Detroit giant GM (GM -0.70%) is in something of a bind. Its margins are too tight, its profits are too small, and its workforce and production capacity are just too large for market demand. Something had to give, and this week, it did: The automaker announced big plans to shrink. That means heavy job losses, and both families and regions will suffer. But on Wall Street, the response to General Motors' plan, to get a handle on its finances before the macroeconomic situation gets tougher, was upbeat.
In this MarketFoolery podcast, host Chris Hill and senior analyst David Kretzmann dig into GM's weaknesses, the downsizing details, the longer range strategy, whether its competitors might follow suit, and more.
A full transcript follows the video.
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This video was recorded on Nov. 26, 2018.
Chris Hill: GM announced it is laying off 15% of its employees and cutting production at five plants in the U.S. and Canada. And just to be more specific on that, two of the plants are in Michigan, one in Ohio, one in Maryland, and one in Ontario. That's close to 15,000 jobs. As we've come to expect, at least from the stock market perspective, we shouldn't be surprised that shares of GM, up on this news.
David Kretzmann: Of course, we always sympathize with people who are losing their jobs. That's a big blow --
Hill: And a rough time of year.
Kretzmann: Yeah. It's unfortunate on a lot of levels, for the individuals, the families, those communities that probably rely a good amount on those factory jobs there. That's always a painful process. But looking at GM from a business perspective, this is a company that needs to cut costs. They need to find ways to cut expenses, raise free cash flow, and improve profitability. This is a company with an operating margin of 5%, a net profit margin of less than 1%. They're, right now, cutting a lot of corners there. They're pinching pennies at this point.
I think this makes sense from a strategic perspective. At first, when I heard this news, I thought, OK, maybe they're shifting some of those production jobs to another market, maybe overseas, where you're able to hire labor for a cheaper rate, or whatever it might be. But it looks like they're essentially just taking that capacity offline and just trying to ramp up capacity or utilize their existing facilities even more than they already are. From an efficiency perspective, that makes a lot of sense. If you have enough capacity with other factories, with other production facilities, then you should just focus on those existing production facilities rather than having several other facilities that you don't actually need to produce the vehicles that you need to supply.
Hill: It was interesting to see that this wasn't simply, as you said, "Let's cut these jobs and move them elsewhere." About 25% of these jobs are white collar jobs. So, yes, they're are a lot of factory jobs, but they're are also some front office jobs, as well. And, as you said, scaling back the production in a pretty dramatic way. It's interesting, this was hinted at a week or two ago by Jim Lutz, one of the former vice chairs at General Motors, talking about Mary Barra, the CEO of General Motors, and her message to her executive team. It was essentially like, "Let's start to look at ways that we can tighten the belt." I don't know if Jim Lutz thought it was going to be on this level, but it's clear from this move that Mary Barra and her team essentially are saying, "Not only are we tightening the belt for our own business, we're doing this now. We would rather be early in cutting costs in the wake of the economy and the run that it has had. We'd rather be early on this than be late. We don't want to be the last ones to do this."
Kretzmann: GM isn't in a position where they have a whole lot of flexibility. It's a company with a lot of debt. They're burning cash. And, as I mentioned, their profit margins are about as narrow as you can get and still be profitable. It's not like they have a lot of time to tinker with things around the edges. They really have to address those core issues now. In this case, they're ripping off the Band Aid. They're saying, "Yes, we can simplify our product portfolio." One thing I noticed in their press release is 75% of their global sales volume is expected to come from just five vehicle architectures by the early part of 2020. So, essentially focusing on select vehicles or architectures and building production facilities around those architectures, rather than having a ton of different types of vehicle architectures out there. It's just harder to have an efficient operation when you're trying to produce every vehicle under the sun. Trying to simplify the product portfolio, simplify production, and in doing so, reduce expenses, increase efficiency. This should end up saving them a lot of cash.
They're expecting cash savings of about $6 billion by 2020. Part of that is lower capital expenditure costs. Some of is just cost reductions, lower labor expenses, things like that. Ripping off the Band Aid, as we mentioned, it's a painful time for those individuals who are affected and losing their jobs. But for GM, it's a company that really needs to do something drastic like this, if they want to raise their chances of surviving over the long-term.
Hill: And I think if you're looking at automakers, two things to watch for over the next two months are, one, Ford Motor and others, are they coming out with similar tightening of the belt? Two, we are less than two months away from the North American International Auto Show, which is held every January in Detroit. I have to believe that this is going to be a topic of conversation for the media at that event -- whether anyone follows suit or not. It's almost like, if you're a reporter covering this industry, if Ford hasn't announced job cuts, that's probably one of the first questions you're asking their executives at the event next January.
Kretzmann: Absolutely. This move from GM undoubtedly impacts the competitive landscape for North American automakers, and potentially international automakers, as well. Building cars is a really challenging and capital-intensive business. These are companies with narrow profit margins. You've got to do what you've got to do if you want to raise the odds that you will be around over the long run.