General Motors recently announced that it will spend $5 billion on a joint venture with Chinese state-owned SAIC Motor to develop vehicles for emerging markets. The announcement came around the same time that GM reported results for 2015 second quarter earnings, which showed cash and cash equivalents decreasing $2.2 billion in the first six months of the year. Marketable securities also declined by $2 billion during that time frame.
The decision by GM to spend another $5 billion of its diminishing so-called “cash hoard” on Chinese ventures is a risky move (particularly given China’s shaky markets recently) reeking of desperation by a management team that can’t seem to maintain the company’s share price above the 2010 IPO price of $33. GM stock has been hovering around the $31 range, which reflects a drop in value of approximately 6% during a roughly five year period when the broader S&P 500 index rose about 80%.
GM management’s strategy seems to continue to focus on red herrings that divert attention from its stock’s horrible performance during a time when both auto sales and the broader stock markets have boomed. This latest spending spree on China brings to mind a 2008 documentary on GM entitled Saving General Motors. The basis of the show was that the then-struggling GM would be saved by a “thriving” Chinese market along with a “game changing” new electric vehicle called the Chevy Volt. GM went bankrupt less than 10 months after the show aired.
The Chevy Volt was obviously not a game changer for GM. So, is it now time for the Chinese market (along with thus far disappointing markets like India and Brazil) to start becoming the driver of profits at GM when the past five years have seen the region contribute only a small percentage of the company’s income? Is China a trustworthy business partner that will be the key to GM's success? Based on GM management team’s past performance, I would not bet on it.
GM just seems to keep focusing on the wrong thing. When the Chevy Volt was clearly shown to be a bust, the creative minds at GM decided to double down, literally, by doubling the price and offering a Cadillac version of the vehicle called the ELR. Not surprisingly, that version was an even bigger failure than the original Chevy version.
Earlier this year, GM wrote off approximately $600 million of a planned $1 billion investment in Russia. The company just can’t seem to find enough ways to spend those billions of dollars that were supplied by taxpayers. At least they pulled the plug early on the Russian folly and admitted the mistake.
Perhaps one of the biggest fiascos by GM management was the 2013 Manchester United sponsorship by Chevy. GM paid about $600 million to have Chevy logos printed on the English soccer team’s jerseys. The main problem with the deal was that Chevy did not have a European presence; Opel was the company’s brand in that market. The hitch was that Opel was going broke and didn’t have the money to spend, so why not waste a little more of the US division’s money since the company was so cash-rich? You have to get the sense that GM is run by politically-trained minds that have no concept of value when doling out the bucks.
So, fast forward to the latest sequel we’ll call “Saving New General Motors.” It can feature such stars as Harry Wilson, an Obama Administration Auto Task Force player who makes a cameo appearance as a restructuring expert who laments that GM just has way too much darn money and needs to start spending it as soon as possible. Mary Barra will replace Rick Wagoner in the role of the ineffective but optimistic GM CEO. The script will remain pretty much the same; the thriving Chinese and emerging markets along with green wonder-cars like the Chevy Volt will drive profits at GM.
The script for New GM’s future may be as similar to that of Old GM’s story. The Old GM gave us an exciting thrill ride that featured political intrigue and suspense that led up to the company’s Obama-orchestrated 2009 bankruptcy process. The cost to produce the first GM bankruptcy was billions of dollars supplied by taxpayers, who received little other than entertainment and a second term for President Obama who campaigned upon the success of the auto bailouts. The politically-favored UAW played a key role in helping with that campaign.
It may take a while for the GM sequel to be completed, but all signs point to an opening at a bankruptcy court near you within a few years. After all, if GM can’t succeed during the best of times, it is unlikely that they will survive an inevitable auto industry cyclical downturn; particularly if they continue to spend like Washington politicians.
Mark Modica is an NLPC Associate Fellow.