subject: Can GM and Ford make it in the long run? [print this page] Author: John Beck Author: John Beck
2008 and 2009 were difficult years for the United States Auto industry. Of the two biggest players in the market, one teetered on collapse, while the other succumbed to substantial bankruptcy reorganization in 2009. The focus of this article is to examine Ford and General Motors from a cost perspective; looking at break even points, operating leverage, and future potential. UAW and Operating Leverage In 2008, GM had structural costs of $30.3 billion, which is the equivalent to 34% of their revenue. Ford also has substantial structural costs, but has taken measures to reduce their fixed costs by $4.6 billion in 2008. By lowering structured costs, Ford is able to achieve a lower break-even point, and function with less operating leverage. Certainly, Fords aggressive reduction of their fixed costs is a main reason why they were able to avoid bankruptcy. Break-Even Points and Future Potential In the auto industry, the goal is not necessarily to stimulate consumer demand, but rather, to fight for market share. In other words, a car company is not going to make a consumer decide to buy a car; that decision is typically influenced by other factors. Car companies goal is to provide the best alternative when that buying decision is made. As such, car companies fight for market share. The automobile sales market is estimated each year, and car companies shoot for a percentage that they would like to achieve. Ford plans to be profitable at its current market share of 15.5% with an industry selling 10.5 million. As such, Ford needs to sell 1.6 million vehicles to break-even in 2010. With trimmed down costs, and a strong core of products, many analysts predict that Ford could be propelled back into profitability as early as 2010. In April 2009, GM announced massive layoffs in an effort to stabilize the company. The plans are in place to cut 20,000 jobs by 2012. GM also sold or dissolved several brands including Pontiac, Hummer, Saab, and Saturn. These moves were made to help lower the break-even point, reduce structural costs, and stabilize the company. Unfortunately, those efforts were not enough to avoid bankruptcy reorganization which occurred on June 1, 2009. Assuming an auto sales market of 10 million vehicles sold in US in 2010, GM's U.S. market share would need to be between 21 and 23 percent. This means the automaker will need to sell about 2.3 million cars a year in order to break even. GMs 2009 market share was approximately 19%, which would still be operating at a loss in 2010. Additionally, maintaining or growing market share may be difficult in 2010 with several brands being sold off or discontinued. Analysts have speculated that by 2011, GM could be around a 12 to 13% market share. Despite emerging from bankruptcy, GM has a long hard road ahead.About the Author:
