualed or tripled with other GM stores. Forcing them to drop a brand would weaken them financially. Besides, it cost GM $1 billion to shut down Oldsmobile, so the short-term costs of dropping a brand come steep.

Worst of all, if dropping a brand resulted in lower sales, GMAC (GM's financial unit) would finance fewer new-car contracts. And GMAC is the auto maker's sole source of significant profits in North America.

And yet, while I understand this reluctance to drop brands, will hunkering down and essentially staying the course ultimately work? So far the results show it is not enough.

GM's core problem is that it has not developed the “gotta have” kinds of cars it promised us. Decent, competent cars yes, “gotta have,” no. And so its market share keeps sinking, exposing the problems it faces with fixed costs, health care, pensions — and profit projections that were way too rosy.

Nevertheless, GM's management team deserves our empathy. The pressure on them must be enormous to avoid being the team that surrenders 80 years of industry dominance.

John McElroy is editorial director of Blue Sky Productions and producer of “Autoline Detroit” for WTVS-Channel 56, Detroit, and Speed Channel.